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Why would a lender accept a short sale?

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Why would a lender accept a short sale?

asked July 23, 2011

7 Answers

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First of all banks do not like excess inventory and bad loans on their books. Therefore, if they see an oppportunity where they can sell the property without a huge loss, they will do it. Secondly, lenders know they could lose a lot more money if the property goes to auction. There are so many fees involved if the property goes to auction, that they would be better off taking the discount before hand and be finished with the headache of it all.

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While most lenders will not be thrilled at the prospect of a short sale they are acutely aware that a foreclosure is usually a far more time consuming and costly option. In a real estate market where housing values are going down it is in the best interests of the lender to liquidate their problem loans as quickly as possible.

With a short sale a property can be sold and the loan taken off their books fairly quickly. If they pursue a foreclosure they run the risk of the process taking a substantial amount of time during which the value of the property is depreciating. Also, buyers will tend to write low ball offers when they know that a bank or lending institution owns the property. The property will also be left vacant which can result in vandalism and deterioration. Some owners will even gut the house just before the foreclosure sale as a way to ‘get back’ at the lender. This is illegal but nonetheless happens on occasion. So, you can see why a lender might want to go the short sale route and get the loan off of their books with minimal hassle.

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Lenders will accept a short sale because it is better than having to foreclose on the property and have it then be in worse condition. Lenders today have a lot of properties in distress. They don’t need vacant properties that can be vandalized and in horrible condition.

When the properties are short saled, they are often in much better condition and will receive a higher price than one that has been vacant for a long period of time. It costs money to file paperwork for a foreclosure.

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Simple, much less time in getting the property off their inventory list than a Foreclosure and less costly to the lender. Also, Short Sales typically sell for more than REO Foreclosures and there are typically no work orders involved in the closing of the sale.

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The lender needs to answer to their investors. Investors do not like negative performing assets. By agreeing to a short sale they are protecting their assets and portfolios. The borrowers usually maintain the properties, they are rarely vandalized, and it is a smoother transaction to sell the property at a loss, than to go through the foreclosure process, eviction process, hire a company to maintain the asset, and then go through the sale process hiring a broker to sell the asset. Agreeing to the short sale will save the investor money on the asset in the long run.

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It’s a numbers game. If the lender believes they will net more from the Short Sale – they will approve it. If they believe they will net more from a foreclosure – they will proceed to Trustee Sale.

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If the hardship is there and it is obvious that the job transferred the person and the house will be abandoned, there is a financial hardship due to illness or job loss….the lender will agree since it is less costly for the bank to agree and have a buyer in place than to first have to hire legal teams to foreclose and then hire workmen to repair and Realtors to sell, etc. The lender will weigh the value of selling now at the short sale price versus selling later down the road after legal and repair expenses have been added. Further, $50000 today is worth more than $50000 six months from now.

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