Why Do Banks Do Short Sales?

Why Do Banks Do Short Sales?

First and always, lenders are not in the real estate business and do not want to own property. They know the costs of repossessing properties through foreclosure, and that the time, effort, and future costs of maintaining and disposing of properties is expensive.

If a lender is going to experience a loss of foreclosing and owning a property, it makes sense that it would be better off to minimize its loss and walk away before it even needs to take ownership of the property. Ultimately it can be easier and cheaper for the lender.

If traditional loss mitigation attempts such as forbearance, loan modification, or forced sale are not feasible, a lender will consider a short sale as its last best option, even before a deed-in lieu. Bottom line: while obviously the bank would ideally just love to get the loan paid in full, if that isn’t possible, a short sale may be the lesser of the other necessary evils.

If a short sale is consummated, the bank has disposed of the property without ever taking possession of it and quickly removes the nonperforming asset from its books.

Common Reasons Lenders Engage in Short Sales

It’s impossible to predict for sure whether a lender would agree to a short-sale arrangement. However, there are some scenarios in which a lender is more receptive to the idea:
The loan is in default and the borrower shows no ability to cure the default.

The borrowers have demonstrated hardships proving they cannot cure the default or maintain future payments under other modification or forbearance agreements.

The lender realizes a short sale would be cheaper, easier and faster that foreclosing the loan, selling the property at auction, and repairing and reselling the property.

The property’s condition makes it likely that the lender would need to invest considerable time and money into making the property ready for sale.

The market for home sales in that area gives the lender reason to fear that it could be stuck with the property for quite a while before it is sold.

In addition, the lender may also consider financial hardships due to circumstances beyond the borrower’s control, such as illness, accident, or being laid off; the number of nonperforming loans the lender already has on its books; the value of owning a property in poor condition in an area of declining property values; and other factors that may make the lender eager to avoid taking possession of the property.


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