A lot of homeowners (and uninformed agents) believe that lenders are waiting to pounce on a homeowner and foreclose on their property the moment a payment is missed. That doing so is a good financial practice. If you look at any successful people or businesses you'll see that they became successful by doing what they do best, and not other specializations. Banks lend money. They absolutely hate having to get into the real estate business. They really don't want your property.
To add to that, a foreclosure is very expensive and opens the bank to huge risks, particularly when a property becomes vacant. If that house is vandalized, that will severely affect the resale value.
An easy way of illustrating the cost of a Foreclosure for a bank is to list some of their expenses, and then to highlight why a Short Sale is acceptable, comparing a Foreclosure to the events and costs of a Short Sale.
To add to that, a foreclosure is very expensive and opens the bank to huge risks, particularly when a property becomes vacant. If that house is vandalized, that will severely affect the resale value.
An easy way of illustrating the cost of a Foreclosure for a bank is to list some of their expenses, and then to highlight why a Short Sale is acceptable, comparing a Foreclosure to the events and costs of a Short Sale.
So in a Foreclosure the bank will (actual financial numbers are hypothetical and may vary from actual costs to the Lending institution):
| Sale Price | $200,000 |
| Seller Concession | -$6,000 |
| Legal Fees | -$7,000 |
| Taxes | -$500 |
| Insurance | -$1,000 |
| 6 Month Utilities | -$600 |
| 6 Month Maintenance | -$600 |
| 6 Month Interest Lost | -$6,650 |
| Association Dues | -$1,200 |
| Closing Costs | -$4,400 |
| Staffing Costs | -$2,000 |
| Commissions | -$12,000 |
| Proceeds from Sale | $158,050 |
| Loan Amount | $190,000 |
| Minus Proceeds from Sale | -$158,050 |
| Lender Loss | $31,950 |
The above figures have been estimated very conservatively and in a typical Foreclosure may well be higher.
Using the same Market Value and Loan Amount, then the bank accepting the hypothetical Short Sale compares fairly well:
| Sale Price | $180,000 |
| Closing Costs | -$4,000 |
| Commissions | -$10,800 |
| Proceeds from Sale | $165,200 |
| Loan Amount | $190,000 |
| Minus Proceeds | -$165,200 |
| Lender Loss | $24,800 |
As you can see the bank is taking less of a loss accepting a Short Sale with a below market value offer. On top of this, the property did not sit vacant for several months. The property does not have an opportunity to be vandalized. This is huge in reducing the bank's risk and exposure.
A vacant property would very likely decline in value, need repairs, and many other issues may arise during the bank's watch.
A Short Sale is a sure thing for the bank, plus keeps the property off of the bank's books. and inventory. A successful Short Sale is a win-win-win situation. The homeowner gets rid of a financial burden that was stopping them from getting on with their lives. The bank gets rid of a problem quickly, with minimal risk and minimized financial loss. The buyer gets a new home for below market value.
This is why Short Sales are accepted by banks. Our next installment we will address the Cost of a Short Sale and we'll look at how a Short Sale impacts credit by comparing a Short Sale vs. Foreclosure.
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