Short Sales from the Lender’s Perspective

avatarthumbnail.jpgAs interest in the Phoenix real estate market picks up again, I’m getting more and more inquires about short sales. I’ve covered the basics in the past … the owner owes the bank more than the house is worth, the lender (usually) has not agreed to sell at the list price, it can take months to get an answer, etc.

But I thought it might be helpful to look at things from the lender’s perspective in order to help those thinking about such a purchase to understand what they face.

First, there is the question of mortgage insurance. If you purchased a home with less than 20% down and didn’t use some sort of exotic/toxic loan to purchase the property, you’re paying mortgage insurance. Should you stop paying and the bank has to foreclose, the bank files a claim and if not made whole at least receives an insurance payment based on your default.

Which is why if a homeowner is in default and the lender has insurance on the mortgage, they may be more inclined to foreclose and take the payment rather than accept less than the amount of the full mortgage. It’s pretty much a no-brainer.

Second, should the lender decide that it’s amenable to a short sale, it won’t reveal what price it might be willing to accept until it sees an offer. And once an offer is in hand, it’s all about the bottom line that the lender will net. What a lender usually will say is they want to net “x” and whatever else needs to be done – changing the listing agent’s commission, paying or not paying for buyer’s closing costs, etc. – needs to add up to that number.

Third, the lender will work to determine the property’s true value before making a final decision. Most will order two Broker Price Opinion’s – a pseudo-appraisal if you will, but conducted by real estate agents – to determine what the house is worth. So even though the listing may say the home’s for sale at $225,000, if the bank determines the house is worth $400,000 would you expect them to accept $225,000?

Would you? Me either.

Where most buyers run into trouble is when they start comparing the apples of bank owned homes to the oranges of short sales. “If I can get this house (a short sale) for this amount, I’d much rather do that than pay this much for that one (a bank owned.)”

Except a full price offer on the bank owned will get you the house (unless there are multiple bids) while a full price offer on a short sale means absolutely nothing.On one you’ll have an answer in a day or two, on the other you can wait weeks or months. We’re now more than five months deep into the process on one of my short sale listings and we’ve had a contract in hand for four of those months.

And at the end of the day, the biggest attraction to most short sales – the well-below market asking price – means nothing because few lenders are going to sell for well below current market value just because someone asked.

Not in an environment where there’s steadily declining inventory and increasing sales. It just doesn’t make good business sense.

Have other questions about short sales or bank owneds? You know how to find me.

[tags]Phoenix real estate, short sales[/tags]

Jonathan Dalton

Jonathan Dalton is a 40-plus-year resident of the Valley and has been helping folks buy and sell homes since 2004. He can be reached at 602-502-9693 or info at