It may seem counterintuitive for a lender to go along with a Short Sale since they are legally entitled to pursue the full balance of the loan. Yet, more and more lenders are approving Short Sales.
Lenders are painfully aware of just how bad the current mortgage crisis and resulting foreclosures are. They know the disturbing reality is that a large number of distressed borrowers will helps the lender look good on paper since the house never gets listed as an actual foreclosure. Second, while the lender is taking a loss, the loss is far less than it would be in a foreclosure situation.
On a recent industry call with a major lender, they disclosed that the average recovery in a Short Sale is 60 cents on the dollar. Now before you get all excited that you can buy a property for 60 cents on the dollar, let us explain how they arrive at that number.
Let’s assume that a borrower owes $200,000 on a property. The market value is set at $150,000 by the appraisal or Broker Price Opinion and the property sells for $140,000, which is 94 percent of market value. The closing costs come to $14,000, leaving the lender a net of $126,000. $126,000 is 63 percent of the $200,000 loan balance.
With a foreclosure, the lender only recovers about 30 cents on the dollar. Which would you choose? The numbers make this a no-brainer.
The other issue with foreclosures is the impact they have on neighborhoods. If a neighborhood experiences a number of foreclosures, the property values in that neighborhood drop as well. Why is this important to the lender? They may be holding other mortgages in the same neighborhood, and a foreclosure drives down the value of those houses as well. They’re poisoning their own portfolio!
Bottom line is if the numbers work for the lender, they are very likely to approve a Short Sale. It’s the lesser of two evils when compared with foreclosure.
