Short Sales - Why Banks Accept Them
I am often asked by newbie investors why banks are so willing to accept short sales, taking far less on the property than they are owed. It’s difficult for most people to wrap their head around why a bank, or any lender for that matter, would accept 40%, 30%, or many times even less as full payoff for a property. Well, there are actually a number of reasons why, and below I go through a few of those reasons in detail. I hope it helps!
1.) They’re not in the real estate business - What commodity 
do banking institutions supply to their customers? What is the product that they “sell” to others? That’s right, it’s MONEY. They have created this amazing system which, like a lamb being led to the slaughter, most of us willingly leap headlong into. We let them rent our money from us for 1-2% (money markey account), and then we rent it back from them for 5-6% to buy our home, 9-10% to buy our car, and 15-18% for our credit card expenditures.
And, after creating this ingenious system, the one thing that banks hate worse than anything in this world is whatever prevents them from implementing that system of selling (or renting) your money. This includes being saddled with real estate that they can’t sale, which is the reason why they hire real estate agents to list & sell their REO properties as soon as possible. They ARE NOT in the real estate business and they don’t want to be…PERIOD!
2. The cost of foreclosure - The 2nd reason why banks will oftentimes accept a short payoff is because of the exhorbitant cost of going through an 
entire foreclosure. The costs include, but are certainly not limited to, attorney’s & recording fees, missed payments, force placed insurance, back taxes, yard maintenance, and the list goes on and on. It can cost the bank anywhere from $40,000-$50,000 (OR MORE) to foreclose on a house.
***UPDATE FROM LAST MEETING*** A recent study released by Connecticut-based Clayton Holdings Inc. showed that lenders (from May to October 2008) lost an average of 56 percent on homes sold after foreclosure versus only 37 percent through short sales. Can you say, “Let’s Make a Deal!”
3. Loan Limitations - In my research I’ve heard a couple of different numbers, but when banks take back a home in foreclosure, they are not allowed to loan between 6-10 times the amount of the loan that they took back. Therefore, if they foreclose on a $100,000 loan, they are now unable to lend up to $1,000,000 of their money.
What was it again that banks do to make a profit and satisfy their shareholders? That’s right, they rent out your money. And if there is something preventing them from renting that money, they will do everything in their power to get that dead weight off of their balance sheets. That’s where you step in as the short sale investor. They have a problem, and you are offering a solution.
4. The Power of Wall Street - On Wall Street, having REO prope
rties on your books is like the kiss of death. To you or I, owning a house is an asset. However on a banks balance sheet, owning foreclosed property (REO) is considered a liability, and it doesn’t bode well for their stock price. These “non-performing” or ”toxic loans”, as they are affectionately called, are driving away investors by the droves, and causing the stock prices of the financial services industry to plummet.
As you can see, there are a number of reasons why a bank would be interested in selling you a house for much less than is owed on it. Never shy away from a property that is upside down or over-leveraged. Instead, learn how to become “short sale savvy” so you can profit from this highly profitable business. Take a minute and give me your thoughts by commenting below…
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