Short Sales of Pre-foreclosure Properties – Because Banks Don’t Want to Own and Dispose of Real Estate

Short sales can also be good for sellers, allowing them to retain some of their damaged credit rating.

June 24, 2007 – Palm Coast – The market price of Flagler County real estate has dropped over the past eighteen months. The median sale price of existing single family homes dropped 17% from $259,900 in December 2005 to $215,000 in May 2007. At the same time, some home owners are stressed financially, either by changing financial situations or by rising insurance, real estate tax, and ARM payments. Whatever the reasons, foreclosures are on the rise.

Banks know if they go through a foreclosure, they will incur heavy costs to ultimately take ownership and dispose of the property. Many distressed property owners took advantage of 100% financing during the peak years and are “upside down” with their bank, meaning they owe more than the current value of their home or lot. So the banks will end up selling the foreclosed property for less than the value of the mortgage – a further loss. Likewise, the property owner is not looking forward to the process and the resulting effect on their credit rating. Losing a home through foreclosure, with the resulting credit damage, is a devastating experience.

Banks typically have a collections department that is responsible for delinquent accounts. When an account becomes too overdue, it’s turned over to legal to initiate foreclosure. Another group within the bank is responsible for loss mitigation, the minimization or reduction of losses. This is usually the department authorized to allow a short sale. Unfortunately, the two different departments in the bank often don’t communicate.

Enter the short sale. A short sale, simply, is a bank authorized sale of a property on which the bank has a lien (mortgage), where the sale price is less than the bank’s secured interest (the face value of the mortgage). As with much of the real estate business, short sales do not happen easily. The loss mitigation department does not usually become involved unless approached by a potential buyer with a short sale offer. And sellers are generally not aware of the short sale alternative. They are too busy trying to forestall the collections department.

A motivated investor or buyer, working with a Realtor® familiar with short sales can help the process along. They need to find the official within the bank authorized to accept a short sale offer. Then they need to provide sufficient supporting documentation to that official to support the need for a short sale as an alternative to foreclosure. These people have the authority if provided sufficient backup documentation, but do not have the time, resources, or inclination to obtain such information. So you will have to help them do their job. They will need to have comparable sales numbers, estimates of repairs, possibly pictures showing the present property condition, etc. The seller will need to be involved also since the bank official will need a detailed account of the seller’s financial situation. And, of course, they will need a serious offer.

It will probably take lots of work but it can result in a win/win/win situation: 

• The buyer gets a great deal
• The bank cuts their losses and avoids property ownership
• The seller preserves some of his or her credit rating by avoiding a foreclosure