2 Big Reasons Why Banks Love Short Sales

In an earlier post I commented on the fact that Bank of America has gone on record to say that they plan to increase the number of short sales they do by 60% in 2012.  I want to explain why this is more than just a feel good policy and why other banks are doing the same thing in the State of Oregon.

There are 2 main reasons that point to an increase in short sales and they are both about minimizing loss and maximizing profits for the bank.

#1 – The bank nets more money in a short sale than in selling a bank owned home.

I  have seen several different statistics with varying numbers that support this fact.  Some experts say… that banks net 20-30% more on a short sale while others claim that the average dollar per square foot is 15- 20% higher on a short sale than on an REO (Real Estate Owned, or bank owned) home.

A good negotiator will point out that every month that goes by the bank loses money on a home they own, or a home where they are not receiving payments.  Time is money.  To foreclose, re-market the property and find another buyer could take several months.  That alone can costs tens of thousands of dollars depending on the price of the home.

The bank would also have to pay for maintenance on the property, hazard insurance, property taxes, HOA fees and more.  Legal fees would also be higher if the bank had to go through the act of foreclosing.

#2 – Paperwork Problems point to higher legal costs and more legal challenges.

In Oregon, the fact that banks have been using MERS (Mortgage Electronic Registration Service) and not recording the transfer of ownership is causing huge headaches for much of the industry.  The details about the MERS fiasco itself is beyond the scope of this post.  But i’ll explain it in elementary terms. Bank A sells the loan to Bank B using MERS, an electronic transfer systems the banks themselves created.  Bank B tries to foreclose but technically cant because they didn’t record the transfer in the county records per Oregon law.  No recorded transfer means no transfer. A big mess.

Because of this I have seen a HUGE increase in judicial foreclosure filings.  The bank actually sues in court to foreclose and has a judge complete the forecloure.  This costs much more money but may be worth it to the bank in the long run since the seller couldnt use the MERS issue for defense.

Additionally, there has been much publicity about “robo-signing” and “show me the note” challenges that homeowners have used to fight foreclosure.  These all point to increased legal fees and increased time.

A Simple Solution

A short sale seems to be the easiest route for the bank to take and they are finally realizing it.  They have an interested buyer, they have a homeowner in hardship.  Take the loss and move on.

Of course it only sounds that easy.  You still need an advocate for the seller to ensure the bank wont pursue them after the short sale to recoup their losses.  A good agent or professional short sale negotiator will know how to speed the process up and minimize the downside for the seller.  Short sales are here to stay for awhile.  Homeowners need to find an agent and negotiator with extensive training and experience. Agents that partner with a company that can take the hassle out of the process will truly stand out for the foreseeable future.

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