Why Banks Do Short Sales
by Vena Jones-Cox
Q: What makes a bank decide whether to take a discount on a defaulted mortgage
or not? And what formula do they use to decide how much to take? Some banks I’ve
talked to have just said no to a discount right away, and others seem perfectly
happy to negotiate any offer, even if it’s a fraction of the loan amount. What
gives?—D.D., Houston
There are a number of factors that go into a lender’s decision about whether
(and by how much) to discount a loan gone bad. Some are obvious; some involve
the vagaries of the lending market.
The first step in getting a particular lender to consider your short sale offer
is to have your own ducks in a row. Before the lender will even discuss an offer
with you, you’ll need a signed purchase contract and a letter of permission from
the seller allowing the bank to discuss his loan with you) You’ll also need to
make sure that you’re talking to the right person at the right bank—sometimes
the place that the seller is sending his payments is not the lender at all, but
just a loan servicer. And there’s usually only one person within a given
institution who’s empowered to take offers to the board, so discussing your
offer with anyone else is a dead end. And don’t even bother to call the attorney
who’s handling the foreclosure—there’s absolutely nothing he can do for you.
Assuming you’ve done your homework and are talking to the right paper-pusher,
there are a number of other factors that could affect how open the lender is to
your offer. One is where the loan is in the foreclosure process. If the borrower
is just a few months behind—or if the auction is happening in 3 days—the bank
might not be terribly motivated to take a major discount. In the first case,
they may assume that they can work out a payoff with the owner: in the second,
they’ve already invested a great deal of money in legal fees, and may feel that
it’s better to take their chances on getting the property back and reselling it
on the open market.
Another issue is the condition of the property. Most lenders are hesitant to
take back a property that needs major work, or that has building orders, or that
could become an “attractive nuisance.” In other words, the nastier the house,
the better the chance that the lender will deal.
Of course, the lender’s position as creditor is another big factor: 2nd and 3rd
mortgagors are usually much more willing to discount—and discount big—than a 1st
mortgagor. Think about it: the seller may have no equity thanks to a 75% 1st
mortgage and a 30% 2nd, but the 1st mortgagor has 25% equity if he has to take
the property back.
The requirements of the lender’s private mortgage insurance company or of FHA
and VA insurance also influence its decision about how much to discount, as does
the housing market, difficulty of foreclosure in a particular state, number of
bad loans the bank is dealing with, likelihood that the owner will declare
bankruptcy, and many, many more variables. So the short answer is, there’s no
short answer. Make your best offer, keep following up, and don’t get
discouraged!
Bio:
Vena Jones-Cox’s real estate business focuses on finding great deals on 1-3
family homes, then lease/optioning them to homeowners or wholesaling them to
investors and renovators. All told, she buys and sells about 50 properties per
year.
Vena is a frequent guest lecturer at real estate investment groups throughout
the country, and particularly enjoys working with new investors. Vena frequently
authors articles on real estate investment and the regulatory environment for
various newsletters and publications, including The Real Deal, her own monthly
newsletter. She has been a guest speaker at the Cato Institute in Washington,
D.C., lecturing on the effects of lead-based paint regulation on small
investors. And in her spare time, Vena hosts a popular weekly call-in radio
program on public radio. Real Life Real Estate Investing can be heard throughout
the Midwest and throughout the world on the Internet (WNKU.org) Wednesdays from
5:00-6:00 PM EDT.
Vena Jones-Cox is a past president of the Real Estate Investor’s Association of
Cincinnati, the Ohio Real Estate Investor’s Association, and the National Real
Estate Investor’s Association. She intends to form the International and,
eventually, Pan-Galactic Real Estate Investors Associations so she can be
president of those, too. Vena Jones-Cox has been featured in publications such
as The Cincinnati Enquirer, Smart Money Magazine, Money Magazine and Reader’s
Digest in articles about successful real estate entrepreneurs.