High Cost of Foreclosure Encourages Short Sale Approvals

Far too often, sellers simply walk away from over-leveraged homes and face the consequences of foreclosure.  For many, it is simply a matter of being emotionally and mentally exhausted and unwilling to take any further action to sell the home before foreclosure.  But for some, they don’t believe their lender will approve a short sale on their property.  Often, the seller feels that they are “too far under water” for the lender to approve a sale and release or forgive a large amount of debt.  Or in some cases, the seller has been told by the lender that they will not approve a short sale; however, this is not necessarily true, and most lenders would rather approve a short sale than go through the foreclosure process.

There are many reasons for this, but the main reason is money.  Big surprise, right?  A 2008 report by the Mortgage Bankers Association estimates foreclosures to cost lenders “over $50,000 per foreclosed home or as much as 30 to 60 percent of the outstanding loan balance.” However, in the case of a short sale, lenders typically recoup more money.  According to an article by CNN Money, lenders typically lose about 50% on foreclosures, compared to about 30% on short sales.

The costs of foreclosing can vary depending on the state, and they can include legal fees, court costs, administrative fees, etc.  Once the property has been foreclosed and becomes an REO (Real Estate Owned by the lender), the lender still hasn’t recovered any money.  The property must still be sold, and that process also requires the lender to incur more fees: real estate commissions, maintenance, utilities, property taxes, seller concessions, repairs, etc.

Further, in the case of higher-priced homes, lenders are not keen on the idea of having expensive homes on their books, as only a small portion of the population can afford to buy them.  Again, the prospect of getting a luxury short sale approved is actually better than many sellers may think.

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