Are Lenders Shooting Themselves in the Foot?
Comments: (0) Written by: Duane LeGate Date: May 7, 2008A couple of weeks ago, Reuters reported that “Realtors in many U.S. states say lenders are demanding excessively high prices before allowing distressed borrowers to offload their homes in ‘short sales,’ making the housing crisis worse.”
A short sale, as we have discussed here before, is when a borrower sells a home below market price and the lender forgives the remainder of the debt. The alternative to a short sale for many distressed homeowners is often foreclosure, and in a foreclosure, everyone loses. The homeowner’s credit suffers and the price the lender can get for the property is often significantly less.
According to the Reuters story, however, Realtors are complaining that “many lenders harm their own interests by refusing to accept bids below internal targets, even though that may eventually force lenders to sell homes in foreclosure, where bids are usually far lower.” That, combined with the fact that there is workforce shortage when it comes to bank employees able to process short sales, has frustrated many potential buyers.
Ron Rosen, a REALTOR® in Lighthouse Point, Florida, was quoted in the article as saying: “The system is broken. The only question banks should ask is can they make more in a short sale than in foreclosure. The answer is that in nine out of 10 cases they will lose more money in a foreclosure. But some banks seem to be asking a different question.”
I share this with you to remind you that you—the real estate investor—should be in the driver’s seat when negotiating a short sale investment opportunity. As an investor, be confident and show the distressed homeowner and the lender you have done your homework. Be respectful but firm, and, if possible, work in concert with the homeowner. Many homeowners and lenders are in a position they never anticipated being in, and you can position yourself as the person extending a helpful hand to them. Know the market and make a strong case for your bid. Share national statistics with the lender (the nine out of 10 cases where the lender will lose more money if the property goes to foreclosure is always a good one).
It may be the case that lender’s are shooting themselves in the foot by not taking advantage of short sale opportunities. As a savvy investor, you just may be able to overcome the lender’s ineptitude by keeping “the one question” at the forefront of the discussion—“can the bank make more money in a short sale than in a foreclosure,” and nine out of ten times, the answer will be a resounding “yes.”
