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Lender Facing Foreclosure May be Willing to Accept Discounted Payoff - 2008-10-12
LENDER FACING FORECLOSURE MAY BE WILLING TO ACCEPT DISCOUNTED PAYOFF
Short Sales Allow Seller to Walk Away and Lender to Avoid Owning the House

When a lender threatens to foreclose on a delinquent homeowner, that lender is literally gambling. The risk is that no cash bidders will show up at the foreclosure auction, and that the lender will end up owning the house.

From the lender's point of view, maybe that's not a bad thing. Perhaps the borrower will voluntarily vacate the premises, and maybe the house will still be in good condition. And it would be nice if the house could be marketed quickly and inexpensively, then sold to a buyer, hopefully at a profit.

Well, there was a time when that scenario worked. It doesn't work today.

The reality is that the Atlanta real estate market is swollen with these bank-owned homes. Many of them are in poor condition, most needing at least paint and carpet, some requiring much more. And lenders have finally begun looking at methods to stem the flow of these houses into the category of REO, which stands for "real estate owned."

One solution gaining traction is a little known procedure called the "short sale."

In real estate, a short sale is the name for the purchase of a pre-foreclosure property in which the seller voluntarily gives up his house and the lender accepts a discounted payoff of the outstanding loan.

As a concept, this sounds too good to be true. Simply find a distressed homeowner who owes more than his house is worth, ask him if he wants to just "walk away," and offer the lender fifty cents on the dollar for the payoff.

Unfortunately, there are a few snags along the way. And while there are no hard and fast rules for getting a "short sale" offer accepted by the lender, it turns out that most lenders follow a few general guidelines. Here they are:

First, no lender will even talk to you unless you have obtained written permission from the current owner. Some will accept any type of written proof, while others require their own forms. And home owners facing foreclosure are often wary of signing any document they don't fully understand.

Next, the lender must be convinced that the financial pain of accepting a discounted payoff will be less than the agony of trying to resell this same home later as a bank-owned REO property.

Yes, the lender is familiar with the ravages of an empty house. Stolen air conditioning compressor, stolen copper pipes, broken windows, missing appliances, occupancy by vagrants and criminals, and creeping toxic mold to name just a few highlights.

But hope springs eternal in the hearts of lenders everywhere. They long for the good old days when REO properties might sell for enough to pay off the loan in full, and sometimes even yield a small profit. Maybe this might happen with this house, thinks the lender.

So if the buyer wants to buy this house at any worthwhile discount, it becomes the buyer's job to convince the lender that the house is descending into a bottomless money pit which will most certainly bankrupt anyone foolish enough to come into ownership.

The lender will often hire an appraiser or broker to perform a "drive-by" estimate of value. While not as thorough as a formal appraisal, this independent guess at value will help the lender make a decision on how low they will go. The bottom line here is that the worse the condition of the property, the better bargaining position that you have in trying to negotiate the short sale.

Accepting the short sale offer is only considered when it is in the financial interest of the lender to do so. But in addition, the lender introduces another hurdle.

Now the lender needs to be convinced that there is some form of "financial hardship" on the part of the borrower. Rare medical conditions with overwhelming hospital bills are popular, as are disabling injuries sustained by borrowers or death of a breadwinner.

The lender must further be convinced that the borrower has no assets with which to pay this debt, and further that the borrower is receiving nothing in connection with this sale of their home.

As a final roadblock to short sale success, lenders often wait weeks to make a decision on these offers, sometimes even allowing the house to be sold at foreclosure while a willing buyer awaits an answer on their short sale offer.

The good news is that lenders are finally waking up. There is evidence that home lenders are recognizing that a short sale payoff is one of the few ways they can prevent a delinquent loan from becoming a vacant REO house.

Short sales alone won't solve the problem of too many foreclosures. But every home sold prior to the auction is one step in the right direction.

 
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