Banks have added far more inventory to their REO listings over the past few years than they had bargained for. Yes, they were foreclosing right and left with all the robo-signing nonsense. But they ended up having to follow through and actually take possession too often. Ideally, a bank that forecloses on a home wants to offload it right away at an auction. However, the standard approach to selling at auction is to set the minimum bid at or above the amount of the outstanding mortgage balance. In an upside down loan to value situation (with a mortgage that is greater than the market value of the home), this simply isn’t going to happen. That means the bank has to actually repossess the home. At that point, the house becomes an REO property.

Why Is This a Problem?

First, a typical bank is not in the business of maintaining and selling real estate. This means they may have to pay an outside service provider (such as an asset manager) to handle the process. If they do handle sales in-house, they still have to hire a property preservation company to maintain the property so it doesn’t get cited for code violations.

Then, there’s the issue of repairs. An REO property may be in worse condition than a similar home that is in pre-foreclosure. If the bank wants to get a sale price close to the current market value for the home, they may have to be willing to sink money into repairs or renovation.

In addition, there may be liens against the home that the bank needs to clear before it can offer the property for sale with a clear title. The longer a bank has to keep an REO on its books, the more money it may lose. Holding onto the home and waiting for the market to turn around is a risky proposition.

Short Sales Offer a Quick Solution

With a short sale, the bank becomes the seller of the home without ever having to take possession. The homeowner is responsible for settling most unpaid liens and for maintaining the property in salable condition. If the home is used a rental property, the owner is responsible for dealing with the tenants.

In a traditional short sale (vs. a HAFA short sale), the bank may require the homeowner to pay a lump sum toward the unpaid mortgage balance. As an alternative, the bank may pursue the homeowner for the balance as an unpaid debt or sell it to a collection agency to recoup some of their costs. Even if the bank must forgive the loan, they still get to dictate the sale price – which is often closer to market value than the price it can get as an REO listing.

Getting approved to short sell a home can still be an arduous process. But at least homeowners can take comfort from the fact that many banks don’t want to foreclose if they can make a short sale work instead. An experienced short sale specialist is often the key player who can make this happen.