Role Of The Bank In Short Sale vs. Foreclosure

Asked by Frank B, Nashville, TN Sun Jan 25, 2009

In my search for homes, I came across a house that I was told was "in the process of going into foreclosure". The owner had taken out some appliances out of the house, including some lighting. However, I was told that the owner's name was on the deed and he was trying to keep it from going into foreclosures. A week later I came across another house where it was advertised as Short Sale. This time, however, I was told that if I made an offer it would be sent to the bank.

I always thought Short Sale was PRE-foreclosure and the bank was not involved yet, and when a house goes into foreclosure, the owner is no longer on the deed. Did I get everything backwards? Or were the facts not presented to me correctly? Or???

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Isaac Bensus…, , 92037
Sun Jan 25, 2009

The answer to your question is a little complicated but I will try to explain to you the different approaches an owner that is in financial trouble can take. When the owner of a property falls into financial trouble and can not afford to make the mortgage payments, there are a few solutions.

First. The Owner can contact his/her Bank and explain the situation and try to work out a Loan Modification. A loan modification, if accepted by the Bank can reduce the mortgage payment to levels that the owner can afford. Some lenders are even bringing down the amount owed to them to reflect the present deflated values of homes in many areas and that way, avoiding to accept short sales or go into a foreclosure.

Second: If the Owner of the home can not afford to make any mortgage payments at all because of job loss, health problems and his/her financial situation is precarious, then he/she could opt for two other solutions.

A) Talk to the Bank, explain the situation and try to convince them to accept a "short sale". In a short sale, the Bank agrees to accept a lower amount than what is owed to them. To my view, this is a good will attempt by the Owner of the property talking to the Bank and trying to negotiate a short sale instead of simply not communicating and letting them foreclose on the Home. In a short sale the Owner of a home has to prove to the Bank that he/she can not afford to keep the home because their financial situation deteriorated to the point that he/she have only a limited amount of income to cover their basic expenses. If the Bank agrees to a short sale, the property comes out to the market as a "short sale". This means that the home will be sold for less than what is owed to the Bank and the Bank agrees to take a loss for the difference. The Bank always has the last word. The Owner might agree on a selling price but the Bank has to accept the propossal. If the Bank does not accept, then, the transaction does not goes through. Some of these short sales end in foreclosures many times because some Banks have unrealistic expectations as to what the home could sell for. In a short sale, the Owner has his/her name on the Deed until the home is sold and they transfer title. Short sales can take from a few weeks to be accepted to many months and many times are not accepted at all, so the properties go to foreclosure. Banks are overloaded with short sales.

B) Let the property go into foreclosure. Usually the Owner of the home does not communicate with the Bank and the Bank starts foreclosure proceedings. In California within 3 months of filing a notice of default , the debt can still be redeemed. After three months went by, there is a 21 day redemption period in which, if the Owner wants to get the home back he needs to pay the Bank the full amount of the Mortgage, missed back payments and foreclosure charges. If the Owner does not respond, the property is sold at auction at the steps of the Court House. If there is no bidder, then the property reverts to the Bank and the Bank becomes the legal owner of the home. The deed is registered and recorded at the name of the Bank.

Usually, Bank owned homes are given to Real Estate Agents to put them out for sale. These agents are well known individuals that the Bank has used before. Bank owned properties are usually advertised as Bank owned property, corporate sale or foreclosed home. In a Bank sale, the property comes out to the market at, usually, a little lower price than the market value. If the home is located in a desirable area, sometimes the price of the home gets overbidded and the home sells for more than the asking price. Offers on Bank sales, opposite to short sales can be accepted right away and can close very fast if the home is vacant and the Buyer can perform in a short time.

I hope you understand this explanation. Otherwise, you can go to many sites that explain this same process in more detail.
0 votes
scott cornett, Agent, nashville, TN
Sun Jan 25, 2009
hey frank-

when you're the buyer, there's no difference really between a short sale and a foreclosure. the seller still owns it but the bank is making the decisions on any offers. if you write an offer on a short sale, the seller's agent will have to run it pass the bank for acceptance before the sellers can do anything.
it cost the bank time and money if the listing gets foreclosed so it's definitely more advantageous for them to sell when it's a short sale. you at least have that in your favor.
and be patient. the bank is on its own time. you may give them a deadline to respond but most banks have been taking at least 7-10 days to process an offer lately.

best of luck to you!
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1 vote
Rhonda Burge…, , Smyrna, TN
Sun Jan 25, 2009
Hi Frank. When the seller is attempting to do a foreclosure, the ultimate decision of how short the bank will accept is made by the bank. The seller will sign the sales contract but only after the short-sale amount has been approved by the bank. The bank may require the seller to bring some money to the closing to help offset the "short" amount that the bank is taking. A short-sale is a pre-foreclosure move but it all depends on how much the bank is willing to lose and therefore the bank makes that call. Good luck to you.
1 vote
Barbara Brow…, Agent, Nashville, TN
Thu Jan 29, 2009
A short sale is when the bank is involved; meaning that the selling pirce of the home may be less than that that is owed. The bank has to decide how much of a loss they are willing to take. The home is still deeded to the homeowner. In foreclosure, the bank has taken back the property and is trying to sell it to regain its losses. Hope this helps!
0 votes
Kimble Boswo…, , Nashville, TN
Mon Jan 26, 2009
I know the homes you are referring to and can;t give too much information because of confidentiality reasons. Call offline if you want to discuss more at 615-715-0545. however, what I can tell you - a short sale is still deeded to homeowner, BUT there will always be some negotiation with the bank to decide what will be done with short funds. That negotiation on a short sale happens between bank and seller. The bank reviews the offer because they have to get the full picture on how short and they have to work out details with seller to deal with short funds.

In foreclosure, the buyer deals directly with bank and bank's agent. Seller is no longer involved. Hope this helps.
0 votes
The Hagley G…, Agent, Pleasanton, CA
Sun Jan 25, 2009
the site below may be a vaulable guide for you....good luck!
0 votes
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