Banks make more money on foreclosures than short sales

Editor,

I sell bank-owned (REO) properties and just had a conversation with one of my asset managers that really opened my eyes. He explained why banks are sometimes not very reasonable in their negotiations or desire to conduct a short sale.

Before this conversation, I always believed that it was more costly for the bank to go through with a foreclosure than to complete a short sale. Everyone seems to think that is the case, but it turns out that it is a myth sometimes. Apparently, sometimes the bank does not go through with a short sale because it is, in fact, more costly to do so.

First, many times banks want to go after the owner for the deficiency after the foreclosure. Sometimes people are in true hardship, but many times they are not; they have the ability to pay their monthly payments and simply choose not to do so. Consequently, the bank will take the property to foreclosure, sell the property at the best price possible, and then go after the owner for any and all deficiencies.

Second, when a property goes into foreclosure, a majority of liens (i.e. second loans, construction liens, etc.) are wiped out and only six months of condo fees (or more for HOAs) are due once the foreclosure is complete. If the bank sells a property in a short sale, every lien and association past-due money would have to be paid in full, or, at the least, the bank will have to go through extensive and costly negotiations with those who placed the liens.

An example: If a property owner has not paid association fees for two years to the sum of $7,500 including late fees and legal charges, and has a $25,000 contractor lien, that comes to $32,500 that would still need to be paid off in a short sale. But in a foreclosure, that could be cut down to just six months of condo fees for a total of only $6,000 in costs – and the bank can still go after the owner for any remaining deficiencies after the foreclosure is sold on the open market.
 
Sep Niakan
HB Roswell Realty
Miami Beach