So-called short sales consist of persuading a lender to accept less than the full amount of its claim in return for releasing its lien and allowing a sale of the property to you.
The borrower might still be responsible to the lender for the shortage. Some states do not allow a foreclosing lender to sue borrowers for deficiencies still due after a foreclosure or a short sale.
Knowing the rules will help you evaluate the strength of your bargaining position. Borrowers are more willing to go along with such a strategy if they know it will not cost them in the long run.
For lenders, short sales are purely an economic decision. The considerations for them are as follows.
• How long will the loan remain on the books, failing to produce any income, until the lender can foreclose?
• Will a third party buy at the foreclosure auction or will the lender have to bid on the property?
• What is the likelihood that the borrower will file for bankruptcy or fight the foreclosure and seriously delay the lender in getting its money?
• What will it cost the lender in expenses (taxes, insurance, attorney’s fees, condo assessments if applicable, etc.) to pursue a strategy of foreclosure?
• If the lender forecloses, how long will it take to market the property and how much can it expect to net after commissions and sale expenses?
• How much will all the above cost in money, time, resources, and lost opportunities to reinvest money if the lender gets paid earlier (through a short sale), rather than later (after a foreclosure)?
• What discount do you assign for the uncertainty of all these concerns? In other words, if the lender thinks it will net $79,000 on a $100,000 loan balance, is it 100% sure of that or only 95% sure? If it is only 95% certain, then the $79,000 should be discounted another 5%, to $75,050. The lender should be willing to short sale the property to you for $75,050.
Short sales might have bad tax consequences for the borrower. These are easily overcome if you know about them in advance and the borrower is prepared.