Why would a lender foreclosure instead of approving a short sale?

Lender choosing to foreclose v.s short sale

As a Massachusetts Realtor who deals with short sale transactions on a daily basis, I have seen and learned quite a bit since I started getting involved with these types of transactions four years ago.

One thing that I am extremely proud of is the fact that every short sale that I have listed has received short sale approval from the lender. This is no small feat, as nationally the success rate for completing a successful short sale in less than 30%.

I certainly can not take all the credit as the attorney I work with does all of the grunt work with the lender. The short sale law firm I use does outstanding work. My job in a short sale is the same as with any home I am marketing….get it SOLD! This means finding a buyer who will pay something in the ball park of market value and be willing to wait the time it takes to get short sale approval which is typically longer than a regular transaction.

Of course part of getting a short sale to the closing table is knowing how to follow proper procedures. The are plenty of Realtors getting involved with short sales who are completely clueless but see it as a money making opportunity and are willing to put a seller’s financial future at risk for their own potential gain.

Here are a few mistakes that I see repeated over and over again by Real Estate agents that don’t know any better:

  • Realtors® submitting multiple unsigned offers to the lender.
  • Realtors® submitting low ball offers to the lender.
  • Realtors® allowing home inspection contingencies after short sale approval.
  • Realtors® allowing an investor to negotiate the short sale.

For a complete explanation of each of these issues and why you don’t want any of them to happen to you see short sale lawsuits against Realtors.

Then again there are some Realtors who do in fact understand the short sale game and how to successfully navigate the waters. Short sales that have more than one lien holder tend to be slightly more difficult to get done than ones where there is only one lender involved. When there are multiple lenders involved you need approval from both in order for the sale to take place.

While I have yet to have this happen (knock on wood) I know of other Realtors who seemingly have had a situation where a 2nd lien holder has chosen to foreclose instead of granting short sale approval.

The scenario goes like this…. a home is on the market for $300,000 and is being marketed as a short sale. There is a 1st mortgage on the property for $310,000 and a 2nd mortgage for $50,000. The seller has lost his job and can no longer afford to pay the mortgage so he chooses to short sell his property.

A buyer comes along and makes an offer for $290,000 which is accepted by the seller and sent to the 1st and 2nd lien holders. After a period of time the 1st lien holder orders an appraisal to verify market value and after doing their due diligence determines that $290,000 is well within the acceptable limits of market value. During the negotiation process the 2nd lien holder is offered $5000 in order to approve the short sale and allow the sale to take place.

Short sale denied by lender

The lender digs in their heals and says NO. They will not accept the short sale payoff of $5000. The Realtor involved says why not? They go on to argue with the lender that if you allow this to go to foreclosure you will get NOTHING as the home is worth far less than the $360,000 mortgage balance.

The lender does not bend and says we don’t care we are going to foreclose. Folks this is a real world scenario that happens everyday in the world of short sales.

What remains to be seen is whether or not the lender is going to get nothing. The answer is probably NO. More than likely one of the following scenarios will have taken place:

  • The 2nd lien holder has a loss sharing arrangement with the FDIC that will allow them to collect substantially more than the amount offered by the first lien holder under the short sale scenario.
  • Unbeknown to the homeowner, the second lien holder has bought insurance against the default. The lender will now collect on that insurance. Depending on the terms, this may not have been possible if they agreed to a short sale.
  • The homeowner’s loan with the lender was full recourse and they intend to pursue him for the deficiency and/or sell that right to a collection agency.
  • There are tax advantages to the lender that far outweigh the offer of $5000 that they received from the 1st lien holder.
  • Any or all of the above!

The above situation is why it is imperative to have a great short sale negotiator on your side. Of course there are times that it will be impossible to make the deal work but in many cases the skill of the negotiator can find a middle ground with the 2nd lien holder.

Click on the links below to see other important information related to completing a Massachusetts Short Sale:

If you are need to short sale your home or condo in Ashland, Bellingham, Framingham, Franklin, Grafton, Holliston, Hopedale, Hopkinton, Medway, Mendon, Milford, Southboro, Westboro, Natick, Northboro, Northbridge, Whitinsville, Upton, Uxbridge, Shrewsbury, Worcester, or Douglas Get in touch! I would love to interview for the chance to represent your best interests.

I am successfully completing short sales through out the Metrowest Massachusetts and Worcester County areas. So far, knock on wood, I have a 100% success rate for short sale approval!

If you are outside of the Metrowest Massachusetts area and need to do a short sale please feel free to contact me and I would be happy to refer you to a Realtor in your location that handles short sales and knows what they are doing! I have referred short sales to other Realtors all around the country.


About the author: The above Real Estate information on Lenders choosing foreclosure over short sale approval was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-435-5356. Bill has helped people move in and out of many Metrowest towns for the last 24+ Years.

Thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!

I service the following towns in Metrowest MA: Ashland, Bellingham, Blackstone, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northboro, Northbridge, Shrewsbury, Southboro, Sutton, Wayland, Westboro, Whitinsville, Worcester, Upton and Uxbridge MA.