Nearly everyone knows what a short-sale is by now. But just in case, a short-sale is a home listed for sale that, when sold, will not yield enough to pay all the costs of the sale and pay off the existing mortgage(s) completely. So the lender is asked to accept less than the amount owed. If they agree, a short sale results. Now, there are several reasons why a short-sale seems like is a great opportunity to buy a home cheap.
First, any seller who would consider doing this must truly be motivated. The seller may have already moved out, may be in financial hardship. But we all know that a motivated seller is a softer target.
Second, once a seller knows that all her equity has evaporated, she often cares much less about price. You can't lose more than all your equity, right?
Last, the lender is over a barrel, aren't they? They either accept the offer or they may have to foreclose. A foreclosure will take longer, cost more, and yield less, particularly if values continue to drop as they promise to do. And lenders don't want to be owners anyway.
All this sounds great. The problem is, lenders don't necessarily agree.
"Why wouldn't the bank just own the property"
For a bank, mortgages are assets, while properties, are looked at as liabilities. The risks of property ownership for a bank are: high foreclosure costs, owning a possible depreciating property, liability for what happens on the property, and risk of vandalism. Usually the bank is out of state and doesn't even have access to the property or know the area well.
