When Does a Bank Choose Foreclosure Over a Short Sale?

A bank, when pursuing action on a distressed property, generally has two options. The first is to allow a short sale, or, a sale in which the bank agrees to let the homeowner sell the property to a buyer for an amount less than what is owed on the loan. For example, if the remainder of the home loan is $100,000, a short sale could be for, say, $75,000. The bank could agree to this and would have a difference of $25,000 to deal with.

The second option is to pursue foreclosure – and this is by far the most popular one. During this option, the bank evicts the homeowner and places the property on sale at auction to the public at large in order to get as much money as possible to pay off the remainder of the loan.

Which option a bank chooses depends on the situation. Is the home in a non-recourse state? If so, the bank will be more likely to pursue foreclosure, since it cannot sue the homeowner for the difference in a short sale (like the $25,000 difference above). What percentage of the home loan is paid off, versus what is owed? What is the condition of the property? What is the foreclosure market doing lately?

Basically, the bank will choose a short sale if it assumes it can get more money by agreeing to a short sale than going through the foreclosure path. Even if a short sale's offer is lower than the projected foreclosure gain – say, a short sale will give the bank $75,000 of the $100,000 and a foreclosure will probably give the bank $78,000 – the added difficulties of the foreclosure process make it a less attractive option.

As is the case, though, some banks may believe it is worth it to pursue foreclosure, especially if the short sale offer is too low to justify the move.