Short Sale Training: The Banks’ Perspective on Short Sales

Short sale training will teach an investor about the short sale as viewed by banks. As long as a homeowner is actually paying on the loan, the lender views this as what’s called a performing asset – meaning the asset is generating the anticipated principle and interest payments from the homeowner. But when a homeowner gets in trouble and stops paying (because they lost their job, divorce, someone in their family getting sick, disability, etc.) the asset becomes what we call “non-performing.”

Banks hate non-performing assets, because remember, performing assets are the main way banks make money. When an asset is non-performing, the goal is to either 1) get the asset performing again, which would require the homeowner to be able to make payments as agreed or 2) dispose of the asset quickly so they can salvage whatever funds are available and get the money back out in circulation in the form of new loans.

Through short sale training, you can come to understand this really important point: banks are not in the real estate business – they are in the paper business. When you buy a house and give the bank a mortgage in exchange for a loan, you are allowing the bank to create paper that has value. The mortgage and promissory note the homeowner signs are valuable documents to the bank. It represents future principle payback and significant interest profits to them, if the homeowner keeps paying on it.

Short sale training will show you that once a homeowner stops paying and the paper becomes non-performing, two things happen. First, the lender is required to set aside what’s called a “cash reserve” against the non-performing debt. This cash reserve is set aside to protect the bank investors from significant losses. Here’s the important thing to know: the amount of cash reserves the bank must set aside is usually the equivalent of 3 to 8 times the amount of the defaulting loan.

Let’s say a homeowner owes $100K on the mortgage and defaults and stops paying completely. The lender is required by federal law to set aside anywhere between $300K and $800K as a cash reserve until that bad loan is resolved. This means these amounts get frozen and cannot be loaned. The blood supply of the bank is completely tied up! Think about banks with hundreds, even thousands of loans in default at the same time, and how much money is tied up in those cash reserves.

Banks hate the defaulted loans and will do almost anything to get them off the books quickly. Can you now see why banks are so eager to erase a bad debt as quickly as possible, even at a significant loss? Short sale training will show that the future interest potential on performing loans far outweighs the short-term losses the bank will suffer by selling for .50 or less on the dollar. Banks understand this principle, and you need to as well.

The second thing that happens is the non-performing loan goes on the bank’s books as bad debt. Federal regulators see it, bank examiners see it, and yes, the investors themselves see it. Nobody likes this scenario. Bad loans are bad news for the bank. Not to mention that it also affects the banks ability to grow and lend out even more money.

Short sale training shows the upshot of all this. Write this down:

The average investor views a loan in default as a difficulty.
Short sale investors view a loan in default as an opportunity.

Understand this simple idea and you can make a killing in short sales.

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