When a person is underwater on their mortgage, and is not making the payments they owe, banks will want to make sure they get what they are due. This means that a bank could foreclose upon the property or the property owners might pursue a short sale. There are various reasons why sometimes accepting a short sale offer is better for the bank than pursuing a foreclosure.
In the end, a bank is a business and its goal is to turn a profit. So, if it is more expensive for a bank to pursue a foreclosure over a short sale, the bank may be more apt to accept the short sale offer instead. According to one source, banks can make anywhere from 20 to 30 percent more in a short sale in comparison to completing a foreclosure.
Sometimes in a short sale, the offer on the property may be on par with the property's market value. When that happens, the bank may decide to accept the short sale offer, and thus not pursue a foreclosure. This is because it is not likely that the bank will receive an offer on the property through foreclosure that amounts to the market value of the property. Of course, there are always exceptions, and if it seems like the property in question is in a location where its value will appreciate, then pursuing a foreclosure may be preferable.
It is important to keep in mind that any short sale offers can form the basis of a real estate contract in which the buyer and the bank will each have legal obligations towards one another. Foreclosures are also subjected to the laws of the state. When it comes to any banking transactions, it is important for all involved to understand their legal options, so they can make informed choices.