Yes, some home sellers have over inflated asking prices but other homes are listed as short pays with unrealistic asking prices.  Lenders want/need to sell property for market value.  When listing a home for sale subject to short pay off, the listing agent and the owner determine the asking price.  The owner/seller is not making ANY money, so they really don’t care what the asking price is.  The Realtor needs to attract a buyer because most lenders want to see an offer before they will indicate whether they are interested in a short pay off and if so at what price.  REMEMBER the asking price is usually not approved by the bank, so it really means nothing.

Once a guinea pig someone writes an offer, the listing agent submits the offer to the bank and everyone waits.  It can typically take 2-4 weeks, sometimes longer for a response.   An example from the MLS:

Kenneth Rd, near Western
3 & 3, 1641 sq ft, lot 7,150 (no pool)
Listed 1//08 $699,000
Sold/Closed: 4/08 $725,000 – which seems like a fair price, not a bargain. And remember the bank and the owner don't make repairs on short sales.... there is no renegotiating because your inspector informs you that the plumbing is shot.  They also don't typically pay for termite completion.

Aha! See the bank wouldn’t accept the $699,000 – they had to squeeze every penny from the buyer. In the meantime the buyer had to wait for the bank to reject their offer, counter it, and settle at $725,000. This is another apsect of short pays; there is a lot of waiting and jumping through hoops on the buyer’s part.

So let’s look at the history of this short pay and find out how/why it got to that:

Onwer # 1: Sold 10/05 $695,000

Owner #2: Sold 6/06 $865,000 (this owner updated kitchens and baths – flip)

Owner #3: Listed 5/07 $734,900 (subject to lender approval of the short pay off) didn’t sell
Relisted 1/08, sold for $725,000 (remember the list price was $699,000)