More On Short Sales

Short Sales: Negotiating the Lowest Price

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Short Sales present a great opportunity for a Buyer to purchase a home at a below market price, but how do you know what is the lowest price that will be accepted? As you know, the approval process takes time, often months, so it is critical your offer has a chance for approval or you are wasting your time.

As a Buyer, you must first understand that the final decision maker is the Lender, not the Seller. The property, however, is still titled in the Owner’s name, and they must approve the sale first.

Once a contract is approved by the Owner, they must file financial information and a Hardship Letter with the Lender in order to prove that they cannot keep up with their payments.  They must also demonstrate that they do not have the funds to pay off the loan balance that is left after the sale is closed; the “Short” amount.

The Lender will evaluate the offer price by comparing it to the current market value and decide whether it is more beneficial for them to accept it or deny the offer. If they deny the offer and foreclose on the property, the Lender will incur higher costs in the form of filing and attorney fees plus they also run the risk of the property dropping in value during the foreclosure process.  The difference between an acceptable Short Sale Price and a Foreclosure price can be called the “spread”.

Foreclosures will almost always be sold for less than a Short Sale. Lenders do not want to be responsible for managing the property, and once they take possession of it will want to get it off their books as quickly as possible. So they will almost always be agreeable to lower priced offers once the home becomes their property.

The “spread” could be several thousand dollars, and it is impossible to know how the Lender is calculating these costs.  We are “flying blind”, so to speak. 

Here is an example of how the Lender may look at a Short Sale Offer using this method:

“Spread” Method

Short Sale Offer:      $190,000

The “Spread”:           (12,000)       Additional costs of a Foreclosure vs. Short Sale

**Foreclosure Net:   $178,000       The “Break Even” point if the Lender Forecloses.

**Note: To simplify this example, closing costs were not included in the calculations under the “Spread” & “Loan Factor” methods.

In the above example, if the Lender believes they can foreclose on and sell the property within a reasonable amount of time for more than the $178,000, then they would likely deny the Short Sale offer. If you knew what the “Spread” amount is, you could position your Short Sale offer at the lowest acceptable price.

We do not know what the Spread is, however, so how can we best position the offer?

There are guidelines that are used by the Lenders which are based on the loan type (VA, FHA, etc.). They apply a factor against the current Market Value, so if we know what that factor is, we can project what the lowest acceptable price will be. Of course, we also have to determine the Market Value, but the Lenders use the same sales data as your Realtor.  An experienced, skilled Realtor will be able to calculate the true Market Value.

We also know what factors are used, so once we calculate the current market value, we can estimate what price will be acceptable to the Lender. Here is an example of the “Short Sale Loan Factor” approach:

Loan Factor Method 

Current Market Value:         $210,000

Short Sale Loan Factor:              85%        (Percentage Used is for Illustration Only)

Acceptable Offer Price:       $178,500       (Closing Costs Not Included. See Note Below.)

Note: To simplify this example, closing costs were not included in the calculations under the “Spread” & “Loan Factor” methods.

Armed with this information, we could submit the offer at $178,500, which is $500 greater than the Lender’s Foreclosure Net, and the offer should be accepted.

I cannot begin to tell you how important it is to submit an offer that will be accepted. If you offer too low, the Lender will reject it, and you have lost a great deal of time, likely months, while waiting for their decision. Additionally, the Lender could accept a better, competing offer.  Either way you lose the current property and must start over.

If you know what price will be acceptable prior to submitting the Contract, you can make your offer slightly larger, ensuring that you (1) obtain acceptance and (2) pay the lowest possible price for the property.  

What about the Owner?

Good question. The Owner must sign off on the Purchase Contract before it is sent to the Lender, so they must be convinced that the offer will be accepted. This is not a time for them to be emotional about what “OUR” home is worth, as they will not receive any funds from the sale. Their concern should only be that it is likely the offer will be accepted, so that the sale will be completed and they will have avoided the foreclosure.

The Seller’s Agent may not fully understand this concept so your Realtor may have to educate them.  Their client may want to hold on for a higher price, but for all the wrong reasons.  The Seller’s only objective should be that the offer will at a price acceptable to the Lender.  This is where Short Sales experience is crucial, as your Realtor must be able to convince the Seller’s agent so they may in turn convince the Owner.

Conclusion

The key to buying Short Sales at the lowest possible price is to be represented by an Agent that has a successful track record in closing these sales.  Critical is their Short Sales experience; An agent with twenty years “general” experience that has never done Short Sales is less likely to successfully represent you than one with only three years experience but has completed five or more Short Sales.

Buying Lender Owned (Foreclosure) Properties

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Foreclosures: A Buyer’s Overview

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Buying Short Sales: The Good, The Bad & The Ugly

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Short Sales: A Buyers Overview

Short Sales & Foreclosures: A Homeowner's Perspective

Short Sales: A Seller's Overview

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Buying Foreclosures

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What about Foreclosures? Are these a bargain and what are the pitfalls? How should I start my Home Search? What would my payments be on a Conventional, VA or FHA Mortgage? As a First Time Home Buyer, what do I need to know? Answers to these questions and more may be found above.

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