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Short Sales: Getting Your Offer Accepted

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Short Sale homes usually sell for below market prices. Sellers are not very concerned about the sales price; they will not receive any money from the sale. The primary objective for a Seller in a Short Sale is to obtain an acceptable offer quickly, as foreclosure proceedings may have already started. 

A Buyer, in many ways, shares the same objective.  If a Seller accepts a contract that is so low that the Lender will not possibly agree to the Short Sale, then the time waiting for a response from the Lender is wasted.  A Buyer should be aggressive in their offer, of course, but the offer will also have to be acceptable to the Lender.

The first step, of course, is to determine the actual Market Value of the home. Market values are determined by Buyers, and the most recent sales are the best source to determine the value of homes in the neighborhood. 

This article is not about determining market value, but here are a couple of key points to remember:

• Prior Sales are the only true indicator of market values.
• Sales of homes in the immediate neighborhood are best, especially if the same builder was used.
• Home Values are usually based on square footage and Features. Larger homes will be priced higher than smaller homes, and desirable features (3 car garage, swimming pool, mountain views, etc.) can add value to the property. 

A good starting point for determining the market value of a home is to determine the average price per square foot of all the homes in a subdivision. Multiply the square footage of the home you are interested in by the average price per square foot and you have the value of an “average” home in the neighborhood with that square footage. Then add or subtract value according to desirable or undesirable features.   

Two more points to consider when determining market value.  The largest homes will usually have a lower price per square foot than the smallest homes.  The prices of a subdivision tend to gravitate towards a mid-point, which tends to lower the value of the largest homes and increase the value of the smaller ones.

If the home you are considering is one of the largest in the subdivision, and the average price per square foot for the properties sold is based on a number of smaller home sales, then the average price per sf is likely high and you should reduce it accordingly.   

The final point concerns the value of certain features (Swimming Pool, 3 Car Garage, etc.).  The actual value of these features on resale is usually far less than you would expect. For example, if an Owner paid $30,000 to install a swimming pool, the additional value of this feature will range from $5,000 for an older pool to $15,000 for a brand new one.  

Once you determine the estimated Market Value of the home, you should base your offer based on the actual market activity in the neighborhood.  If the location is very desirable and homes are selling well in the neighborhood, then you should likely keep your offer close to market value.  If the home you are considering is exceptional, such as having one of the largest lots or best views in the neighborhood, then you may need to offer full market value and sometimes even more.

Determining Market Value is not an exact science, and a good Realtor will not just look at past sales but will also call the Listing Agent to get a sense of the home’s prior activity and their Lender(s) position. They often can also often find out the level of interest in the property and whether or not you can expect competing offers.

As you may wait months for an answer, it is very important to plan your offer carefully in a Short Sale situation. It would be very disappointing and a waste of time if your offer never had a chance at acceptance.  

Once you have decided on a good offer price, what else can you do to help your offer obtain acceptance?  Here are some more pointers:

Earnest Money:Offers are evaluated two ways; (1) the net return to the Seller and (2) the ability of the Buyer to obtain financing and close on the sale. While many homes can be held with $1,000 Earnest Money, a larger deposit makes the statement, “I am a serious Buyer and I have the funds to close on this property”. 

Lenders will be more likely to consider aggressive offers if accompanied by a large deposit – I recommend $5,000.  If you later decide to withdraw the offer, your Earnest Money is refundable so long as you cancel, in writing, prior to the expiration of the Inspection Period.

Cash vs. Financing:Cash Buyers will get the attention of the Lender as they do not have to be concerned about the Buyer’s ability to close on the property. They also do have to be concerned about Appraisals.

Whenever a home is financed, an appraisal will be ordered by the Lender.  If the Appraisal comes in lower than the offer price, the Buyer can cancel the sale and obtain a refund of their Earnest money.  In a cash offer, an Appraisal is usually not performed; however, we often recommend that an Appraisal contingency be written into a cash offer, which gives the Buyer the same option to cancel if the Appraisal comes in low.  

Offers where the Buyer is not putting much of their own money into the purchase may raise a red flag.  VA and USDA Rural Development loans allow the Buyer to obtain 100% financing.  If the Buyer does not have much “skin” in the game, they are more likely to default on their mortgage than if they have some of their own funds in the purchase.

Do not place too much importance on a cash offer, however. A Lender may accept a lower offer if it is a cash deal, but they will not give it away. Do not expect that a cash offer will be accepted if it is far below the market value.

Proof of Funds/Loan Status Report:You must include documentation with the purchase offer that shows that you have the funds (cash offer), or that you have been pre-approved for the loan (Loan Status Report).  Proof of Funds can be a Bank Statement or an Investment Account Statement that shows funds in excess of the Purchase Offer.

Closing Costs:Home Buyers are sometimes “cash poor”, as the out of pocket costs in buying a home and moving can be substantial.  Buyers often request that the Seller pay for some or all of their closing costs, either a dollar amount ($5,000 or so) or a percentage of the list price (3% is common). 

Lenders are used to that and will usually allow that in a contract; however, bear in mind that they are focused on the “bottom line” – the net return to them.  When requesting the Seller pay for the Buyer’s Closing Costs, they will take this into account when evaluating your offer.

For example, let’s say you determine the Market Value is $200,000 and you position your offer 5% below that or $190,000. If you also request the Seller pay for $5,000 of your closing costs, then you must increase the offer by that amount so that the net return to the Seller is the same. In this example, your offer price would be $195,000.

If you do not have to request funds for closing costs, don’t.  Lenders prefer “clean”, simple offers, and contracts that require the Seller to pay closing costs can result in an appraisal problem. 

The Buyer’s Lender will only approve the loan based on the appraised value. If the Appraisal comes in below the purchase price, the Buyer has the option to cancel the contract.

This puts pressure on the Seller to lower the price to the appraised value in order to get past this issue and keep the sale active. That is why it is preferable for a Lender to agree to an offer that does not include a request for the Seller to pay the Buyer’s closing costs.  The Seller runs the risk that the higher sales price might result in an Appraisal problem.

Home Warranties:Don’t bother.  A Lender will not pay for these costs. If you ask for that in the offer, they will take it out in their acceptance letter. 

Your goal should be to submit an offer that the Lender will approve on the initial submission. The above suggestions will help you get your offer accepted, but they will not necessarily hasten the approval process.

The responsibility for getting the offer to a Negotiator for approval is with the Seller’s Agent. The Seller’s agent must make sure that all of the Short Sale documents are submitted in their entirety, and they must then guide the transaction through the process by calling often, and no less than one time per week.

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Short Sales: A Seller's Overview

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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.