If you are now joining in on this real estate investing training discussion on Understanding Short Sales, we are picking up where we left off in Understanding Short Sales and The Short Sale Process Part I. Once a property is “in foreclosure” the bank will be more willing to entertain offers that are less than the full value of the mortgage balance owed to them since the bank now has an incentive to negotiate.
How Banks Analyze Short Sale Offers
The bank has to carefully analyze what they believe the house is worth, and what they think it would sell for at a foreclosure auction or as a bank owned REO property. Then they need to consider the time it would take to get the house back and how many months of monthly interest payments they would lose and how much that would cost them. They also have to consider the legal costs of the foreclosure lawsuit as well as the holding costs and disposition costs to sell the property. The bank also looks at the current condition of the property and if any repairs are needed.
Occasionally the bank will consider selling a property for as little as 50% of the fair market value which can be much less than the face value of the mortgage. Usually this occurs when there is substantial damage and rehab required to bring the property to a marketable condition. A more typical short sale is probably at around 80% of current fair market value although each property is different and there are no set guidelines (although with some lenders there are). I have seen banks decline high offers which they should have accepted and I have seen banks accept very low offers where I was surprised that the offer was accepted. Each case depends on the property in question, the comparable sales, the condition of the property and many other factors. The ability to have a good short sale negotiator and a good working relationship and understanding of loss mitigation is also a key factor in the negotiations.
Of all the factors that the bank considers, the condition of the house and how much damage it has is one of the most important from the perspective of the lender. Houses that are in pristine move in condition do not sell for a lot less than fair market value. Some lender guidelines allow for an offer of no less than 88% of current fair market value. However if the property is substantially damaged from fire, flood or any other damage that makes the property uninhabitable then the bank will be willing to accept substantially less than the 88% guideline. If the house is abandoned, or is in a high crime area with visible signs of gangs, graffiti, squatters or illegal activity such as drugs then the bank will be very willing to negotiate a quick sale at a reduced price since the bank does not like the liability of these types of properties. The key is to communicate this information to the bank which is why it is so important to have an experienced short sale negotiator.
Negotiating a short sale is a time consuming and cumbersome procedure. It can typically take a few months of back and forth negotiations between the buyer, the seller and the banks loss mitigation department. This is best handled by an experienced short sale negotiator who negotiates short sales full time.
The next installment of Understanding Short Sales and The Short Sale Process will cover Short Sales Negotiators, required documents and buying short sale investment deals.