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It is a simple question with a difficult answer. How low will the bank accept for a short sale offer? As with most things, it depends. First of all, the seller of the property is the owner, not the bank. The seller must accept the offer before the bank will even see it? But, since the seller walks away from the closing without any money going to him, price is not his first consideration.
A short sale is when the seller owes the bank more money than the home he owns is worth, and the bank agrees to accept a lower amount as payment in full for a sale. The bank will sometimes ask for a personal note from the seller to cover the difference, but the seller will want to avoid this if possible. The bank will decide to approve this arrangement only if it makes financial sense. The threat to the bank, is this home will go to foreclosure if a short sale cannot be arranged. If the seller has the income to continue paying the mortgage and is doing so, that threat is lower. In some cases, a short sale can be arranged without the seller missing any mortgage payments, and the sellers credit is much better preserved. A difficult dance, but possible if an owner without financial hardship wants to move.
For the majority of short sales, the bank has not been paid in a while. If the house goes to foreclosure, the bank is facing high expenses, and the prospect of owning real estate. Bank owned property tends to decline in value over time because it starts in an uncertain condition, remains vacant for long periods, and is roughly and poorly maintained. Banks make money by lending money. They must have a reserve of cash to lend money. They do not want to own real estate. So they sell it; and they are not likely to get a good price for it. If the house is sold in a short sale, the home is still someone’s home. The home is not usually vacant. The home is at least modestly maintained and not mistreated. The home is sold in an orderly process, and the bank receives cash at settlement. This is a lot of benefits in favor of allowing a short sale.
So what will the bank accept for a short sale? Answer these questions:
- What is the condition of the house?
- What is the demand in the local market?
- How much does the home appraise for, or what is the broker price opinion (BPO)?
- How long has the home been on the market and at what price was it offered?
- How well has the home been marketed?
- Are there any existing offers?
- What is the financial condition of the bank and the banking industry?
- What is the competition?
- What is the absorbtion rate?
- What are the recent sold prices including REO sales?
- How many payments are late?
- How much is the balance of the loan?
- How many lenders are involved?
- Is the mortgage insured?
- Who owns the mortgage?
- How well is the short sale package presented?
- Who is the negotiator?
- How many files are on the negotiators desk?
- Are there any contract contingencies?
- Is this a cash offer?
- How certain is the bank that the deal will go through?
We can try answering these questions, and we do, but is there another way to answer the main question?
The above list is the theoretical way of trying to compute an answer. I like to tell my buyer clients, that the only way to know for sure if a seller (or bank) will accept some amount of money is to make an offer. A real offer is binding on the buyer. It shows the question is not idle talk. The bank in it’s own way is answering those same questions above to evaluate an offer. So an offer means it is worth the trouble for the bank to spend the time and money to figure out just how much it will accept. If there are multiple banks, and mortgage insurance, then there are many people that have to agree on the price. That takes negotiation, and none of that negotiation will take place without a real offer on the table. So the answer is to find out by negotiating with the bank.
And, we can use short sale sold data as a guide to our negotiations. The following two graphs show as a percentage of original list price the final sales price for short sales in Baltimore County for the last year. Each dot represents a sale. Each sale has it’s own unique situation. For instance there is one sale at 30% of original list price. This is an as/is home with renovations half unfinished. There are also sales over 100% of list price. This can mean the price was listed very competitively at the start.
There is nothing magic to the original list price, but it gives us a number to work from for this blog post. For a real transaction, we would research the above questions for the specific case.
- Find closings for a specific bank
- Find the loan balance
- Analyze the local market
The discounts buyers are getting can be quite dramatic. If you were to look at the original loan balance, or the highest property sale price, then things really start to get interesting.
The American Recovery and Reinvestment Act of 2009 established the current FHA loan limits. FHA loans are the most popular financing choice right now. You can buy a house with only 3.5% of the purchase price as a down payment. The seller can help with other closing costs. But you have to keep the loan value below the limit set for each county. Maryland has pretty high limits, so first time home buyers should be fine. Still it is good to know what the limits are:
|County||Single Family Loan Limit|
Look up other states or multi-family home limits at the HUD FHA Mortage Limits page.
Photo credit, Rob Pongsajapan.