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How low will the bank accept for a short sale offer?

May 14, 2009 by  
Filed under Featured

Limbo

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.

Neglected Home

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?
  • etc.

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.

Short Sale Percentage Days on Market Baltimore county

Short Sale Percentage list price Baltimore county

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
  • etc.

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.

Photo credits, lolodrake and Doug Wertman.

How To Challenge Your Maryland Property Tax Assessment

March 13, 2009 by  
Filed under Featured

US Supreme Court

When property values were rising, local governments were loving the new higher property tax assessments that went along with that. Existing homeowners were protected from quickly rising tax bills by the Maryland Homestead Tax Credit. But, new homeowners aren’t immediately protected by the Homestead Tax Credit. Still, at least they know in advance how high their tax bill might be. Now that most homeowners have had their property values decline with the housing market and slow economy, assessments will lag behind. Maryland assesses property values every three years. So two thirds of the homes will not be looked at this year. For that one third it remains to be seen if assessments will drop. In the end the responsibility falls to each homeowner to make sure their assessment is fair.

So, how do I challenge my assessment? Property assessments are supposed to reflect property values in a theoretical arms length transaction. This means if a neighborhood house was foreclosed on, or sold to a family member, the transaction value does not impact assessments. If we have enough of these transactions, as we do in some neighborhoods, then regular sales values are affected. These regular sales can then be relied on as evidence of reduced assessment values. You can look up sold prices at the Maryland SDAT property tax search, or you can ask a Realtor for a report on recent solds. If you promise me you will spread the word to family and friends about the HelpShop.com website and homes search, I’ll make you a report of the last 50 homes that sold within a circle around your home.

Read through the American Homeowners Association “Property Tax Reduction Kit“. This document is a good general guide to how to approach an appeal. It is not Maryland specific however. Next you might want to look over the Maryland Assessment Procedures Manual. Also, you may want to take a look at the updates. And SDAT has written a guide to the appeal process. For more background, here is an example worksheet for calculating the property assessment on a particular house. Everyone can order a copy of the worksheet for their house. If you are appealing then you have the right to order the worksheet for anyone’s house. Everyone is to be treated equally under the assessment process. You can use other peoples worksheets as a guide to how yours should be done. Each worksheet costs one dollar.

Armed with any factual discrepancies on your house, worksheets of similar houses, and sold prices in your neighborhood, you have a reasonable chance of reducing your assessment at an appeal. The first level of the appeals process is with the person that assessed your property in the first place. If you have an unfinished basement, but the tax records say it was finished, with proof, you will win this battle. Another avenue of attack is condition. The assessor has leeway to say the condition is less than 100 percent. This can translate into a percentage reduction in that portion of the value. The rest of your appeal will be more difficult. Your home has been categorized into very specific categories. If a neighbors home is a different style, then the assessor might not take it as evidence of inequity of treatment. If you can, get worksheets for homes styled like yours. The assessor will argue that you are protected by the Homestead Tax Credit, so you need not worry that the assessment seems high to you. Don’t let them get away with that. You could argue right back that since your tax is limited by the Credit, they might as well lower the assessment. A lower assessment could make it easier to sell your house, since the new owner will be taxed at the assessed value.

The next level of appeal is more formal than the first. Still, there are no fees, and you don’t need a lawyer. You can represent yourself. This appeal is before your county Property Tax Assessment Appeals Board. This is composed of three local residents appointed by the Governor. Be sure to request in writing at least 15 days before your hearing, a list of the comparable properties that will be used by the assessment office before the Board. Read over the rules for the board.

If you are still not satisfied with your ruling, you can appeal to the Maryland Tax Court. This too is made up of people appointed by the Governor. It is an administrative court under the Executive branch of government. It is still informal, but a lawyer might be wanted at this hearing. For any level in the appeals process, you might find it instructive to read some of the past rulings of the Maryland Tax Court.

Now that you have gone through channels, and used up your remedies within the Executive branch of government, your next option is to try appealing through the Judiciary court system. Another option, which a friend of mine succeeded with, is to petition the Legislative branch of government for a change of the law. This is another story, but in his case, the law did change…but this only benefits the rest of us. His case was still correct under the old law.

I am not a lawyer. I am only reporting my limited knowledge of the assessment and appeals process. If you have gone through this, or have any tips, please comment below.

Photo credit, dbking.

A tip for negotiating on new construction and getting the best deal.

January 28, 2009 by  
Filed under Quick

New Construction

Q: Can you negotiate price on new construction homes?

A: Yes you can, but you are fighting an uphill battle. One thing I suggest when negotiating new construction, is to ask for free upgrades. In a development, the builder has constraints other sellers don’t. Price is very important to maintain so existing owners don’t feel like they bought at the wrong time. A common strategy is to hold the best lots for last. The other strategy is to include more upgrades. So ask for the upgrades, and you are speaking the builders language. Ask for price reductions, and the builder has more than this deal to consider.

Photo credit, Bart Everson