How Flexible Is That Short Sale Price?
How Banks Determine Short Sale Values
Question: "My husband and I want to buy our first home but we're having a hard time. It seems that almost every home we're interested in is a short sale. I've heard awful things about short sales — how they trick you into making an offer and then come back and ask for a lot more money. There's one house in particular we'd like to make an offer on but we're scared. We don't know how much to offer. Just how flexible is that short sale price?"
Answer: In a short sale, the list price most often means diddly-squat. "How can that be?" You may wonder. How can an agent and her seller put a price on a short sale that isn't real? It's done every single day in cities across America.
Buyers just like you asking the same question: How flexible is that short sale price? Or, they ask: How low will the seller go? If they offer list price, the bank has to accept that price, right? The answer is no.
"How can a seller and her agent mislead an entire pool of buyers like this?" You may think. It's how short sales are priced. Some prices are correct and some aren't.
The Preapproved Short Sale Price
First, realize that a short sale is a privilege, not a right. Banks don't have to approve short sales. There's no law that says a bank must grant a short sale for an underwater home. Banks do short sales based on five principles:
- The seller is underwater on a home.
- The seller has a hardship or is in imminent danger of foreclosure.
- The buyer is qualified to buy the home.
- It's more profitable to short sale than foreclose.
- The price is adequate or at market value.
It's the last bullet point that banks care about when they decide to preapprove a short sale. They want to be in control of the pricing and won't waste time working on a short sale that is priced too low. But it also means they might not get any offer at all because they picked the wrong price.
For that reason, I dislike preapproved short sales. It would make more sense for banks to let the market determine the sales price, but not everybody plays fair and not every short sale is priced according to the market.
Moreover, buyers should realize that just because the bank has preapproved a sales price, it doesn't necessarily mean a buyer must offer that price. A buyer may offer less but the bank might not accept it. However, if the buyer does offer the preapproved price, the short sale will be approved, provided the buyer qualifies.
How Does the Bank Determine Short Sale Pricing?
I've gone around and around with banks on price more than any other aspect in a short sale. For example, I listed a short sale home for $599,000 and received an offer for $599,000. The bank decided it wanted $635,000, so the buyers agreed to increase the price to $635,000. Then, the buyer's lender appraised it at $599,000, prompting the bank to agree to sell at $599,000.
Most banks rely on a BPO, or broker price opinion. They hire an agent who is in the business of doing quick, mini-appraisals at a cheap price. That agent looks for homes within a specific radius from the subject property. The homes are similar square footage, age and condition.
This system works well as long as there are comparable sales within the last three months and as long as the neighborhood is the same. But often a BPO agent may need to adjust the value by deducting from or adding to the sales price for noncomparable homes — something not every agent knows how to do. Alternatively, the agent might cross neighborhood boundary lines and not realize a different neighborhood commands a different price.
BPOs, like an appraisal, are a combination of art and science. Before you buy a short sale, you should ask your agent to run the comparable sales, just like a BPO agent would do. Then, you'll have a pretty good idea of whether the bank will accept your offer. If the seller believes the bank will accept your offer, the seller will likely also accept your offer. That's the secret.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.