How Flexible Is That Short Sale Price?
How Banks Determine Short Sale Values
A short sale is when a homeowner sells a home for less than they own on their mortgage. This might sound like a good deal for homebuyers, and it can be, but these transactions can take a long time. It's best not to get too attached to the list price, though.
In a short sale, the list price doesn't mean much. How can an agent and their seller put a price on a short sale that isn't real? It's done every single day in cities across America.
You might wonder how flexible the short sale price is or how low the seller will go. If you offer the list price, the bank has to accept that price, right? The answer is no.
Despite how it might seem, the home seller and agent aren't being deceptive. The confusion comes from how short sales are priced.
Learn more about how short sale pricing works.
Short sales are an alternative to foreclosure and do less damage to the homeowner's credit.
How Short Sales Work
Short sale pricing is uncertain because the seller isn't the only party who needs to approve the offer. The bank holding the mortgage on the home has to approve the short sale offer too.
Short sales are 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 the most when they decide to approve a short sale. They want to control 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.
A real estate agent experienced with short sales can help you navigate the process.
How Does the Bank Determine Short Sale Pricing?
Short sales are complex. For example, an agent might list a short sale home for $599,000 and receive an offer for $599,000. The bank may decide it wants $635,000, so the buyers agree to increase the price to $635,000. Then, the buyer's lender appraises the home 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 low price. That agent looks for homes within a specific radius of the subject property. The homes are similar in 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, which is 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.
The Bottom Line
Short sales require patience and flexibility. As a homebuyer, consider the list price as a guide. It's not necessarily what the bank will accept, though. Many factors affect the price the bank will be willing to accept, including the appraisal and the BPO.