Home Buying in Austin>Question Details

Scott_home, Real Estate Pro in Austin, TX

Short sale -- How does a bank price a house? Based on BPO or percentage of the loan loss?

Asked by Scott_home, Austin, TX Sat Feb 20, 2010

I heard two schools of theory on short sale pricing. Some say the price is based on BPO or a percentage of the BPO while others say it is based on how much the bank is willing to lose in a soured loan. Any thoughts? Thanks.

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What the lender will take is a direct function of what the current market value is for the subject property. In all Short Sales, the bank will order either an appraisal or a BPO and what they need to net in the transaction is and will be based on the type of loan the Seller has. If the Seller has an FHA loan, which is insured by the government, the loan is insured at a certain %, therefore, any offers that net the bank $$$ below this percentage will not be accepted. If they are accepted, usually the Agents will be asked to forfeit their commissions, which can be avoided with the right training. The % net thresholds on an FHA Short Sale will either be 88%, 86%, or 84%, depending on how long it has been since the homeowner was formally approved to participate in HUD's pre-foreclosure sale program. HUD Form 90045 provides proof of the Seller's acceptance and has to be sent to both the Seller and the listing broker within 7 days of acceptance. For VA loans, which are guaranteed by the government, the net threshold is 88%. For conventional or home equity loans, the target net threshold for most lenders is +/-85% of the current market value. What does this mean? This means that in order to pay all the typical closing costs, commissions, etc in a Short Sale transaction, an offer must be high enough to ensure that all these expenses are paid before reaching the bottom line %threshold.

For more information, please visit http://www.ShortSaleSolutions.biz.

Michael Spickes
America's Home Rescue
2008 and 2009 NAR Convention Speakers
1 vote Thank Flag Link Sun Feb 21, 2010
Banks do not price the house in a Short Sale situation (the seller and his agent decide on a pricing stratagy with a Short Sale - that they believe will bring in offers quickly enough to present to the lienholders before the foreclosure takes place). The lienholder(s) do approve the sales price amount and other terms of the offer they will take. And what sales price the lienholder(s) will approve is based on a percentage of the BPO(s) done. Some lienholders will do more than one BPO (and ie average them or toss low or high etc). The BPO is an as-is with all faults contract in 30 days value (so the BPO amount should be lower than what comps show). Once the BPO(s) are done; the bank will normaly take around 90 cents on the dollar (of the BPO amount). The percentage of BPO they will take varies bank to bank. It also depends on what kind of loan it is (ie FHA, conventional, USDA, VA, etc) and how many lienholders are involved and if a mortgage insurance company is involved. Amounts owed to lienholders does not factor in at any point. If the lienholder can not get offers around that 90% of BPO strike range he is looking for; they will normally foreclose on the property. Moral to the story: a bad (or too high) BPO(s) can often lead to foreclosure.
1 vote Thank Flag Link Sat Feb 20, 2010
Wow if this one doesn't make clear how ineffictive this forum is for getting yoou a complete answer.

Agree to work with an agent so the person trying to help can have a clear understanding of what your question is and then can give a clean answer. We seem to have gotten down to the "what is is" question.

It is true that the agent and owner who is trying to aviod foreclosure set a price for the listing. Rest assured that the bank has the final say over what an acceptable price is. When it's the banks turn to work on a final price they will make a business decission using all the available information none of which the agent or owner have a say over.

SO who sets the price?

I'll stand with my original answer. I answer it from the prospective of someone who is my client and that is my obligation.

BIll Austin
0 votes Thank Flag Link Sun Feb 21, 2010
George is correct, banks are not the ones that set the list price. The seller does with the help of their agent. After they have an offer and go through the normal bureaucracy, they will order the BPO. They use the BPO to determine the value of the home in its current condition. Then based on the person that prepared the BPO that will give them how long it would take to sell the home, they estimate their loss and then decide if the offer is acceptable or they counter.

0 votes Thank Flag Link Sun Feb 21, 2010
My expirence is that it is used to limit losses based on market value. In other words, so they don't allow the price to get so low when they can get another quick buyer at a higher price. The probelm comes in when the house has 2 loans on it and thus requires the 2nd lien holder to get involved. The 1st lien hold is gladly willing to take a lower price, even whiping out the 2nd note altogether. The 2nd loan is basically fighting for table scaps.
0 votes Thank Flag Link Sat Feb 20, 2010
I suspect each bank may have slightly different criteria. I'm sure they will leverage information on the current value of the property, the outstanding mortgage, the costs of forclosure, carrying costs versus time to sell etc...
0 votes Thank Flag Link Sat Feb 20, 2010
The bank makes a business based decission using market value, loan balance, & appraisal which can be a brokers opinion or an actual appraisal. Most banks have REALTORS they depend on to help develop the pricing and marketing plan.

That being said, when I work for a buyer we make offers at the price you want to pay. Sometimes they work out sometimes they do not. I am not scared or intimidated in writing offers that are aggressive. In this market you just never know what anyone will take. Heck I've had offers on non-distressed listing that were 30% below list price which was at market value.

What you need to know is that in recent months about 3% of homes listed are in forclosure & 5% are offered as short sales totaling about 8% of available properties. However, recently about 15% of closed sales come from this pool of distressed homes. This tells us that these homes are aggressively persued by buyers. You need to have current information and be ready to move on day one when properties become available in your target area & price range.

Give me a call or email if you'd like t work together in finding your home. The sellers (banks) pay for my professional services as your buyers agent so it costs you nothing. Free is a pretty good price.

Bill Austin ~ 512-709-6343 ~ baustin.realtor@gmail.com
0 votes Thank Flag Link Sat Feb 20, 2010
It's based on the BPO or appraisal. What that percentage of BPO or appraisal they will accept will be based on the type of underlying loan being shorted.

Guy E. Gimenez ABR, CRS, GR
Broker / Investor
The PowerHouse Group
Web Reference: http://www.phgbrokers.com
0 votes Thank Flag Link Sat Feb 20, 2010
My experience has shown that the banks base the price primarily on BPO's and fair market value.
0 votes Thank Flag Link Sat Feb 20, 2010
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