It's the MARKET VALUE of the home that you want to look at VERY closely.
A short sale is a short sale so long as the seller owes more on their mortgage than the home is worth, so why would their mortgage balance matter in determining market value and what you should offer?
For that matter, the balance of someone's mortgage has NO bearing on the VALUE of their home, whether it's a positive equity situation or a negative equity (short-sale) position.
The ONLY time I can see it being an issue is this: the listing agent has set the list price WAY UNDER 'market value', thus 'creating' a short-sale when there is actually some equity in the home.
This is rare, but I have seen it happen a time or two over the last few years.
Example: seller's mortgage balance is $200,000 - actual market value is $220,000 - listing agent believes that the market value should be $190,000 and sets the list price at $190,000.
How could this happen? An inexperienced (or unethical) listing agent has mis-interpreted the market data to believe that the seller is in a negative-equity position (short-sale) when in actuality the home's value is much higher and the seller DOES have some equity left and does NOT have to short-sale.
The absolute best thing to do is to have your agent run a CMA (comparative market analysis) of the property you want to purchase and make your offer based on that.
Give yourself some room to negotiate; you might find that the listing agent has OVER priced the property and your offer should be lower. This does happen occasionally.
One very important item as well....the seller's lender has NO idea what the value of that home is until they order their own appraisal and/or BPO (broker price opinion). Once they have that in hand, they'll compare YOUR offer to the appraised (market) value and determine IF your offer is sufficient to meet their minimum required NET, which usually is set in place by the investor that owns the loan (Fannie Mae, Freddie Mac, etc).
Keep In Mind...the 'list price' is set by the listing agent, & is sometimes NOT a good representation of the 'market value'.
*In a short-sale, the only time the list price is set by the bank is either an FHA pre-approved short-sale OR a Fed Gov't HAFA short-sale.
Based on the condition of the home, a general rule of thumb is that the seller's lender will settle for a percentage of the market value on the NET side (after Realtor commissions and seller closing costs). Sometimes it's as low as 80-82%, and sometimes it's over 90%.
NOTE: This would be a home in 'average' condition, NOT a damaged or distressed property.
The bank might be willing to negotiate more agressively IF they know that the home is damaged in some way (ie: A/C unit has been stolen) and if they foreclose, they'll really have to take a serious 'hit' on the sales price.
Example: Your agent performs a CMA of the desired property and he/she decides that the market value is $100,000.
You and your agent believe that the seller's lender will settle for 88% of that price, NET after fees ($88,000).
The title company will help you determine what the 'seller' costs are based on your type of offer (cash or financing), property taxes, the closing date, and any outstanding liens that the seller may have, and they'll come up with a NET to the seller.
On an offer of $96,000, a 6% commission would be $5760, and let's say the remaining seller closing costs would be another $3000 for a total of $8760.
$96,000 - $8760 = $87,240
That is just slightly below 88% of the market value, which tells me that an offer of $96,000 is just about right.
Obviously, the neighborhood can also play a major role in the market value of a home and the amount you should offer as well.
If there are multiple offers that the seller is mulling over, AND the home is in good condition, & the buyer wants THAT home and ONLY that home, then I recommend that they be aggressive on their offer.
Unless I'm in a very competitive 'multiple-offer' situation, I always believe in NOT leaving my buyer's cash on the table, so I typically have my client offer in the 82-84% range which gives us some room to increase our offer should the bank issue us a counter. This works best if the listing agent only submits ONE 'seller-signed' offer to the bank, NOT multiple-offers at a time.
You should also have your agent ask the listing agent how they process their short-sales and the offers.
IF the agent is sending the bank every single offer that comes in, you have an uphill battle ahead of you....good luck. This practice seems to have waned over the past couple of years, but from time to time I still run into an agent who does this, & I recommend to my client to pass on that particular property and to keep looking.
Hope that helps!
Century 21 All Star, REALTORS
I would consider focusing more on the comparable sales figures in determining your offer price, not the mortgage balance.
Best of luck!
DAVID COOPER Las Vegas Foreclosure Speiclaist with 35 years experience buying below market. For a free list see website or Call +1-7024997037
Is it legal? Yes.
Will it help you construct an offer more likely to be accepted by the seller and the lender? Probably not.
The lender will take a variety of factors into consideration in consider whether to approve the short sale. The primary one is: How does this offer compare to the value of the property? Usually, the lender starts out with what's called a BPO--kind of like a quick appraisal. They're sometimes pretty accurate, but they do have a reputation, often, of being somewhat inaccurate . . . either high or low. Still, that's often what the lender starts off with. Then, if the house doesn't sell at that price, the listing agent is likely to reduce the price. The bank will recognize that the property's been on the market for awhile, and likely will accept less than the original listing price. All of this has nothing to do with what the seller owes.
Now, some lenders will place some weight on what was owed. But the main factor will be the BPO, as adjusted by days on market and by other recent sales.
Your question about what's owed would be more useful in a conventional sale. Even then, though, the "traditional" agent will argue that what's owed doesn't matter--that what matters is what the house is worth. Well . . . not so much. Tim (in his June 11 answer) mentioned some of the factors influencing seller motivation. And those are all relevant. Real estate investors really, really want to know what the balance on a mortgage is . . . so that they know how little the seller can accept.
The more information you have, the better. And there's nothing ethically or legally wrong with asking what a seller owes. Just understand that, in a short sale, that information isn't going to be very helpful.
Hope that helps.
As far as lowballing offers goes, it doesn't matter on bank owned. On Short Sales, the important thing is not to insult the seller so it's important for a buyer to express to an owner (if the owner is present during showings) how nice and beautiful their home is... you see the seller on a short sale is under no obligation to sign a contract with the highest offer. If the agent representing the buyer is seen as being abusive or insensitive to the short seller then his chances of getting the seller to attempt a "steal" is probably slim and none and slim just left town. On a bank owned, the asset manager will never see any abusive comments and the only ones that get upset with lowball offers are the buyer's agent and listing agent because all offers have to be uploaded to the asset manager. Lowballs are usually a waste of everyone's time--unless the REO has been sitting on the market over 90 days.
On regular sales, a lowball offer may actually result in the buyer paying more than he could have gotten the house. Regular sellers can be highly emotional and insulted when an absurdly low offer is received. They may become less negotiable.
Why an Executor/Personal Representative for an estate would accept a sale at half of the appraisal value is very foolish on her part because she has liability to the heirs and they may ultimately go after her for her lack of prudence. In some states the judge will not allow an executor to complete a sale that far below a licensed appraiser's determination of value.
Calling an individual out is berating. Did I need to just answer, "yes or no" to his question or were you unable to decipher my answer in my first response? I inferred, without spelling it out for you, it's not ethical, nor illegal. Wasn't that the question?
In addition, do you understand, I didn't specify that what anyone said was wrong specifically, I was speaking to what I see in this and other posts, where agents are trying to say that how much they owe is not a factor. If you didn't see that in the posts below, I recommend you read them again. Did you read, "Your question shows a basic lack of understanding for the 'short Sale' process, one that can be long, complicated, and frustrating." ??? Did you read the posts where respondents said, "what they owe does not matter"? Did either response answer his question? In addition, did you see where agents said that it does not have any weight in a sellers decision? Is that definitively true, Mark? And, where did you answer the question? It appears that you threw around fancy terminology, assuming a guy asking a simple question will be impressed and then go on to say he needs an agent that can speak knowledgeably to these issues with examples, HELOC... 15-18%? Huh, that was speaking to his question? That wasn't a plug for you, a "short sale" specialist? Come on, I thought this was a forum to help the individual asking the question, not to sell your superior abilities? I am merely coming from an angle to provide insight, this isn't my first rodeo and I'll do anything I can to represent the best interest of my clients, barring unethical practices. That's all I was saying, without anterior motive.
In the future, I would prefer that you don't call out your battles, just like in a transaction, it isn't personal, it's business. I truly hope that any buyer is not discouraged by their agent from offering what they are comfortable with or that a Realtor does not pose the question for them for the sake of "value", because of the seller's personal feelings about it. That said, I have never asked what they have remaining, the buyer has been satisfied with seeing what they paid and how long ago and estimating the remaining balance.
Wow Tim, it seems you may not have read the majority of the replies here. I don't recall reading anywhere that anyone referred to the question or the questioner as stupid. Predominantly the replies were educational in nature. The replies I read did not invalidate the question, just put it into perspective relative to the type of transaction.
As I read your reply nowhere did you address the question posed, however you did manage to berate others and toot your own horn quite loudly. Perhaps a review of the Community Guidelines are in order.
Sunbelt Realty - The Williams Group
You need to understand that there's nothing short about a short sale. In fact they should be called Long waste of time sales that typically do not end well for anyone.
To simply get a response is going to take between 90 - 180 days. more than 80% of the time the answer will be no. More than 80% of the time the property will end up for sale as a foreclosure.
While I am certifed as a short-sale and foreclosures specialist, and specialize in buyer side brokering I will never get involved in one as I value my time.
Forget this proeprty and focus on either properties already owned by the bank or by motivated Sellers of which there are plenty in Arizona.
DAVID COOPER Las Vegas Foreclosure Speiclaist with 35 years experience buying below market. For a free list see website or Call +1-7024997037
Do any of us plan to pay full price or more for a car? Moreover, if you were looking for an investment property, would you pay full price for it? I haven't met an investor or Realtor that doesn't try to capitalize on a seller's situation.
Seriously, I love how Gene, a potential client, asked a question in these forums and was treated as if his question is not valid. There are many factors that can help a buyer get a property at a good price and it is our job to help them reach or come close to their goals.
There are so many factors to consider to help a buyer get what they want. Besides, a buyer doesn't need us to find out what the seller paid for the property. They merely need to check the local tax records. They can see what was paid, if the seller refinanced and obviously did not utilize the money in their pocket to renovate their home, assuming that the value will just magically increase.
There are many factors such as seller motivation, job transfer, lost job, seller's independent appraisers, inflated appraisals, depressed neighborhoods, etc.
What ever happened to, "A HOME IS WORTH WHAT BUYERS ARE WILLING TO PAY FOR IT?" Of course, if a client expresses love for a home and I can show them that it's listed at or below value, I encourage them to offer their highest and best and in some scenarios my buyers realized that they needed to come in at full price.
Why don't we share success stories of steals we got our clients???
Example... I had a buyer that just happened to be interested in a home that the owner left to her niece upon entering a nursing home. The niece got an appraisal for 230K, listed it for 230 and within a week, reduced to 214K. Hmmm, maybe that shows motivation??? Unfortunately, for the seller the Realtor shared the niece's situation with me and said that she needed money quickly for some other interests, so we offered 90K conventional financing without seller's assistance. Can you believe they accepted and we got the home below appraised "value"?" Doesn't that serve the buyer's and ultimately the seller's purpose?
I am not trying to be rude, but many contributors to this post basically told the buyer that he doesn't know anything and/or that any Realtor saying that it's important is wrong. When is the last time you purchased a car from someone that said you must not understand the process or you just asked a stupid question?
is worth to you and see if they will accept that offer. Go low, you can't offend them. Foreclosures are easier to
purchase than a short sale. Plan on a response of 2 weeks to 30 days and another response in the same time frame. You will be lucky to get it under contract and closed within 90-120 days.....even with CASH! Good luck.
Good luck to you.
Agnes Tabor, REALTOR
Focus first and foremost on the current market value--that should be your only point of reference when making an offer on short sale. The balance owed really won't have any bearing on what the lender will accept. Once the lender receives an offer on a short sale, they will have a Broker Price Opinion (BPO) done on the home in order to ascertain market value. That is the guidepost they use when evaluating an offer.
Your offer should simply be base don what it is worth in the market and what it is worth to you, a bank will not approve a short sale price that is substantially lower than market value.
Please see my blog for a list of tips and advice on short sales
I make it a point to always check the notes recorded on a property in the tax rolls before submitting an offer.
You are thinking ahead and thinking smartly to wonder these things so you don't end up with a bigger problem / wait than you wanted to sign up to undergo.
As James has stated, the banks are interested in the current market value and very often this is much different from the fair market value as stated on some tax bills. You would be wise to hire a buyer agent that is familiar with short sales and ask them to do a market analysis before making an offer. As I stated earlier the amount that the bank will accept will vary depending on the type of loan the seller has and the type of loan the buyer is getting. There are different criteria, but most often it falls within 80% of market value. Hope that helps.
Again as Realtor James wrote, the amount of mortgages are irrelevant on a Short Sale because the underlying lender(s) and Private Mortgage Insurance company that may need to approve the sale price will do their due diligence and get an appraisal to determine current "market value". If the lender were to foreclose, the "market" price is what they'll get and it has no relation to the amount of the underlying mortgages.
Your first hurdle on a Short Sale is to get the Seller to sign a contract with you as the buyer. If you make any demands or insult the Seller in any way, they will sign the contract with another buyer they may like better and for a lower price. The Seller is not obligated to sign a contract with any buyer and may just wait until someone they like makes an offer!
All the best,
Ron & Brenda Cunningham
West USA Realty
*Recognized by the Phoenix Business Journal as "One of the Top Realtors in the Valley"
While it is true I may have said some things differently than others here, nowhere did anyone call the questioner stupid, the only time that was used was in your second post. Speaking to a lack of understanding is a reference to ignorance. That can be cured by asking questions and getting replies from those in the industry.
As to where my office is in relation to a seller...not sure what your talking about...this was a buyer question.
The information I referenced was specific to information given to me by a local attorney and my own experience with second loans on short sales. Since the question was about loan balances it spoke directly to the question.
I appreciate your advise about not calling out my battles, my offered advice in return is to take more careful consideration of your words in future posts.
Keep in mind, most short sales involve the bank releasing the lein on the loan because the seller owes more than they can sell it for. Some sellers make arrangements with the bank to pay some (or all) of that back. This is one reason that the seller may not approve an offer than is below market value. The other reason is that if the offer is too low, then there is a higher probability that the bank won't approve the offer anyway. A seller is working against time if they have an upcoming foreclosure. They can get the foreclosure postponed, but not always. So, working with experienced agents (both the listing side and selling side) is important.
Here is a blog I wrote about the short sale process for a buyer going through the process that may help you:
Ron & Brenda Cunningham
West USA Realty
**Recognized in the Phoenix Business Journal as â€œOne of the Top Realtors in the Valleyâ€
However this information is not as relevant as one might thing. The key information you will need before making an offer is the fair market value of the property.
Having said that, I do understand that most buyers feel more comfortable knowing the amount owed on the property before submitting an offer. And that is fine. Just ask your REALTOR to obtain the information.
Jose Dias, REALTOR
The only thing I would add to his reply...know what type of loans are in place. If a second mortgage was used to purchase the property then mortgage insurance comes into play and this complicates the transaction. There have been unreasonable demands from MI companies that have blown apart deals.
More complex is when a HELOC (home equity line of credit) was placed on the property after the purchase and the funds were used for: Cars, Vacations, Credit Card Debt Consolidation or anything else that was not an improvement to the home. In these cases the second lender is much less flexible about accepting a "token" payment from the first lender to settle the debt. Often the home seller will have to come out of pocket to to allow the transaction to close.
My experience is the second lender in a HELOC will want 15-18% to release the lien and 30-35% to release the lien and the debt. If a seller took out a $100,000 line of credit we can be talking some large numbers at the closing table.
Make sure the agent you retain to help you can speak knowledgeably to these issues and give you examples. Its also important that your agent questions the listing agent on these topics prior to your making an offer.
Sunbelt Realty - The Williams Group
You need to get an agent to represent you and do a market analysis of the immediate area and submit your offer based on that information. As a buyer's agent, I do need and have the right to know the bank, the type of loan etc. that we're dealing with, but I do not have the right to ask what is owed on the home.
I think the few answers here that said it was legal and ethical misunderstood the question. This would be like asking a seller what their bottom line is. What???
keller Williams Arizona Realty
Relax excalibur realty
Your question shows a basic lack of understanding for the "Short sale" process, one that can be long, complicated, and frustrating.
Are you working with an agent? A real estate professional will be able to clarify the process for you. Not being familiar with this process is very common but an accurate appreciation is very important.
Essentially you will be negotiating with two sellers...the present owner and their lender. Thus, you will be required to have agreement on the sale price and contract terms from both the owner and their bank.
It's very common for the owner to accept a sale price and the bank to not. This brings the process to additional negotiations. There are normally additional factors beyond the balance of the mortgage that enter into the bank's financial expectations. Second mortgages, liens, back taxes, HOA fees, damages, legal expenses etc. are few possible contributors to a higher than expected bank price.
We strongly recommend working in conjunction with a short sale specialist (an attorney) that specializes in distressed sales as well as a RE agent that truly understands the process.
In your interview process find a REALTOR(R) that has successfully closed on multiple short sales. Find out their ratio of successful closed properties. Certifications for short sales/distressed sales are a plus but if the experience isn't evident the certification really does not matter. Look for someone with a minimum of 10 successful short sales with a minimum of a 90% close ratio. Help your agent so they can help you.
Jeff Daley - Luxury Valley Homes Scottsdale
The only thing I would add is if you haven't already written your offer, you may want to ask your Realtor to write in a clause that would allow her to discuss the Seller's account with his lenders. That way you can have another set of eyes on what the lender needs from the seller to expedite the short sale.
Also so you know, if the owner purchased the property with less than 20% down (or a combo loan with a first and a second) the property probably has Private Mortgage Insurance on it. The PMI company must also approve the short sale. I've seen unreasonable demands for the seller to sign a promissory note for a large portion of the PMI company's loss.
You absolutely need to keep looking for a home while you wait for the short sale to get approved. Also do not put up any escrow deposit until/if you actually get an approval. It may be a month or could be as long as year before you will get an approval. It also may just simply foreclose. You don't want to miss out on a property that may be better while you're waiting for what seems like forever.
I would recommend that you access the public records to get an idea of what the seller paid for the home and when, to give you a better idea of how much money they have into the home. You could bare the risk of showing the seller that you are trying to get the home for as little as possible. Just like poker, you don't want to show your hand... a good Realtor, will also work with the mortgage company to ensure your pre-approval letter is close to the amount you offer. If the seller and bank are desperate to sell, they may be worried about countering, with risk you cannot finance a higher amount.
All of this sounds good; however, there are many factors that you should consider. If you love the home and it beats out all other properties you have seen in that price range, there is a strong chance that other buyers in your area feel the same way. I've seen too many buyers, worry about how much they skimmed off the price, rather than property value, and lose the home they wanted most over 50 or 100 dollars a month. Unless a seller has to sell immediately, they generally won't accept less then 10% off asking price, without lowering the price first, to see if it brings more buyers their way.
There are many other important factors to consider. A good Realtor who functions as a consultant, rather then a salesperson, will go over those scenarios with you to advise how to get the best value meeting your needs.
The banks have really made short sales a ridiculous process. Some banks are known for expediting short sales and others sit on the offers for 6 months or better, only to find out the offer was denied quite some time ago. Short sales have virtually zero guidelines and nothing can make the bank answer in a timely fashion, so if you are definitely placing an offer on one, I would ask the Real Estate attorney's office for their success rate, average time from offer to settlement, if they have dealt with the bank in question, and if they have a specific process they follow to expedite short sale offers. With a short sale, the bank can continue to receive offers, even after you place yours and many times you are not informed??? The process is akin to the lottery, if you ask me. Well, at least with the lottery, you know when they will draw the numbers...
I explain the ins and outs to my buyers about short sales and they typically decide to go for standard listings or bank owned homes. In both scenarios, they received answers quickly and walk away with amazing deals, knowing what they are getting into.
There are many other factors to consider, especially how the contract will be written to ensure that you are protected in all facets, i.e. home inspection issues, financing issues, questions you would like answered prior to settlement with the ability to back out w/deposit, if the outcome isn't pleasing to you. I personally believe that the bank knows whether or not they will take a short sale from the start and have an equation they look at, considering factors like mortgage insurance terms or whether or not the owner had a guarantee, like a VA loan. Therefore, they may not be too concerned about whether it sells short sale or not. I recommend that you find an experienced agent (not all experienced agents are good), intelligent and savvy, who asks these types of questions, advises you of all scenarios, and will put you in touch with experts (lawyers, attorneys, accounts, etc.) when appropriate. You'll know if they have your best interests in mind to build long-term agent/client relationships or are just in it for a quick buck. Good luck, hope this helps.