I’m going to tell you a story, and I know it’s one that you are not going to want to hear. But, it’s the truth—plain and simple, and based on lots and lots of personal experience.
When the market began to decline in 2007, I was involved in approximately 40 short sale transactions. At that time, banks didn’t have large loss mitigation departments and short sales were still called short pay resolutions. There were few guidelines for what the banks would accept to mitigate their losses, and short sales took forever to negotiate. (If you think they take a long time to negotiate now, know that Rip Van Winkle’s nap was shorter than the average short sale negotiation in 2007.)
However, at that time, there were fewer guidelines because the short sale was not a commonplace transaction. As such, buyers could use such phrases as ‘distressed value’ in order to make a compelling argument for a lower purchase price.
Nowadays, the short sale is a common transaction, and all of the major lending institutions and most of the minor ones have whole departments and systems in play in order to process a short sale. These institutions send out Brokers and Realtors® to conduct Broker Price Opinions (BPOs); sometimes appraisers are also sent to the property in order to ascertain the value. To the bank, there is no such thing as a distressed value anymore. Banks and their investors just look for a percentage of the market value and a specific net amount in order to approve the short sales. No personal feelings get involved, and the choices made at these institutions are totally objective.
I’ve had the same experience with the REO listings. When taking these listings, the bank also sends an appraiser and requests a BPO. Little consideration is given to the fact that the property has been foreclosed. The only assessment being made is of the list price for local active listings, and the closed price of recently closed comparable properties. Banks do not see their own properties—now REOs—as distressed. They want to get top dollar to offset their loss.
It’s ironic, but just about the only person or group these days who is using the words ‘distressed value’ are the investor buyers. And, while it is true that many of these properties are inches away from the courthouse steps, it appears that the banks don’t quite have the same point of view.
It will be interesting to see what happens in 2011. Fitch Ratings just reported on the benefits of short sale versus foreclosure in the coming year. And, while the numbers seem to show that short sale is the best financial option for the banks, I’ll be curious to see if the banks agree or if they will continue to march to the beat of their own drums.
Photo: flickr creative commons by informatique
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Article Author: Melissa ZavalaMelissa has written 79 articles for us.
Visit Melissa's Website: http://www.shortsaleexpeditor.com
Melissa Zavala is the Broker/Owner of Broadpoint Properties and Head Honcho of Short Sale Expeditor®. Before landing real estate, she had careers in education and publishing. Many folks say that Melissa is genetically pre-disposed to success with short sales. In fact, last year she and her staff obtained over 500 short sale approval letters! When she isn’t speaking with lien holders, Melissa enjoys practicing yoga, walking the dog, and vacationing at beach resorts.
Joshua Dorkin
{ 6 comments… read them below or add one }
As a BPO provider for some of the leading banks I too have been wondering if the banks and other lending institutions will put their pens to the paper and find out the true cost of short sale vs foreclosure.
The lending institutions I know send up to 5 BPO providers out to a property for each of the processes. Also at times they have BPO’s done when mortgage insurance is due to be removed.
But the cost of obtaining the value is a minute cost compared to the cost associated to the foreclosure of a property.
In my area of Alaska the average market price of a home is $222,300. The average short sale has been reduced by about 7-9% from the high of the market, when 85-90% of the current short sales were actually purchased. If you were to take this percentage from the average home sale the amount would be between $15,561 and $20,007.
The banks attorney fees alone in a foreclosure with out and hangups is normally $10,000. Then you add in servicing company fees, winterization, property management, holding fees, brokeage fees (when sold) and this amount easily exceeds the expected loss of the short sale.
But if you look deeper in the relationships of the banks you will find that really they are just a servicer for the true lender (investor) and this is who is really calling the way they want to do business according to their needs in a financial tax code arena.
I’ve read elsewhere that short sales are actually LESS profitable for banks. While they may get back a larger percentage of the original loan, they’re not making $$$ on punitive fees the way they would be in a foreclosure.
I agree that the term distressed is so overused that it has no meaning anymore. Every home in Scottsdale Arizona has plummeted in value and is thus “distressed” in some way. Very few industry professionals use the term anymore.
Trying to figure out the logic behind a Bankers thinking is a hopeless task. Although, a short sale would appear to be the best route to take for all concerned, the bottom line is; A foreclosure is quicker and easier to do. Once the Bank has control of the property, they call the shots. REO’s can be bundled and sold off in bulk to private investors. Finally, short sale departments at most major banks have grown so big, that the costs involved to run them, far exceed any so called extra profit they might realize in a short sale. I know, You know, We know that a short sale is better for the home owner and the community, but don’t hold you breath waiting for a change of heart (less)!!!!
I somewhat disagree with your statement, ” to the bank, there no such thing as a distressed value anymore”. Although it is more commonly now referred to “as-is value” , in essence, it means the same thing since REO’s are also sold “as-is”. Since a short sale should net the lender more in proceeds than it would otherwise get as an REO, then an offer should be made while considering sold REO comparables.
I have been doing short sale since 1994 and little has changed in the valuation process (well, maybe except for quality). Regardless whether it is called “As-Is” or “distressed value” does not change the fact the there is a determination of future expectations based primarily on sold comparables.
What is different now is the exponential change in volume. Higher volume means less time to work these files. Hence, you will often hear from the negotiatior “we need to net x% in order to approve the short sale”, and the translation of that statement would be ,”we need to look like we are saving the investor money and do not want to spend anymore time on this file.” If you are taking this as the final word, then your missing the boat.
While the banks are ordering their BPO’s to complete their due diligence before accepting any short payoffs, I have found that in many cases the subject property (if vacant) continues to deteriorate. In some cases, there have been approvals that could have been sold for .70 cents on the dollar. However, by the time the bank has made a decision, there has been ongoing deterioration that has devalued the property even more. In the end, either a new approval is sought with a new buyer at .50 cents on the dollar or the foreclosure occurs. After the foreclosure has occured and is listed on the REO market, the bank (at least in the Colorado Springs real estate market) will reach a little high in price to see if they can catch a buyer soley on the fact that it is an REO. My advice to buyers who are searching the market key words for “distressed” or “bank owned” properties…. beware! Just because it is labeled as a distressed or bank owned sale…. it does not equate to “good deal”. Always run your numbers and have an expert guide you when making an offer.