Anyone have a firm grip on the math of how Banks determine what to accept for a Short Sale?

18 Replies

I know this is equivalent of asking someone to throw darts in complete darkness, but as I'm researching I'm finding that Banks/Investors have at least some initial approach when contemplating where to set their values at based upon the market. I'm generally able to get a 80-85% of market value with solid comps accepted rather frequently, but when I start to get below that I notice the approval rate either takes longer or it takes a bit of a fight (market dependant) to get within that magical 65-75% range.

Any experienced short sale investor/negotiator care to dialog on what you are experiencing, and some of the different ways you approach to maximize your chance at getting lower numbers?

I'm seeing homes that have PMI insurance on them, with higher taxes in stricter code enforcement municipalities seem to be more negotiable as well.

Not a good answer, but it all depends. If gov't backed they may push for fully what is owed, if not gov't backed they may accept 10-20 percent off loan amount. The reason for pushing for what is owed, when gov't back is, they will get all that is due if they cannot sell during short sale and if after 90-120 days after marketing after foreclosure they aren't made whole, then they are allowed to take highest offer and gov't backer will make up difference. Depending on timing if not backed, bank may try to clear books and get the non-performing asset off their books. There seems to be a magical number and percentage and they come to light when counter offers are make an offer and play it out!

@Darron Stewart Not sure where you came up with those ideas, but they don't exist in the real world. The loan balance is irrelevant, as the shorted investor is looking for as close to FMV as possible. That could be 90% of UPB or, as normally the case is, it can vary from 60% down to 25%. "Government backed loans" are shorted every day for no where near the full balance, and have some of the better short sale procedures. FNMA does constantly ask, initially, for above market value in their shorts, just like they do their REO's.

@William R. There is no firm %, as each decision is made by the actual investor on the loan. And for example, Chase services loans for 3,600 different investors. And yes, when PMI is involved, the approved price is usually closer to FMV.

@wayne brooks, I have a percentage that works at the 90-120 day mark after foreclosure. The majority of short sales end up in foreclosure as I have seen. I have a property that I have followed for three plus years, through short sale and into forclosure, waiting for the magical day to get it for my price...

Only you can guess how the banks come up with their numbers.

Joe Gore

I agree there's a bit of a "formula" for REO's, as related to % off of asking price, at 30, 60 and 90 days....particularly HUD and FNMA. It just doesn't apply to short sales.

@Darron Stewart , as Wayne said foreclosures and short sales are much different. The unpaid loan balance has no bearing at all on why they will accept before or after a foreclosure. It may affect whether a bank decides to apply for insurance pay off from HUD on FHA loans, but that is another matter.

There are some formulas for short sale acceptance. Va wants 88 percent of the appraisal I believe.

Originally posted by @William R.:

I know this is equivalent of asking someone to throw darts in complete darkness, but as I'm researching I'm finding that Banks/Investors have at least some initial approach when contemplating where to set their values at based upon the market. I'm generally able to get a 80-85% of market value with solid comps accepted rather frequently, but when I start to get below that I notice the approval rate either takes longer or it takes a bit of a fight (market dependant) to get within that magical 65-75% range.

Any experienced short sale investor/negotiator care to dialog on what you are experiencing, and some of the different ways you approach to maximize your chance at getting lower numbers?

I'm seeing homes that have PMI insurance on them, with higher taxes in stricter code enforcement municipalities seem to be more negotiable as well.

 The real answer to that question is that the banks will do whatever they deem fit as far as portfolio allocation in order to remain as profitable and compliant as possible. The rhyme or reason might seem ambiguous, but the more short sale transactions you close, the more you get inside the head of the bank. If you can land a job as a processor or negotiator you really can get a glimpse inside the strategy of the bank. As previously mentioned, Chase bank plays the role of the servicer for many investors and services many different types of portfolios. During my almost 2 year span with Chase, i was the active negotiator on well over 300 short sale transactions. If you understand how the back end functions, you will approach your submission way differently.

 The relationship between the listing agent to the seller is kind of like the relationship between the negotiator to bank. The reason why there are two agents is because title is split between equitable title(borrower) and legal title(bank). A good negotiator will do their job, be diligent with the file and not lay down to an agent who wants to be aggressive. On the same token, a negotiator and the department as a whole is incentivized on how many files they close. So by default it is in their best interest to be as cooperative and "on the ball" as possible. Remember there is usually a VP that manages a dozen supervisors which each have a dozen regular negotiators on their respective teams. Its these departments' duty to burn and turn as many of these short sale offers that are coming through the door in a legal and trackable manner. As you would probably imagine there is a sophisticated internal system that utilizes charts to tell the story on a file and if required, approval by upper management and credit officers when loss ratios are higher. So the waived amount definitely does matter. Its what determines who has enough authority in the chain of command to write off how much loss. Think of the department like one big machine with multiple moving internal parts, just like any sophisticated machinery. The files would be the fuel or the feed that requires processing in order to truly be able to utilize it as a resource. Every file is treated just like the next, whether the sale is in California or Rhode Island, with its proper set of protocols and procedures. The beneficiary(bank) in this particular situation has the say-so as to what they will accept as a proper settlement. If you understand how things function, you can definitely have the upper hand.

Its all about submitting a thorough and complete file that tells a story and submits enough documents to prove your case. You always want to demonstrate that you have done the best to market the property to earn as much as possible and through your experience & research have arrived at a figure that you feel makes the most sense during that period of time in the market. Short sale have been around for over a decade but they became highly fashionable in 2009 because we were in a recovering economy. As previously mentioned these banks are nationwide so the connection for the bank to the streets is a BPO agent thats supposed to be local and familiar with the market . A broker just like you and I gives their opinion on what they think the homes is worth. Since this BPO will be the figure the bank utilizes as their opinion of what the property is worth, the BPO resembles an appraisal and documents the analysis just like one. You can dispute a BPO just like you can an appraisal if you feel you have evidence or information that suggests against what's reported. Using these rights to your advantage, plus by being there when the BPO agent is there during the time of the inspection, you can totally make a significant effort at controlling your fate. Its not illegal for you to be there and have a conversation about all the deferred maintenance on the property with the BPO agent at all. Usually an experienced agent will know that the BPO is good for 120 days and every four months is basically another opportunity to bring in a new deal that is appropriate to the new BPO figure. They will also know that they're fully entitled to submit their own property inspections and bids for upgrades/rehab cost that will help make the file look stronger. Don't expect your negotiator to be nice and share the BPO figure with you. If the property has been on the market for a significant period of time, thats another key factor that a VP will look at before approving a file. The longer it sits, the more likely the approval of a low offer. This is an ideal instance for an offer thats low, but just above the tolerable threshold of approval. Seasoned agents know that the bank won't approve an offer if the benefit doesn't outweigh the cost of just letting it go to foreclosure, so they use their offer as a poking stick just to see where the bank is at with their figures. Most banks will counteroffer once and it is your responsibility to come in with your best & final offer. Judging by how far off your offer and inspection report are from their BPO and counteroffer, you will know more or less how to proceed at that point.

Make sure your files contain the following always:

1)MLS listing showing you have had the property on the market for a while and haven't been able to sell it at the demanded figure, so therefore you need approval on a lower offer to make it work.

2) Inspection report documenting everything that needs to done to the place to bring it up habitable standards. Most of these short sales are bruisers with significant amounts of deferred maintenance. Since its difficult to truly compared distressed properties with one another due to different types of distress, you compare the ARVs to the BPO figures, and then subtract the cost of rehab/improvements that your inspection suggests in order to get your true offer amount. This way you're injecting a dose of logic as to why you arrived at that figure and why it makes sense for the bank to take your offer.

3) Listing agreement obviously because you are the agent on the deal. Show that you have had the property up for sale at the prices they recommend and that its simply just not moving at that price.

4) Contract of course stating the price, terms and conditions of the deal. All cash closings tend to be favorable no matter which way you look at it simply because its a faster closing. But at the end of the day a deal is a deal and who cares how you buy it. The bank shouldn't provide any priority to a cash deal over a financed one so pay attention to things like that.

5) Proof of funds or letter of pre approval to show that you have the financing aspect covered without a problem.

6) If you're purchasing with an LLC, the negotiator will ask you for an Articles of Incorporation anyway. Be proactive and submit it ahead of time to show that you advocate transparency.

Always remember that you can't rely on the negotiator's logic and incentivized structure because at the end of the day the negotiator gets significantly less for each closed file than you, so you have more to lose. Its your deal, you need to chew it up and put it in their mouths' to swallow if you want things to go a certain way. Just be sure you're always submitting proof to explain yourself and you should be good.

It's not just about what the 'offer' is on a house. a lot of it has to do with the current 'owner/borrower'.  I have an offer that the bank accepted 6 months ago on a short sale, but they won't approve the short sale because they are not happy with the owner/borrower.  At one point they agreed to pay them 'cash for keys' to get out, then they said no, so we had to do new closing documents with no cash going back to seller.

I put the house under contract in November,, the hold up is if the bank want to let the borrower short sale, or if they want to push them into foreclosure,,,meanwhile the house sits empty and I'm sure developing 

From what I can tell the bank thinks they (borrower) has assets they didn't tell them about,,,again, nothing to do with my offer, everything to do with the current 'owner'


@Joseph Zanazan  Good detailed overview.

@Andy Collins  The "cash for keys" likely went away because that money is actually "relocation assistance".  If the house is empty, they don't qualify for/need "relocation assistance", since they've already relocated.

@Joseph Zanazan  Great information.

I think that the short answer to the question is that it's entirely up to the bank/investor.  In 2007-2008 we saw short sale offers accepted/rejected at percentages that were all over the map.  We found that the banks that went under (IndyMac & CountryWide) were impossible to work with and wouldn't accept 95% in two cases while Wells Fargo was taking 60% on similar props.

I had one that was rejected for 4 months at 87%.  When the file was transferred to another desk, they quickly accepted a different offer at 72% (same everything except buyer and price).

As mentioned, banks' (investors') assessments of their own liquidity, capital requirements and exposure to the market have a lot to do with it.  And some negotiators are just better to deal with than others.  We once got an approval from Citi 11 minutes after the foreclosure (and they were junior!).  


Let's change some ideas here.

1.  Stop using the slang term "bank" and start using the term "investor".  That idea is closer to the actual state of the industry.  The majority of the mortgage market is held in securitized trust +/- $4.0 Trillion.  More often than not, the "bank" is simply the servicer that has an interest in the MSR (Mortgage Servicing Rights).  The underlying mortgage is owned through the trust in the RMBS.  

2.  Loss Mitigation decisions are governed by the Servicing Contract and the characteristics of the actual assets within the pool.  Even within the original lending institution there still must be a contract since the two sides of the institution are separate.  Just because BOA was the original lender and is now servicing the loan does not mean BOA is the actual investor.  As I said above, most of the residential mortgage market (especially conventional conforming loans) were originated with the intent to distribute through RMBS (Residential Mortgage Backed Securities).  That is why Fannie Mae and Freddie Mac are the two largest mortgage investors in the world.  BTW, they do not directly make loans, loans are made and 'sold' to them.

3.  MANY factors go into what offer can be accepted.  Since the purpose of making the loan was to get paid back.  When any portion of principal is not paid back, the INVESTOR is taking a loss.  In addition, this will have a domino effect on other investors involved in the loan in some fashion.  Some MSR's restrict the level of loss.  The servicing contract may only allow the Servicer to grant a sale to a certain percent of loss or market value or UPB.  There are variations, while there are standards, there are still variations.  Older vintage loans may be subject to more 'outdated' (pre-crash) Servicing restrictions, thereby handcuffing, if you will, the Servicer from taking make sense offers due to being past their authority level.  Remember, in 2004 we didn't think there would ever be a problem like the RE value decline and the contracts reflect some of that poor thinking.  

While contracts can be amended, it is no small task and has it's legal challenges the more the investor interest (all of it) is spread to a larger number of investors.  We like to romantically think a loan has a single investor, if you will, that is far from the truth.

5. FHA loans have a Mortgage Insurance Premium (MIP). That is not the only type of mortgage insurance in the market. Private Mortgage Insurance (PMI) is mortgage insurance provided by private companies (also a form of an investor) that are not related to the government.

Claims on the insurance policy for default are not the same.  Coverage is not the same although there are obviously overlapping ideas.  How claims are processed drastically affects the Loss Mitigation efforts since those efforts MUST conform to the insuring entities guidelines if the Investor wishes to make claim on the policy.  Just like any other type of insurance policy.

6.  Mortgage ownership (the Note Investor) is a moving target.  Assets held in RMBS can be purchased back and re-issued.  Non-preforming loans can be sold off to private investors.  Servicing of those loans, in the event Servicing is retained as a function of sale, may stay at the same BOA example above, but now the owner behind them is not a trust and is more of a 'normal investment company'.  Point is, unless you trace through the assignments AND the file to see where the Servicing rights went, you may not know for sure whose interests are being served.  

The public likes easy to understand simple answers to things.  There is not one here and never will be.  Certainly by the nature of the RE market and the values within, similarities in pricing will occur.  That does not mean interests or intents are aligned.  

So the moral of the story, there is no universal methodical or quantitative system to use.  If there was, trust me, instutional investors would have deployed that long ago.  Unfortunately each deal is really a snowflake since the actual bundled interest in the loan can be sliced and distributed into many different investors.  I.E. - rights to interest payments, rights to principal payments, rights to servicing, rights reserved for insuring, etc.  

As noted in the last post, the Mortgagee and all the interests that represents is not the only interested party in the mix either.  One must also consider, those parties who hold title or an interest in title as well.  Including borrowers and other lien holders.  


I worked in community banking for the last 7 years.  As others have stated it's based on the state of the bank.  If they have a OREO portfolio that is large they will want to dump it and get rid of it to take the losses and clear up the portfolio.  There is a ratio of allowed non-performing loans( can't recall it) but if you start exceeding it regulators start to question your underwriting.

The "Texas Ratio".

Texas Ratio = (Non Accruing Loans - Government Sponsored Non Accruing Loans + REO) / (TCE (Tangible Common Equity+ Loan Loss Reserves)

Texas ratio is a calculation on all banks performed by the FDIC as one of many metrics for a depository bank's health. This ratio along with a couple others are the metrics that put banks on FDIC Watch Lists.

Loan Loss Reserves are the reserves a bank must hold back in, I believe, cash equivalents.  The reserve ratio is set by FASB.  It came under fire after the crash and was eventually raised some.  Essentially, the bank makes a loan for $100k and must hold back $10k in order to recover from the collateral.  I made those numbers up, it's a much bigger portfolio number but if my memory serves me correctly I think the ratio is in the upper 30%.

@Joseph Zanazan Thank you for going above and beyond and giving a thorough answer to the question!

@Dion DePaoli Thank you and everyone else for your contributions as well. I love getting a more indepth, behind the curtain perspective of these types of transactions as it helps tremendously when you are in the pits.

I interviewed a short sale attorney today, and his negotiator which just left him supposedly just negotiated a situation where the bank paid the attorney 13k for the "attorney fee"....Typically I have seen agents cap out at 7% commissions, and the lawyer/negotiator taking down about 500-3000 a transaction.

I know this is another one of those it depends on the bank your dealing with, but anyone have any clue how the negotiator managed to take that 13k fee down from the short sale?

Also if the Real Estate agent also negotiates their own short sales, instead of taking on a 3rd party negotiator/attorney, can he ask for a part of the "attorney/negotiator" fee, raise his commission to compensate,etc?

I'm asking this as I'm weighing the pros and cons of finding another attorney to do my SSs or just taking on the grunt work myself....

- List price is irrelevant.   Your % off list price, is not % off market value.

- Their price approval process is extremely simple.

     1) Get an Appraisal

2) Get 90-100% of Appraisal Value.

I just got a counter offer on a short sale I am trying to buy.  List price was about market value, but after seeing the condition - it's high.  I offered accordingly.  Bank now came back at 10% over list price as their counter offer.  In a market that is taking significant decreases in sales prices right now. WHAT?! 

So go figure.  At this point I imagine they put blindfolded monkeys in a room and have them throw darts at numbers on the wall.

Did you show the bank in writing why their price is high? Most banks are very aware of investors trying to make a large profit or providing false or misleading info to get a better deal.

Joe Gore

@William R.  

The attorney did Not get a bank to pay a $13k negotiation fee. What may have happened is.....they structured a 3-4% concession back from the seller/lender back to the buyer, for closing costs, etc., and likely a concession the buyer did Not ask for. Then the attorney takes this closing costs concession, which is a credit on the buyer's side of the HUD, and applies it to an attorney/negotiation/other costs line item added to buyer's side, which makes the concession he got from the seller/lender a "wash" for the buyer. These fees now get paid for on the buyer's side, as the bank will Not pay these fees. The buyer doesn't realize he could have gotten this $13k back, it's a wash to him, so everybody's happy.

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