Have never offered on short sales but have questions before I try.
Is the listing price on a short sale the least the bank will accept?
Does Approved short sale mean that the bank has approved the asking price?
Does Pre-approved short sale mean the bank has not yet approved the sale price?
Pre approved (in writing) means it will speed up the process if they get that amount. Short sales are not as straight forward as you think. Before closing, the bank often pulls a cba/bpo and if the market has improved, increases the price you pay. They generally take 3+ months.
So the asking price is not the set in stone least the bank will accept. And you are telling me that even after accepting an offer, the bank is likely to increase the price just before closing. Does that releases me from the offer I made if I don't want to pay more?
I gather that short sales are not straight forward but I'm trying to find a way to understand them before I ever venture into an offer.
The owner "accepts" your offer/signs a contract. The price is subject to bank approval, after they have approved the owner(based on their financial condition/hardship), and the bank will order a BPO to see of they feel the offer is near market value, at which point they will accept or counter. This will usually be 60-90 days after the seller signs your contract. Very, very few are actually "preapproved", and the listing price usually is no indication of what the bank will accept.
Same as any other property,
- A) Research Zillow for recent home sales in last 12 months (having pictures) with comparable bedrooms and sqft. If none exist, do 2 yrs. Still nothing? Do +/-1 bedroom, etc.....Come up with a After Repair Value you think makes since.
- B) subtract the amount you want to earn in equity (10k, 20%, etc...). This amount is whatever you see fit to make it worth doing a deal. On flips some people do 10k or 15k. On buy & hold finance deals people look for close to the bank terms as they can get...80/20, 75/25 split that they will receive when financing.
- C) Subtract repair costs.
- D) This is now your max purchase price.
A-B-C=D start with a number you think the bank will accept and make the offer. If multiple offers exist you will be asked for a best and final, offer accordingly.
Thanks @Clay Smith this formula really helps guide my thinking. I thought the asking price was the lowest possible and the options I saw do not pass the test as you outlined it so I felt perhaps short sales were different than other deals and I would not be interested if prices did not make sense to me.
I recently closed on a short sale that went into probate during the process and had to be signed off by the estate. It was offered at pre-approved 35k and day 1 I offered 35k. 4 other offers where made that day. I adjusted my best and final up to 38k all cash. Although I offered 38k and they accepted, 5 months later it cost me 39k to buy it when the BPO came back at a slightly higher rate adjusted for the market change during the 5 month waiting period. In the end, my agent got very little for the transaction on this cheap property and it was a waste of opportunity cost. It is stressful constantly holding back the cash for a short sale that might come through eventually. Just be sure your money is not tied up waiting when you could be doing 2x the deals during the same duration. Also, be prepared for a messy closing with lots of headaches and poor communication (the usual). Dry closings and rescheduling is hard to do with a short sale, so have everything prepared to meet the closing date.
*numbers are approximate
I have listed many Short Sales in Southern California. Unless indicated on the MLS by the listing agent, the listing price is always negotiable. Even when an agent says, "The listing price is the lowest price the bank will accept," I have seen a house sell for less. When you are trying to purchase a short sale, you need to not only appeal to the bank, but to the current home owner as well.
An approved short sale price means that if you offer at that price, the bank will likely accept it without any negotiation. But we are all here to make a deal, so always shoot for less!
@David Friedman Thank you for your explanation. It is really in line with what I hoped to learn. Some of the short sales I'm seeing are priced equally or higher than conventional sales. So What would the motivation be for me to wait several months and probably not get the property? Not attractive to me at all, but knowing that a deal can be had...Well, that may be worth the wait. :)
I wouldn't wait. Make offers on many properties if your strategy is buying a short sale. Short sales can be great, but you will need to be persistent and get lucky. If it's listed on the MLS anybody can see it. Competition is higher so make a lot of offers if that's your strategy. Or, find agents in your area that focus on short sales and network with them.
Thank you @David Friedman . It isn't my strategy so I am trying to learn about it so I can add it to my very slim acquisition bag of tricks consisting of looking on the MLS and relying on drips from three Realtors. I am investing remotely so I need to add a things I can do virtually to my TO DO list.
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