How do you decide on an offer price for a short sale?

9 Replies

Hi,

So I've been doing a bit of reading on short sales. I'm interested in making an offer.

1) I've seen people use a NPV (net present value) calculation - I understand how to do the calculation, but how do you determine the discount rate for your area (I'd be interested in the Los Angeles, CA area)? Do you just average say the annual S&P 500 returns for the past 5 years? 

2) Also, I've seen a rule of thumb that says take 15-20% off the list price of the short sale and that's your offer.

3) Finally does anyone have any good book picks for reading up on short sales?

 That’s a whole bunch of nonsense you’ve heard there. The fact is the lender will do an appraisal and  that will come back at or  near market value and you will not have a lot of flexibility from that. Lowball offers on short sales are a waste of your time. 

@Bruce Park

I have bought a few short sales for my rental portfolio. They are generally at a discount. I like them because in general they are maintained to a certain degree versus an REO. You need the seller and the bank to sign-off.

Here is my take on these purchases and for that matter all offers.  The asking price is irrelevant.  The only thing that matters is what your offer number is.  If it’s a good deal at $85,000 then that’s your number.  Determine your maximum offer that makes sense for you.  Nothing else matters.

Good Luck.

@Bruce Park I don't think I've met two people that do it the same way. It also depends on your market. In Los Angeles, a lender doesn't need to take a discounted offer from an investor. They can list it on the MLS and somebody will pay full market price. Short sales in most of America are sold at a discount because it's faster and cheaper for the bank than to go through a foreclosure. FHA, USDA, and VA backed loans ensure the bank doesn't lose any money, even though it sells below retail.

@Anthony Dooley That discount everywhere is quite insignificant. I’ve closed several hundred short sales in the last decade and I can tell you during that time I saw maybe a handful of  investor discount quality deals go out the door. Short sales generally end up going for a little bit less than market value but maybe 5% -10% not 20 or 30.. The so called “gurus” teaching  these short sale calculations to wanna be investors are simply trying to make a buck selling their books or courses. 

I pretty much agree with @Minna Reid

If you see a short sale you have an interest in my recommendation would be to take a look at it, come up with a number that works for you. It leaves you plenty of room for evicting the former owners friends and relatives who they may have invited to live there. Account for the cement down the drain that they may do and a year plus worth of maintenance that will not be done.  Then take that number put it in an offer with a 180 day "Life of offer" send it in and forget about it. You may end up with a call in 3 months asking for some tidbit of information and then radio silence again for another 2 months. You may just never hear anything. The biggest problem most people have with short sales are they expect them to become part of their portfolio some day. 

Put it in and continue looking for stuff, if by some miracle it looks like it may work then get some liquid cash to make it happen. Don't tie your money up waiting on a ship that most likely isn't going to come in.

@Minna Reid I completely agree. The only way that I have seen a huge discount is when the investor talks directly to the asset manager BEFORE it is listed with a broker. Having first hand knowledge of a pre-foreclosure and making a solid offer prior to foreclosure is an uncommon situation. The investor also needs to have funds available, close quickly, and buy "as-is." If a short sale hits the MLS, it's not much better than a motivated seller listing.

 Thank you @Kenneth Garrett  @Anthony Dooley @Minna Reid . A lot of what you say makes sense.  I also found this thread https://www.biggerpockets.com/forums/103/topics/204113-pricing-the-short-sale-offer by Denise that made a lot of sense, that's why I was asking about NPV.  You guys have definitely helped shape the way I'm going to do my offer, so thank you!  And any further advice from you or anyone else is appreciated!

That’s an interesting thread but I would have to say the posters short sale experience has to be extremely limited. Those numbers are just not realistic across the board. The investors that are making their net numbers known are always wanting to net somewhere in the 82-88% range of their appraised value.  Let’s call it 85% to make it easy. What the public does not understand is that is a net number after costs of sale. The cost of sale are going to be at least 7 to 8%.  Thats puts you right back to a possible discount of maybe 6% on the front end - make sense? Add a fee extra costs of sale and it’s maybe 3%.  This is why short sales are rarely great deals. Now the only variable here that makes your short sale a great deal is an incredibly low valuation.   If the house is worth 100 and the appraisal somehow comes back at 70 well then you’re golden.   But rarely is that the case. BPOs and appraisals are coming back pretty close to fair market value most of the time. 

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