Short Sale Bank Negotiations. Who is high in this deal? Is it me?

21 Replies

I've been trying to get a bank short sale under contract. It's got an ARV around $220, rehab costs around $40. I put an offer in that was about 12% over asking (acceptable for this market), but still left room for profit as a flip. They seemed very excited about my offer, asking for lots of additional information such as could I be flexible on a close date (yes) and some other minor issues that weren't clear (to them) in my original offer.

This morning, they said that they got an appraisal in for 130% of my offer and I should submit my highest and best.  After I picked myself up off the floor from laughing so hard, I pulled out a calculator and a pencil and came up with some numbers.

Based on some information my agent has, I was able to back into the probable balance of the mortgage.  My original offer would definitely be a short sale.  Because of the condition of the house, the listing says it had to be a cash offer.  No problem.  

However, with this new price, it puts it over what I'm estimating the mortgage balance to be by quite a long shot.  Which makes it no longer a short sale. right?

But the thing that has me really scratching my head is that the new price would be retail - what an owner/occupant might pay. ARV of $220, back out the rehab costs of ~$40 and you've got what the appraiser came in at. However, it's got to be a cash purchase and I guess I thought that not many owner occupants wanting a house in this neighborhood would have $180 of cash laying around.

So who is high in this deal?  (I am in Colorado, but I don't smoke).

I had a similar situation only with a foreclosure. What I did was sit back and come back to a number that I was happy with minus renovations as a big and hold for a rental! While it wasn't the home run of my first offer it's solid!

That was my best and than I walked away! Luckily I got it so it all worked out but that's what I did.

As for mortgage price a lot of people refinanced etc. so there other options to what their numbers really are at the time!

If your numbers are accurate, I'd say you're both a little high.  No way a bank would approve an offer of $130k, and after doing repairs, having a spread of $50k.  They're also a little high thinking a buyer wouldn't want Some discount for doing the work.  Then again, this assumes this $40 k of work is actually necessary.  Most people/buyers will also under estimate the balance of a loan in default.

@Linda Weygant I saw a similar situation happen in Erie where it went for near retail all cash because of condition. I think the market is so hot that the advantage of a fixer is that there is less competition. Ask the selling agent point blank what other liens are involved. Perhaps they also need to cover arrears on the first.

I think it would be silly to outbid yourself no? They are trying to bid you against a sheet of paper that states the property is worth $X, not another buyer willing to pay $X. Maybe they forgot to mention to appraiser all of the repairs that will be required to make it move-in ready. You can ask to see the appraisal report, pick it apart and show all of the repair items they missed that affect the current appraisal and show them that the appraisal is worth less than the sheet it was written on. Did they state there were competing offers? Regardless of competition, if you think you submitted your maximum allowable offer based on your rehab estimates and ARV, your spot on where you need to be. Let the bank make the counter offer after they submit it to the bank. Since the owner is doing a short sale, they honestly shouldn't care less about what you are offering, rather what the bank will be willing to accept part of the short sale agreement. The owner won't be taking any proceeds after the sale, therefore there is no reason to be greedy.

I think the seller saw the appraisal and thought maybe they can actually sell it as a non-short sale and getting too excited and think they can get a buyer to match the appraisal. Its funny because, people usually end up dropping the offer price to meet a low appraisal, but I've never seen someone ask you to raise the contract price to meet a high appraisal. If it were a reasonable price, maybe they should have asked for that in the first place in the listing. Bold move by the seller...

Tell them they are holding on to your best and highest offer, and if they are serious about selling their house, they will submit all viable offers to their bank for short sale consideration. If they submit however, be prepared to transition to negotiating with seller bank to justify your short sale offer with them and market value. I've negotiated short sales with banks before and in one case, held my ground and listed out the total repair costs and photos to support my offer valuation vs. their BPO report. sometimes they might not budge and you might have to walk away if bank refuses to go down to your original contract price. Short sales can be lucrative if you are patient, but they are always a crap shoot until you get to the closing table. So don't get too emotional along the process when something can and does go the other way... these are low odds deals unfortunately... good luck!

Originally posted by @Wayne Brooks :

If your numbers are accurate, I'd say you're both a little high.  No way a bank would approve an offer of $130k, and after doing repairs, having a spread of $50k.  They're also a little high thinking a buyer wouldn't want Some discount for doing the work.  Then again, this assumes this $40 k of work is actually necessary.  Most people/buyers will also under estimate the balance of a loan in default.

 I'm willing to admit I'm a little high on this.  Let me provide more detail.

They're listing price was $120, I offered $135.  Rehab will come in $40 ish, maybe as high as $50.  Includes a 10% fudge factor since I haven't had it inspected yet, but does include some stuff that was really obvious such as dead tree removal, roofing, broken window replacement, furnace replacement, full trash-out as well as a full update of everything and a bunch of plumbing repair (water was shut off by the city prior to our last hard freeze.  I'm assuming it's toast).

My agent has a history of mortgages on the property, so essentially every time it was refinanced or a second added.  Very rough back of the envelope calculation based on some historic comps and interest rate research over the years is that the mortgage is somewhere between $140 and $165.

But back to the house. ARV is $220ish. So 220 less 6%, less rehab and purchase and closing and some carrying costs leaves about $30 left in profit. That doesn't seem unreasonable, does it?

@Jeff Bridges

 I've got no emotional investment in this, so I'm right there with you.  If somebody else can make it work for a higher price, they're welcome to do so.  I know what my time and effort are worth.  I know I can justify my numbers.  Makes no difference to me other than that deals are hard to find in my area.  I'd rather start Spring off with a job and make best use of the good weather than have my money and my team sitting idle, but I'm not going to throw money away just to put everything to work.

The more I think about it, the more I think this is an opening salvo.  My response is to duck and push my original offer back across the desk.  We'll see what happens.

Well, a couple of issues...

The agent listed it at a low ball price, which won't get accepted, and is a total waste of time. The bank doesn't care about your " selling commission, carrying costs, expected profit, etc. etc". They want as close to current FMV/retail as they can get, period.

Originally posted by @Wayne Brooks :

Well, a couple of issues...

The agent listed it at a low ball price, which won't get accepted, and is a total waste of time. The bank doesn't care about your " selling commission, carrying costs, expected profit, etc. etc". They want as close to current FMV/retail as they can get, period.

 That makes total sense and I see it from their point of view.  But because it's cash only, they must know they're going to be working with investors and not owner occupants - especially in this particular neighborhood.  Shouldn't that make a difference?

No, bank is going to get BPO ordered once an offer is submitted. That BPO is basically a realtor doing a search for comps and current unit condition to determine the most appropriate value of the place based on recent sales. If your offer is way under the BPO value, they will reject or counter to meet or come close to BPO offer. In some cases, I've stood firm on original offer and supported it with laundry list of repairs and estimates for repairs (non cosmetic and necessary repairs) along with pictures. They accepted after my counter.  You can either challenge the BPO and find better comps, challenge the condition of the unit to support your offer, but you cant challenge their offer just because they are now dealing with an investor.... that wont cut it... you're still not past negotiations with the owner however and that's only your first hurdle....

If the note holder is FHA(HUD) then the SS offer needs to be > than 84%-88% of the fair market value depending on how long it's been on the MLS. Other banks might have similar ratios.

The seller and sellers agent may be in arrears on taxes or HOA so they may need 90% of fair market value to cover all costs and for the realtors and SS negotiators to get paid.

So the magic number they need may he quite a bit higher than the mortgage balance.

I have a SS I am waiting on right now where I'm at 84% of FMV plus realtors plus negotiator plus HOA balance. It's still a deal for me because the FMV is about 10% below ARV and I'm keeping this for a cash flow rental.

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@Account Closed I don't know what banks are doing. Do what works for you and as others have said, support your numbers and wait and see what you get. I've been told that with banks it's often the one with the most patients that wins.

Question, if it's greater than the mortgage owed, then just buy it from the owner of the property which is the one who owes the mortgage. They have the right to sell or not as the owner. If the Bank Owns the property then there is no mortgage owed. If the bank forecloses on the property but has not yet sold it at auction, the owner of the property can sell it up until the auction date. If they owe less than the sales price, the bank has no say in if they can sell it or not.

Yeah bottom line to all of this is you make money when you BUY. Talking yourself into a deal is a loser.

There should be a cash discount in my opinion because you are giving the bank a sure thing versus financing unless you dropped a bunch of conditions in your offer.

Typical resale cost is 10% ( 6% commission, closing costs, buyer concessions on resale, etc.) 

I think this deal is way to thin. If you do not get 220 and the purchase price is lower you stand to make less than 30k.

I like to look at this way:  Whenever a seller responds to my offer with "give me your biggest and best", they are saying "I am not going to show you MY hand, but I want YOU to show me YOURS".  Any time you are told to give your biggest and best, don't get suckered into bidding against unknowns.  You did the math and came up with what made sense to you.  Stick to logic and you win.  Get pulled over to emotion and you lose.

They recently increased the listing to $175 (from $120) and are in constant contact with my agent letting him know that they expect a lot of interest at that level.  In this market, stuff goes under contract in less than 24 hours in the sub $300 level.  This one's not under contract yet - mine or anybody else's.  At $175, I don't think it's a short sale any more, so if somebody were interested, it would go quick.

I've moved on to sniffing at a different property, but I let my agent know that if they contact him later wanting to know if I'm still interested, the answer is yes.  At my original offer.

Well, it certainly is a short sale, or the bank would have no involvement.  The bank wanted $180k, they'll get a new BPO after 90 days, if they get another contract.

You are missing a lot of pieces to the puzzle:

- the 120k list price is irrelevant to the bank.  how much above this price your submitted doesn't matter

- the way you are estimating your rehab seems pretty rough

- just like you, the bank does a formula.  short-sale the bank nets 160k in 60 days.  foreclosure we think we net 180k in 120 days.  15k rehab and we think we net 210k in 180 days.  That is how they do their math.  It is sometimes way off, but that is what they do.  

- now if the place is 90 days on market at 180k and very few offers the bank might think that number is more legit and put some weight on it in the BPO. 

There could be 2nd liens on the property as well as mechanic liens, etc. In order for a short sale to be successful, the second lien holder would basically have to agree to take a loss. This may or may not be the reason why your numbers are coming out the way they are. 

It's not uncommon for banks to counter back at a number closer to the ARV. Short sales actually aren't supposed to be listed at such steep discounts, but rather at a price closer to the ARV of the property.

My guess is that the listing agent didn't take all the steps necessary to insure the best possible chance of the sale going through. They listed it low hoping that they would get an offer like yours that the bank would consider (sometimes they do, sometimes they don't). I would ask the listing agent if the owner has a true financial hardship....

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