Hit Them With Your Best Shot: How Much to Offer on a Short Sale

How a short sale works

A short sale happens when, for whatever reason — financial hardship, job loss, or a drastic real estate market downturn — the amount a homeowner still owes on their mortgage is more than what their house is currently worth. The home is sold at fair market value, with the bank accepting a loss—in essence, coming up “short” on the sale.

So, once it’s established that a short sale is the best option given the circumstances, it’s time to get down to business and start the process.

First, that means a seller will need to start finding a buyer, by listing their short sale home on the multiple listing service (MLS). Then, the buyer and seller will have to agree on a realistic offer price to submit to the bank.

Next is the waiting game. If you thought this was going to be a speedy process, this is when your patience will be tested. At best, the bank could sign off on a short sale application within weeks, but it could take as long as several months.

Luckily, a top-notch, experienced short sale agent like Bell Air South, Maryland-based Laura Snyder, can craft an offer with fail-safes in favor of the buyer’s best interests.

Snyder explains that one thing she puts in her short sale offers helps protect buyers’ costs and time spent. “On the third-party approval addendum, you can give a specified time that you give the bank to respond with a short sale. The minimum number of days is typically 30,” she notes. “A lot of times, they’ll ask for more — maybe 60 or 75 — just to get the short sale approval.”

You’ll also have to think about securing the lender’s approval on the deal before you pay for an inspection and your mortgage rate lock expires, in addition to other timeline management issues that your agent can help you understand.

Additional contingencies that will support a beneficial short sale contract for the buyer include the condition of the property, the appraisal, and the financing.

Again, these are just a few reasons why working with a qualified real estate agent is critical to a successful short sale purchase.

Because short sales are up to the bank’s discretion based on strict criteria, the buyer and seller will need to finalize an offer that works for everyone — most importantly the bank — and that requires a careful strategy.

So, that begs the question: how does the buyer know which price is right for everyone involved?

Researching the seller’s mortgage debt before making an offer

Before making an offer on a short sale, it’s a wise move to know more about the seller’s mortgage status. This helps you gauge whether the lender is likely to approve your offer and how much negotiating room you have. Here’s how to research the seller’s mortgage debt:

• Check public records: Many counties have online databases where you can look up mortgage details, liens, and foreclosure notices. This can give you a general idea of the outstanding debt and whether the home has multiple loans attached. Knowing this information helps you determine if the short sale is feasible or if lender approval will be complicated.
• Ask the listing agent: The seller’s real estate agent may be able to provide mortgage information and whether the lender has already agreed to a short sale. While they may not disclose everything, they can offer insights into how far along the short sale process is. A cooperative listing agent can be a valuable resource in crafting a realistic and competitive offer.
• Look for multiple loans: If the seller has a second mortgage, home equity loan, or any other liens, multiple lenders will need to approve the sale. This can make the process longer and more difficult, as each lender will want to minimize their losses.

Understanding these factors ahead of time can help you decide if the home is worth pursuing or if you should adjust your offer strategy.

Setting a winning offer price

By now, you have a lead on a short sale home. Awesome! Now what? It’s bidding time.

You can find a short sale home anywhere you’d find any other home listing, most likely on the MLS. The property must be listed through a real estate agent, designated as a short sale, and usually labeled “pending third-party approval” with an as-is clause. So it’s a very specific listing.

If the listing is on a site that anyone can access, it may or may not include an asking price. This can help you determine a fair market value.

The best place to start is for your agent to conduct a comparative market analysis (CMA), which uses comparable recently sold homes, also known as “comps.” A CMA will evaluate similar homes in the same area as the short sale listing and the price they sold for. Comps account for features like square footage, number of rooms, the neighborhood, the age of the house, and its amenities, ideally adjusted using regression analysis to reflect differences between the homes, to determine a concrete value.

If the short sale house is on the MLS, it will be listed with the seller’s asking price. Typically, this price will be at varying levels below the market value. How low the price is depends on how long it’s been on the market and how many offers it’s received.

Snyder says a seller will list their short sale at their starting price and evaluate it approximately every two weeks. If there’s little to no activity, they’ll adjust it down. If it’s still not selling, there will be “a pretty standard two-week reduction. So you’re feeling out the market with the pricing.”

Just because the seller has set an asking price doesn’t mean the listing agent has done their due diligence, so it’s on you as the buyer and your agent to complete your own comprehensive research.

According to Snyder, “Often with short sale listings, they’re not completely thorough, so they don’t have the dates and the years of the different upgrades and updates.” This means a short sale could require more due diligence on the buyer’s behalf.

Once your agent shows you a CMA, it’s time to go see the short sale in person. This is the opportunity to get a close look at the home and check out what condition it’s in.

Your agent should take copious notes during this walkthrough to glean as much as possible. Ideally, this tour will reveal any necessary major repairs, like replacing the HVAC or roof, before the official inspection occurs so you can factor these impending expenses into the offer price.

Word to the wise: Offering the seller’s full asking price won’t necessarily give you a better chance of getting the lender’s approval if the home is listed for lower than fair market value. A better strategy is to order an appraisal, and then offer an accurate fair-market value price.

Fine-tuning your best offer

Whether a short sale home is significantly below market value or it just so happens to be an amazing home in a prime location, you want to make sure to get a good — even great — deal on it. So while you want to set a reasonable price that both the seller and the bank will accept, it should also be to your advantage since you’ll be putting up with a more drawn-out transaction.

If it appears to be worth the expense, it’s not a bad idea to have a contractor check out the home to identify needed repairs and give a ballpark estimate of what they might cost. This is very important information because short sales are typically sold as-is, without any help from the seller (or the lender) to cover repair costs.

You can convey these results in the proposal to the bank to support the offer price. “We’re supplying that justification because the bank isn’t coming out and looking at the home itself. It’s relying on the listing agent, and if the listing agent didn’t do a thorough evaluation of what would need to be done, it’s not necessarily a reasonable number for a buyer,” says Snyder.

Just like with a traditional home purchase, the lender requires an appraisal or a broker price opinion (BPO) to validate the mortgage. A BPO is typically quicker and more cost-effective, though less thorough, than an appraisal. This is often the route taken to get the ball rolling on the short sale approval process.

Understand that with a short sale, if the appraisal comes in lower than the offer price, it’s usually up to the buyer to cover the discrepancy. There’s little room for negotiation with the seller, and it’s unlikely the bank will lower the price at that point.

It’s important to be discerning when naming your price because the bank will have its own market value resources and won’t be inclined to approve an offer that’s more than 10% below fair market value. If there aren’t sufficient comps available, it can be hard to determine fair market value at all, and thus risky to submit an offer. This is something that the buyer should discuss with their real estate agent.

It’s best to strike a balance between what’s a good deal for you and what’s reasonable for the lender. A price that’s 5% to 10% below market value is typically a good number to put on the table. Venturing further down could be dangerous territory.

One last factor to consider when finalizing a short sale offer is interest rates, especially if they are unusually low at the time the offer is submitted. If you’re expecting a low interest rate, and the deal doesn’t get approved in time for you to lock it in, and rates have gone up, then your monthly mortgage payment could also increase. This is another situation when your agent’s projections and expertise will be a huge asset in your offer strategy.

Name your price

Now it’s time to assemble all your research and nail down a number. Evaluate your primary deciding factors to calculate your price:

• The CMA with its comps
• Expert input from a real estate agent who is very familiar with the local market and short sales in general
• Your best estimate for repair costs based on walkthroughs and a contractor’s quote if you have it

Your price should ensure you’re not overpaying or underpaying for the short sale home. Your agent will be your best resource for constructing an offer that wins you the home at a good price and protects your interests along the way.

If handled properly, short sales can be one of the best hidden gems in real estate for buyers. If you find a short sale opportunity, craft an offer that will open your next door.

Header Image Source: (Roger Starnes Sr / Unsplash)