What You Should Know About Short Sale List Prices and Market Values

Short Sale Education

First a little short sale education may be in order.  Sometimes even when people think they know what a short sale is, they really want someone who actually knows, to explain it to them.  That’s where I come in.

Short Sale Defined:

A short sale is when a home owner’s mortgage company/bank is willing to accept a pay off for less than what the borrower currently owes on the house in the event of a sale. Once the mortgage company informs the borrower that a short sale may be possible, the mortgage company instructs the borrower to list the home at “market value.”

Market Value Defined

So now let’s turn our attention to market value.  Market value represents the amount that the house is currently worth in today’s market.  Market value is determined and established by what similar homes have sold for within a given radius from the subject property (say within one mile) within a given time frame which can be between 6 months to a year. In the meantime while the property is being marketed, the mortgage company will order a Broker Price Opinion (commonly known as a BPO) or an appraisal to establish the value of the property. Whatever the BPO agent or appraiser determines the market value to be, then that is what the mortgage company will use as its basis for determining an acceptable offer.

Even if the market value proves to be very low, the bank will always try to get more. The problem with this is that short sale agents will list the price at actual market value, while on the other hand, banks often insist on using an inflated number.  Unfortunately the bank will not reveal the result of the BPO or appraisal. That is why it is so important for the buyer and seller to have their agents review recent home sales and base the list price and offer price on factual data (that is, data that can be supported by documentation).  Being able to support the list and offer price with factual data, will increase the chances of a successful short sale transaction.

List Price and How It’s Perceived by the Buyer

Now let’s say you’re working with a real estate agent and you have your eye set on a Birmingham Alabama property that is listed for possible short sale.  Naturally you want to lowball your offer because the bank and the seller should take what they can get right? WRONG.  Here’s what buyers need to get into their heads:  Yes the bank is willing to accept less than what is owed on the home.  But get this:  the LIST PRICE is already set at less than what is owed on the home. My point here is that many buyers and sometimes their agents)  make the incorrect assumption that the list prices reflects what the seller owes on the home and that the bank is willing to accept less than that number (the list price).  Wrong, wrong, wrong. The house is already listed at less than what the seller owes.

They Should Take What They Can Get

This is generally the attitude of the buyer.  But here’s what the buyer doesn’t know:  there is this little thing called a deficiency judgement.  The deficiency judgement is when the seller is still responsible for the difference between the sales price and the amount that is actually owed on the house.  So you see, it’s not just about taking what they can get.  It’s about getting as much as they can for the house so that they won’t still be responsible for owning money on a home that they no longer will be the owners. The short sale does not always result in a deficiency judgement for the seller, but the seller has to consider it when negotiating an offer on a house.

So, this is only a “part” of the skinny on short sales.  If you’d like to know more, please feel free to call or contact me via email.

Come on.  What you do you say?  Are you ready to make that call?  If nothing else, we can talk about what you can expect when it’s time to take that first step to buying or selling your Birmingham, Alabama home.