Negotiating Short Sales

negotiate-short-saleMost of this website talks about negotiating in one form or another, but here are some key points.

If you are trying to avoid foreclosure, you need an offer fast. Negotiate with the Realtors through the MLS by putting something like “submit all offers, we do not care about the selling price” in the MLS listing. You will probably get “less than wonderful” prices, but you will have an offer to submit. This is particularly important with those lenders who will not let you talk to the loss mitigation department until you have an offer. With the offer, you can negotiate to keep the file in the loss mitigation department and avoid foreclosure. One of the great ironies of this process is that when the lender puts the pressure of foreclosure on you to get you motivated to sell the home, the lender almost always gets less for the home.

Negotiate the price with the agent doing the Broker’s Price Opinion (BPO) for the lender that is considering the short pay. Use the independent authority of comparable sales and the preparation of pictures of defects and bids for repairs to keep the price in line with reality. Most of the time you will have no contact whatsoever with the BPO agent, so do this negotiating with the loss mitigation negotiator, by furnishing the same pictures and bids.

Negotiate the time for review and the postponement of the foreclosure by using every form of persuasion possible. I have even called the Western Regional Director of the Office of Thrift Supervision to put pressure on Washington Mutual when they were under supervision by OTS so that I could avoid a foreclosure. If you are not getting what you need, go to an authority who can get it for you, like the investor who owns the loan, the guarantor (mortgage insurer) or a supervisor in the department. Just remember, when you do that, your pleasant relationship with the loss mitigation negotiator just ended, so only do that when you can afford to make her mad.

Most of negotiating success in short sales comes from preparation. That is why it is so important to have a complete Short Sale Package, with persuasive materials about the problems with the real estate market and the problems with the house. If you can convince the lender that they never want to own this house, the negotiations on the short sale go better. Mold, toxic waste, dangerous conditions and illegal structures are your best friends in negotiating to avoid foreclosure.

After you get a response from the loss mitigation negotiator assigned to your short sale, realize it is not that person’s decision. Don’t yell at them, they are the messenger. Also, you will need their recommendation as the negotiations continue. If the lender wants more money, present it positively to the buyer, with the benefit that the buyer has the power to eliminate the biggest problem with the short sale i.e. if the buyer accepts this offer, the approval process for the lender is over and the buyer wins by getting the home they want.

If the buyer wants to give a counter offer to the lender’s counter offer, present it with some comparable values that support that price. The BPO price may be getting out of date, so if you have more current sales and homes that just went on the market, that will give the negotiator ammunition to persuade the investor or decision maker.

Part of a Realtor’s education in negotiation is that once you get an acceptance from the lender, do a “nibble”, a negotiating technique that gets you the one last part of the deal that you need. Say, with confidence, “Of course that includes a full release of the obligation for the seller.” One of the biggest benefits of a short sale is to get the entire debt off the seller’s back, so get a full release. Some people who provide Realtor training call this without recourse, which is adequate, but the real term you want is to be fully released from the balance of the debt.

If you do not get an approval from the lender that the buyer will accept, you still have accomplished getting a short sale file open and established a method of communication with the negotiator. See if you can persuade the negotiator to keep the file open so that you can directly submit another offer to her. This will dramatically shorten the time for a second review of the short sale.

Even if you did not get a deal accepted by the buyer, hopefully you have a price from the lender that they will accept in another short sale. Some lenders just give you a denial with no price, which is a ridiculous way to negotiate. If the price was so low that it did not merit a response, the whole short sale review process should not have started. After all the review work, get a price and try to put the short sale together. Getting an acceptable price greatly helps your negotiating with future buyers. Tell them they can get the benefit of a short review time and decrease the chance that another buyer will come along if they will just equal the price the lender wants. In other words, they win on the big issue of getting the lenders approval. Also, you can adjust the listing price accordingly, so you can get more showings and hopefully more offers.

Negotiating an “as is” sale is difficult in a short sale. Most buyer’s agents cannot handle that term. They get the buyer excited about all the horrible problems that the house could have, and wonder why you brought it up if there is not some horrendous problem. Some agents even ask if “as is” means they cannot do an inspection. Assure them you want them to do an inspection so the buyer knows the condition of the house. But, the seller has no money to fix anything in a short sale. The lender is already getting a short payment, so the lender does not want to pay to “upgrade” the house.

In most short sales, you can accomplish “as is” using gradual persuasion. A tug boat cannot move a supertanker in one huge push. It does it with slow, gradual nudges. Tell the buyers agent that the lender will probably insist on an “as is” sale, but you will see what you can do. This gets the buyer startiing to accept this term, but without the image that the seller has no confidence in the quality of the house. When the lender comes back with the requirement that it gets exactly the amount shown on the closing statement (HUD-1), you indicate that there are three choices. The buyer can take the house “as is” after doing an inspection. The buyer can pay more for the house to get the repairs paid for on the closing statement, because the seller has no money. Or, the buyer’s agent can kick in the money for the repairs. When the buyer’s agent and the buyer have three choices, no one is forcing them to take the property “as is.” They just select that choice as the best one for them in the short sale.

If you get multiple offers on a short sale, a smart buyer’s agent will put the “as is” term in their offer to make it more acceptable to the lender. The buyer’s agent will know that the mortgage lender wants to deal with an agent who knows how to close the sale, and who will not “nickle and dime” them after the contract is approved for a short pay. I have seen offers that are less money get accepted by banks because they have better terms, although it is usually because the buyer is paying all cash for the short sale home. So, if you represent a buyer, make the terms of the contract as easy as possible for the lender to approve.

If you want to pick up all the tools of real estate negotiating, look for my book Create A Great Deal, the Art of Real Estate Negotiating. It will help you in ever part of real estate, but especially in short sales.

The BPO is Critical to a Short Sale

March 9, 2009 by  
Filed under Short Sale How To

bpo-house-70x70A short sale is a way for a bank to minimize its loss and get as much as possible for their loan. To judge whether the proposed sale is reasonable, the bank wants to know what the market value of the property is. Most banks will accept an offer that is around 90% of the market value of the property, some will go as low as 80% under exceptional circumstances. To get a market value, some banks hire appraisers for a full appraisal. Most ask for a Broker Price Opinion, commonly called a BPO.

BPOs are done by Realtors, typically ones who sell the properties that banks foreclose on, commonly called REOs (for Real Estate Owned, a category on the bank’s books to show the foreclosed properties they own). The bank contacts the REO broker with an order for a BPO. Typically, the Realtor has a series of instructions from the bank that have to be carefully followed. The BPO form is just a few pages long, asking for a comparison of the short sale property to three properties that are for sale and three recent sales.

The standards for the properties to be compared are set down by the bank, and the reviewers for the BPO company are meticulous in enforcing these standards. Most of the forms are extremely inflexible, with little room for comments or description of any issue that does not fit into a box on the form. In other words, you need to be aware that the form does not normally allow for any unusual information, and most of them only allow a limited number of pictures. Imagine trying to get the information for the house in the picture on this post into a BPO form. So, you could have a serious ideosyncracy for the property with no place to put it in the BPO form. However, the banks process thousands of these forms, and standardization makes them much easier to review.

There are interior BPOs and exterior BPOs, commonly called drive bys. Both involve taking pictures of the property and the neighborhood. The interior provides much more information, the exterior just looks at the outside. The pay for an exterior BPO is around $40 to $60. The pay for an interior BPO is higher, typically around $100. Some companies get the BPOs done for free with the promise that Realtors who do enough BPOs will get the REO listings. You have to get used to the alphabet soup, if you are talking to a bank, you need to know the acronyms.

You can tell from the pay, or lack of pay, the BPOs cannot take too much of the Realtor’s time. Many of the Realtors who do BPOs have a staff to do the administrative tasks, so the agent gets involved only on evaluating the information to give the price range. In short, they are mass produced.

Most of the people who teach about short sales want the Realtors to try to influence the BPO. You want to provide accurate information about the market, the repair issues in the house, the features that will make it hard to sell and other factors that affect the value. Some seminars say to take the lock box off the door to the house, so the BPO agent has to meet the listing agent to get into the property. That is difficult to do if the house is still on the market and being shown by Realtors. The idea is to give the listing agent an opportunity to provide information about how the sales price is close to the market value, such as handing the BPO agent three listings that are for sale and three that have recently sold. Some instructors say to fill out a sample BPO form and give it to the BPO agent. There are a great deal of new regulations prohibiting Realtors from trying to influence appraisers, so if you are dealing with an appraiser, be sure you know the rules for your area.

A good idea is to furnish the bank with pictures of any repair issues or damage, along with bids for the cost of repairing those items. These pictures and bids should be sent to the loss mitigation negotiator, as the BPO agent may not be able to put them into the form. Ask the negotiator whether the BPO discusses these issues and adjusts the price accordingly.

It is prefectly appropriate to try to get accurate information of the value of the property into the BPO. The whole process depends on comparing the offer to the market value. A high BPO does no one any good, except for the people who make money off of foreclosures. There is a new state law in California that prohibits an unfairly high BPO price by an agent who may get the listing on the property if there is a foreclosure. The California legislature found there were agents who gave a high BPO value to prevent a short sale from being accepted so they could list and sell the property after a foreclosure. I am skeptical that agents would do that, because it is extremely hard to predict who will get the foreclosure listing. It is the law in California none the less.

If you get a BPO that is out of line, it is difficult to correct. Many loss mitigation negotiators will not tell the agent what the BPO value is, which makes little sense because the listing agent could provide great insight into any mistake in the BPO.

I had one short sale where the propety was appraised at a value of $520,000 while the sales price in the contract was $420,000. The property had been for sale for over a year, with the highest asking price being $475,000. I had to drop the price several times to get other agents to show the property, which indicates the $475,000 asking price was too high. When the bank started foreclosure proceedings, the price was dropped to $400,000 to get a quick sale. The low price resulted in three offers, and buyers who bid the price up to $420,000. If the property was worth anywhere near $520,000, there would have been dozens of buyers much earlier.

The bank would not disput the appraisal, and ignored the comparable values I sent. Radian Guaranty, the mortgage insurance guarantor, would listen to me, and reviewed an extensive market analysis that I sent. As a result, they overturned the decision to reject the short sale and the sale closed gracefully. The lender, the guarantor and the investor will be skeptical of your figures, feeling that the Realtor is just trying to get the sale approved to make the commission.

In short, the secret to success in short sales is to get a good BPO that allows the sale to be approved by the lender.

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