Short sales, like all real property sales, should start with a broker’s price opinion (BPO) backed by a Competitive Market Analysis (CMA). Click here for a detailed discussion of BPOs and CMAs. Lenders are not going to discount their loan so a buyer can acquire the property for less than its actual value. That means you have to know the actual value of the property. Market value is the number the lender will start with, not the loan payoff or even the offered price.
Your CMA and BPO will give you what the property should bring on the open market. Market value, unlike sales price, does not depend on the seller’s financial condition or need to sell. Such factors may motivate a seller to reduce their asking price below market, but that is initially of no interest to a lender. To the lender, it is simply a matter of figuring out what process is likely to result in the most money in their pocket. To get there, they have to start with the actual market value. Sure, they are going to have to discount that number, but first they need the number.
Once you have market value, you can do a preliminary net sheet for your seller. The net sheet will tell you, the seller (and eventually the lender) how much money an offer will actually make available. You have to figure the unpaid balance of the loan(s), any late fees, real estate commissions, necessary repairs, closing costs and the like. What you are looking for is cash to the seller at closing. That number will be negative in a short sale situation.
How negative the number you arrive at tells you how “short” the sale will be for a given purchase price. It is the amount you are going to ask the lender to eat. You can compare that number with the rule of thumb twenty-five percent of market value recovery in foreclosure to get an idea of whether a short sale is going to be attractive to the lender. If you are going to have to ask the lender to give up more than they can expect in foreclosure, they are going to say no. If your numbers says you are in the ball park, it is time for a serious conversation with your client.
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