How Much to Bid on Short Sale Real Estate?
Short sale transactions often take longer than traditional real estate purchases, as both the seller's lender and the property owner participate in the negotiations. The short sale lists below the loan balance on the property, yet not necessarily below current market value. Short sales are a way for property owners to liquidate real estate when they are upside down in the property loan. When making a bid on a short sale, consider the possible motivations of the property owner and the property owner's lender.
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Short Sale Definition
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In a short sale, the property sells for less than the amount needed to pay off the property loan. This typically happens when property values drop. While the property owner lists the property, the lender has the ultimate power to reject, accept or counter a buyer's offer. At the close of escrow the lender or lenders accept an amount less than the total needed to pay off the property debts, and release liens on the property. The lender may opt to forgive the unpaid balance, or may hold the seller responsible to pay the difference between the buyer's offer and the loan balance.
Pricing Short Sales
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When making an offer on a short sale, understand the lender has typically had an appraisal, broker's price opinion or comparative market analysis completed by a real estate professional to determine an estimate of the property's current market value. This is what a ready, willing and able buyer might pay in the current market. Therefore, the lender understands the property's current value. The listing price may or may not be at the current market value. Before making an offer, have your real estate professional perform a comparative market analysis to estimate the actual current value of the property.
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Property Owner Motivation
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Typically, the seller accepts a buyer's offer before sending it to the seller's lender for final approval. If the lender has agreed to forgive any unpaid balance, the seller may be receptive to an offer below the list price, as the seller receives no proceeds after a short sale and therefore has no financial motivation to hold out for a higher price. But if the seller is responsible for the unpaid balance, a lower offer from the buyer means more money the seller must give the lender.
Lender Motivation
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Some lenders in a short sale won't accept any price lower than the list price, and in some instances, a lender might counter a full price offer, and request more from the buyer. When making an offer on a short sale, the buyer must understand that the lender may not respond quickly, sometimes taking weeks or months to respond to the buyer's initial offer. While counters (back and forth) between a buyer and property owner can go quickly, that is typically not the case in a short sale. As with any real estate purchase offer, the buyer's first consideration is what the property is worth, and the second is how much the buyer is willing to pay. If a buyer decides to make a very low offer, with the intent of inching up the price with each counter, until he reaches the highest price he is willing to pay, the property may sell to another buyer during negotiations, if the property is properly priced.
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