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How to Determine Your Short Sale Offer

How to Determine Your Short Sale Offer



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Published by Cory Boatright
Cory Boatright expert short sale real estate investor discusses how to win at short sales
Cory Boatright expert short sale real estate investor discusses how to win at short sales

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Published by: Cory Boatright on Jan 08, 2008
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How to Determine Your Short Sale Offer
 Article Written: Cory BoatrightHere is a question I'm constantly being asked by my students and other real estate investors.The answer to it is not an exact science. First let's identify some common used terminology.
BPO (Broker Price Opinion):
A generalized opinion or value of the property. These can beexterior and interior. They are ordered by the lender and sent to a third party or BPOcompany such as BPODirect, First American, etc.. The company has a list of Realtors ineach state. They send out the BPO request to several Realtors. The first Realtor to respondto the request and accepts the offer get the order.
FMV (Fair Market Value):
This is determined by a Realtor using the MLS. It is a comparativeanalysis showing sold comparable homes with similar square footage, bedrooms, baths,garage etc... that show how much properties are selling for in particular areas. The timeframe used is usually 6 months to 12 months for the comparison test. If enough comparables(comps) are available a flexible formula to use is the following.Take out the two highest comps and the two lowest ones and average the rest.Example:Comparable Sold CompsLet’s say you think a property is worth $200,000A Realtor pulls some comps off the MLS that show the following.$214,000$216,000$212,000$209,000$207,000$211,000$195,000$190,000$187,500$182,000$180,000Using our formula you would take about the 214,000 and $216,000 comps as well as the$182,000 and 180,000 comps. That would leave 7 other comps. see below.$212,000$209,000$207,000$211,000$195,000$190,000$187,500----------
You take an average by adding up all the comps and dividing by the total amount ofproperties left. In this case the number is 7.Total: $1,411,500 divided by 7 = $201,642In other words you might expect to sale your house for $201,642.
ARV (After Repair Value):
This is actually a slang term used with real estate investors. Itbasically means about the same as FMV. The difference could be argued stating the ARV ismore of a guess or value that is derived by using comps from houses that were not sold by aRealtor. Hence they would not show up on the MLS. Of course an appraiser can use BOTHCOMPS, but generally sticks to the ones off the MLS. Think of the ARV as a less accuratevalue than the MLS comps ... generally in my opinion.Dealing with short sales you usually find is the FMV and / or the ARV will come in about 10-20% higher than the BPO ordered from the lender. If this is the case you might consideroffering 60% of the ARV or FMV value. This of course depends on the amount of repairsneeded for the property. If you have what is usually classified as a "Pretty House" ... showingvery little repairs, let's say under under $10,000 ... don't expect to get a huge discount fromthe lender. If you cannot JUSTIFY a reason for the lender to accept either a small or largediscount ... don't expect them to accept it. This also dispels the myth that all houses headingtowards foreclosure are good short sale candidates.I will provide two examples below for a better understanding of this.
 ARV/FMV: $100,000REPAIRS: $5,000BPO: $90,000 plus or minus 5%
 ARV/FMV: $100,000REPAIRS: $15,000BPO: $80,000 plus or minus 5%
 ARV/FMV: $100,000REPAIRS: $35,000BPO: $65,500 plus or minus 5-10%Based on this evaluation model. If you had a PRETTY HOUSE and you submitted and offerof $50,000 to purchase it. Can you find anything to justify that? Probably not so don't makeoffers that waste both the lender, your and ultimately the homeowners time. Use the modelabove as a general guideline.Now let's discuss the different loan types. I was speaking in front of a large group recentlyand I called this "The One Thing You Can Ask To Increase Your Short Sale Offers By AtLeast 50%"Why? If you know more about any property if provides you better leveraging and ultimatelynegotiation strategies to target. Not all short sales are created equal.
 These loans are found all over the place. They provide the most flexibility especially dealingwith short sales. Using the $100,000 example; You might start out your offer submitting 60%x 100,000 (FMV) = $60,000 ... which the $60,000 is actually 70% of the BPO Price. However
it is very common to see the lender accepting around 80-85% of the BPO price which wouldbe around $68,000 - $72,250.This model can fluctuate a little bit, but this is a common average. The BPO (value opinionalso considered the PERCEIVED value of the house) to the lender is the MAIN FACTOR.Therefore in this example if you thought the BPO was going to come in around $65,000 ...You would take 82% of THAT number which would be $53,300. The lender may very wellaccept $53,300 based on what they perceive the value of the property (their asset).
 I repeat. This is not a scientific grading scale. It is model used by many short sale investorsas a guideline. You can and will have other factors that make you stray from this. If you aredealing with a FHA type loan or any government backed loan, they are going to recoup a setamount if the foreclosure is completed. For example with FHA loans, the insurer will basicallyguaranty the lender 82% of an FHA Certified Appraisal amount. Notice I did not say BPO. Forthese loans you will need a FHA Certified Appraisal for the lender to consider in theirevaluation process on the property. The BPO will not suffice on these types of loans. You canmassage the numbers 1-2%, but 82% is listed in their guidelines. I provide a list of these inmy course. You can go online to find them for free too.VA (Veterans Affairs) type loans have a guaranty of 88% and FNMA (Fannie Mae) or FMAC(Freddie Mac) loans are around 90-92%. Something else to consider. All local banks, usuallythe smaller ones, will almost always NOT ALLOW more than a 10%-15% discount off theproperty depending on the amount of repairs. Repair to consider if the house is; Pretty, Uglyor just plain SCARY!
 On the average unless there is a considerable amount of obvious equity, consider junior lienholders being wiped out or at the very least accepting 10-20% of what is owed to them. It isnot uncommon to see them accept $500 - $2,500 for their position. Yes, this means if the junior lien holder is owed $100,000 they might accept $2,500 for their position. In fact, arecently in NY our team of negotiators got an acceptance on a $220,000 loan owed to a junior lien holder to accept $9,000! It happens. The more short sale deals you get acceptedyou will start to recognize that in short sale investing ... NOT ONE SIZE FITS ALL! What thatmeans is EVERY short sale opportunity has different dynamics associated with it.The longer you work at completing short sales you will identify common factors and methodsthat work for you to liquidate them. You can save a COUNTLESS AMOUNT OF DOLLARSinvesting in more education from others that had positive and productive experiences workingat them. Don't try and reinvent the "short sale wheel”. Why would you? Instead, learn fromothers that have made mistakes and paved the way for you to succeed at them. The price ofthe education isn’t the issue as much as the cost of not having one.
 As with anything worthy of your time, you must set a goal to complete it. You must have mapon how to get to where you want to go. Many people will end up somewhere but, very few willend up exactly where they want to go without a goal. If you spend time praying aboutdirection and goals you will consider the short distance to your destination. What is it? Theshortest distance to anywhere from two points is a straight line. The straight line idea meanssetting goals, prioritizing them and taking massive action to move forward to reach them.In the game of short sales negotiating with the lender to pay MORE out of their NET to helpget your offer accepted is your goal. If the lender approves it you are golden and everyoneinvolved usually saves over an expensive foreclosure. This means you serve everyone betterand still make a handsome profit by accepting a small/large/huge discount the lender agreedto give you on the property.

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