Getting lenders to say "Yes!" to your short sales require that you know how a lender approves a short sale offer.
Often, an agent or an investor will ask me why their short sale offer is not being approved by the bank. They typically go on to explain to me that the property is in bad condition, it has been on the market forever without another offer, and after countless phone calls, emails, and voice mail messages, the lender still will not approve their very fair offer.
What the investor or agent does not realize is that, in every case, the lender thinks the property is worth far more than the current offer they have submitted. It's really that simple.
THE APPROVAL PERCENTAGE:
Lenders agree to a short sale based on a percentage of what they believe to be the current "as is" value of the property. Each lender has a different approval percentage, and it changes often.
Knowing the approval percentage is one part of the equation. The other part of the equation involves what the lender thinks the value of the property is. Lenders assess the "as is" value of a property using a variety of sources. The first and most prevalent is the the Broker's Price Opinion (BPO).
A BPO is conducted by a real estate agent and usually includes 3 closed comparable sales, 3 active competitive listings, as well as local market conditions and other important valuation details. And there are two types of BPOs, interior and drive-by.
With interior BPOs, the agent has access to the property and is able to examine the property inside and out. A drive by BPO is just as you would imagine, the agent is unable to get inside the property so they simply "drive by" and make their assessments based on only viewing the exterior of the property. As you would guess, an interior BPO is far more accurate than a drive by.
The second valuation a lender may use is an appraisal. Appraisals are conducted by licensed appraisers and typically cost about twice as much as a BPO. Although the industry may recognize the appraisal as a more accurate assessment of value over the BPO, due to the fact that appraisals only use closed comparables sales, we have found that a BPO is a far better value determinant. Some lenders, like Countrywide, will oftentimes order both an interior BPO and an appraisal to be mightily sure as to the actual as-is value.
The third valuation lenders rely on is an internal valuation from their REO or special assets department. Most lenders have access to many of the same tools that appraisers and BPO agents use and therefore can quickly glance at the comparable sales for the subject property and be able to verify if the BPO or appraisal is accurate.
In some instances, their "valuation" department may put together an assessment of the property's worth (even though they are unable to view the property in person.)
With all this new knowledge, let's now go back to the dilemma of getting the lender to say "Yes!" to your short sale offer. How does a lender determine what the current "as is" value of the property is? First, they locate the appraisal that the loan was based on. If the loan is relatively new, that appraisal will have some bearing on the final assessment.
Next, if the property has been delinquent on payments for any stretch of time, chances are the lender will have a "drive by" BPO completed. Then, if you make a short sale offer, the lender will usually order an interior BPO, an appraisal, or both. Finally, most lenders have access to a department who will supply an interior valuation.
To create the final tally, the interior BPO or appraisal will weigh the heaviest, followed by the drive by BPO, then the internal valuation and, in some cases, the original appraisal.
In the end, there is a number that the lender finally settles upon that indicates the current "as is" value of the property. They will agree to a percentage of that number. That's it.
SO, HOW MUCH DO I OFFER ?:
You may be asking, "How do I know what that number is?" Sometimes you can simply ask and the loss mitigation rep. will tell you. Other times, we employ a series of strategies that almost always uncover that number.
Further, even if you know what the interior BPO value came in at, that doesn't mean the lender is using that number. They may incorporate an exterior BPO or their own interior valuation into the equation.
So there you have it, armed with the approval percentage and the determined current "as is" value, you'll have the lender saying "Yes!" in no time.
It's also important to know that you can reduce the lender determined value by controlling the interior BPO or appraisal. The concept is that you communicate directly with the BPO agent or the appraiser before they assess the property and educate the person as to your objective, so that hopefully they do not over-value the property and instead, value the property as low as possible.
Lenders have a few checks and balances that will disregard an ultra low BPO. There is a very fine line between a low BPO that the lender accepts and one that is inaccurately low and thrown out. We've spent a decade perfecting the art of controlling the BPO, so that the BPO report or appraisal is low but acceptable by the lender--a fascinating topic for another day.
So, the crux of the matter is that a lender approves a short sale based on what they think the current "as is" value is and their current approval percentage. If your offer is not being accepted, you are offering too low. That's it.
Today, I lost a deal that I shouldn't have.
Now the lender will, most likely, end up foreclosing and they'll add that property to an ever growing list of REOs that are already flooding nationwide marketplaces.
This particular deal has been in negotiations for 11 months and 3 BPOs have been done, on this property, during that time.
All 3 BPOs came in at different values, but the lender opted to stay with the higher value.
How do I know ? Because 2 of those BPOs were mine - I had them done AND there was a difference of 36K, in value, between my 2 BPOs !
According to the servicer, their BPO was higher than my 2, simply based upon the purchase price they were insisting that I pay.
They wanted to capture 92% of their BPO/value - which was more than 90K over the true/current market value of the property.
We tried to compel the servicer to review the most current comps, which we provided AND we also linked them to resources where they, as well, could confirm those comps.
We provided interior/exterior video of the property - so they could see, first hand - the required repairs that would have to be completed.
And, of course - we provided our 2 BPOs, to show the difference of "opinions" in value -
I'm no stranger to losing, or walking away from, deals - because, like the banks and/or any other business - I'm in it to make $$, right ?
However, losing this deal isn't about my lost opportunity, it's about a disturbing fact that these lenders are declining huge volumes of short sales that they should be approving - because the losses, even at less than 92% of their "opinion" of value, aren't as great as the losses that are being realized when these lenders foreclose and the property reverts back to the lender/investor.
So how do I propose the lenders/servicers solve this problem ?
I have a few suggestions that might help:
* They can start by having 3 BPOs, done by 3 independent brokerages, done on each short sale - ensuring that the BPOs are being done by LOCAL brokerages.
Then, they can average the 3 out to calculate an ESTIMATED MARKET VALUE.
* After more than 3 solid years of declining property values, in most markets, they can easily create a formula, based on available data, that calculates the AVERAGE LOSS of value - for a given market, over the previous 12 months (or 6 months) and apply that as a discount off of the current ESTIMATED MARKET VALUE.
* They can stop trying to control the buyers of these short sale properties, relating to whether, or not, these buyers intend on flipping for profit, or keeping the property. What I'm saying is IF THE SHORT SALE OFFER IS ACCEPTABLE, THEN TAKE THE DAMN PAYOFF AND BE DONE WITH IT !
*FINALLY - If a short sale offer is acceptable - then the lenders/lienholders should NOT maintain ANY rights to pursue the sellers for deficiencies.
WHY ?? I'll summarize:
When the buyer originally purchased the property, or even had it refinanced, BOTH the buyer(s) and the lender(s) agreed that the value of the property supported the purchase price, RIGHT ?
So, a partnership is formed between the buyer(s) and the lender(s).
Now the market changed AND the property has lost that value -
So, the buyer(s) are going to lose and the lender(s) are going to lose.
Buyer(s) lost the property -lender either sells the property in a short sale, or gets it back - which should conclude any further contractual obligation from the buyer(s).
Legislation will need to be enacted to prevent, or reduce, the inevitible wave of deficiency judgements/litigation that's sure to come.
As an aside, it might be a better idea for foreclosing lender(s) to train reps to contact buyers in foreclosure - that are suffering TRUE HARDSHIPS, but want to remain in their distressed home.
Taking the LOAN MOD (Don't EVEN get me started on LOAN MODS !!) to a new level, the foreclosing lender(s) should arrive at that ESTIMATED MARKET VALUE, as referred to above, and rewrite a new "market value" loan, thereby keeping the current owner(s) in place.
HOW MUCH $$ WOULD THAT SAVE ??
According to numerous "reliable" sources, there's a 2% + month-over-month increase in the nation's home loan delinquency rate, up to over 9% in May 2010.
Delinquencies are expected to increase as seasonal purchases taper off.
That buyer's tax credit also helped to inflate what many believe would have been an, overall, "flat" Spring Buying season.
Sources state that the percentage of mortgage loans in default, 90 + days, increased, while both delinquency and foreclosure rates continue to remain relatively "stable", at historically high levels.
As of June, 2010 - there are more than 7 million loans in some stage of delinquency.
Sources state that the average number of days for a loan to go from 30 days delinquent to foreclosure is on the rise.
Keep in mind that there's a HUGE inventory of REOs that cannot be released onto the standard marketing engines, like the MLS - for fear of declining already challenged real estate values.
Sources went on to state that, after a two-month decline, deterioration ratios increased, with an average of more than a 2 to 1 ratio of loans rolling to a worse status, meaning for every one loan that is "saved", 2 move closer to foreclosure.
The number of delinquent loans that "cured" to a current status declined for every stage of delinquency, except in the "greater than six months delinquent" category.
This improvement was likely the result of trial modifications made through the Home Affordable Modification Program (HAMP) that transitioned into permanent status. LPS manages the nation's leading repository of loan-level residential mortgage data and performance information from nearly 40 million loans across the spectrum of credit products. Diana Olick of CNBC says, "Oh good, so the HAMP program is helping "cure" those 6 month+ delinquencies. No, they're just delaying them yet again, since we know that the re-default rate on HAMP is only rising. Forget cure and think remission."
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