I am, from time to time, asked by buyer agents how much is owed on a listing that is being sold as a short sale. We always disclose when a property is being sold subject to lender approval, and I understand the rationale for asking about the numbers, but the underpinnings of the question are based on a misconception.
I'll explain, but first, a question.
Which home has a better chance of having the short sale being approved:
- A $500,000 home with a $550,000 mortgage
- A $500,000 home with a $650,000 mortgage
Many people assume that the house with the $50,000 shortfall is the one that will be easier to have the short sale approved. That assumption is incorrect. The fact of the matter is that the amount that the lender loses in a short sale is immaterial to the approval. Once hardship is established, short sale approval is based on the banks's valuation of the home, chiefly through an appraisal or Broker Price Opinion (BPO). The lender could be losing $25,000 or $250,000- it doesn't matter. It all hinges on that appraisal or BPO.
Why? Because you can't expect to get more than the market will bring. And if the lender has to seize the home, they will do a BPO on the home and price it accordingly with no regard for the loan amount they foreclosed on. The lender is simply trying to minimize their loss. For that reason, the buyer's terms are less important in many cases. A regular seller might give a significant premium to a cash buyer for example. A lender in a short sale probably won't give that term much deference at all.
Therefore, the big question in a short sale is not how much the bank is losing or what they are owed, but if the offer on the table reflects comparable sales activity. That is the great yardstick by which approvals are measured.