Putting Together the Short Sale Offer: How Banks See It

Understanding the short sale offer from the bank’s perspective is a huge advantage in negotiating these deals.  It will help you immensely in communicating with loss mitigators and other short sale decision-makers.  The better you understand these people the more likely they will be to accept your short sale offer. There are 12 factors a bank or lending institution will consider for a short sale deal.

1.  The number of non-performing loans currently on their books.

Banks consider loans to be assets.  It continues to be listed as an asset as long as payments are being collected.  If the payments stop that loan is considered a non-performing asset. If a bank or lending institution has too many non-performing loans on its books they run the risk of getting in trouble with federal regulators and investors.  You can expect that as the real estate market cools banks will experience an increase in their number of non-performing loans.  Your short sale offer gives the bank an opportunity to get a non-performing assets off the books.

2. The lender’s overall financial condition

Federal regulators give banks a set amount of time to turn a non-performing asset into a performing asset before requiring them to list it in their financial statement as a liability. This grace period is typically 180 days. Shifting what was an asset over to a liability is a bad thing for a lender.  If the bank can do a short sale on a non-performing loans before the grace period ends they don’t have to consider it a liability.  This is a helpful piece of information to keep in mind and as you negotiate this deal with the bank decision-makers.

3. The financial condition of a third-party investors

Most banks operate in what’s known as the secondary mortgage market. This means that when they loan money they can “sell the paper” (the actual mortgage agreement) and get their money back, which they can then re-loan.  The mortgage is of course now owned by the third-party investor. The Federal National Mortgage Association (known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (known as Freddie Mac) are two examples of third-party investors. They are both stockholder owned corporations, created by Congress to support homeownership and rental housing.  If these third-party investors are experiencing high rates of foreclosure on non-performing loans they become motivated to do short sales, and often use the original bank to service the transaction.

4.  The third-party investors’ loss mitigation department

Once a foreclosure has begun on a loan backed by a third-party investor, their loss mitigators can and will act quickly to conclude a short sale.  For example, Freddie Mac will often approve short sale offers of 90% of the brokers price opinion, and take just two to three weeks to get processed.

5. Servicing lenders that work for third-party investors

Servicing lenders are organizations that collect payments for the third-party investor organizations.  Though the servicing lender cannot make a decision on the short sale, you must deal with them in submitting your short sale offer.  Find out if a service lender is handling your mortgage, and who the contact person is.

6. The borrower’s finances

The lending institution may want additional information on the borrower’s finances.  You need to be the go-to person to get this information, assemble it in the proper documents, and get back to the bank in a timely manner.  Just remember the rule that your job to be persistent and to make a short sale happen.

7. Mortgage insurance

Because of the complexity arising of third-party investor participation, the issue of mortgage insurance will need to be handled through the service lender.  Just be aware that there may be issues related to the mortgage insurance that will need to be handled by you.  Your service lender is the point person for having those questions answered.

8.  The as-is value of the home

The as-is value of the home is considered to be the current value of the home with no repairs or deferred maintenance completed.  Typically two broker price opinions are ordered and compared against the original appraisal to see if there has been any deterioration in the value of the property.  Broker price opinions are typically used in the place of a formal appraisal.  The lender relies on these appraisals heavily.  When dealing with the service lender for third-party investor, the service lender orders the broker price opinions.

9. The costs of repairing the property for resale

Real estate contracts on homes requiring repairs require an explanation if the owner is unable to complete the work.  To written bids for the work must accompany the short sale package.  These repairs may be presented and negotiated with the lender.

10. The after repaired value

In a short sale offer, the “after repaired value” (ARV) of the home gives the lender some idea of what the house would be worth if they foreclosed, repaired the house and put it back out on the market themselves. Banks would do this if they thought they could recoup the defaulted loan balance, all the back payments, foreclosure costs, and repair costs.

11. Securing and maintaining the property

Securing and maintaining a home includes protecting it from vandals, repairing broken windows and doors, and maintaining the water and utilities.  It also includes such things as removing trash and debris, lawn care and keeping all the mechanicals of the house in good working order.

12. Holding costs and expenses related to selling the property

A lender must estimate the cost of taking back a foreclosed home and maintaining it until a suitable buyer can be located.  In a short sale offer, this is known as holding costs.  Holding costs can include making repairs, painting, replacing damaged or broken appliances, water heaters, air conditioners, furnaces, floors and carpet, insurance and property taxes.  This can get very expensive.  In addition to that, locating a buyer through a typical real estate professional can take up to six months and sometimes longer. Always remember: banks are not in the housing business, they are in the paper business.  These holding costs and other expenses are a horrible inconvenience to banks, and in most situations they will take big discounts to avoid the hassle.