I often find my customers confused and sometimes angry when the bank finally approves a short sale, but at a higher price than it was listed for. Why does this happen?
The listing price is established by the owner of the home and the listing agent. The price is typically just below market value because the owner wants to have multiple offers to choose from. They then choose the offer from the buyer they think will be patient enough to wait for the bank to give them an answer. The lower the price the more offers that will be received the more likely they are to find a buyer willing to wait.
Once the owner has accepted an offer from a prospective buyer they submit it to the bank (or banks if they have a second mortgage or a line of credit) along with paperwork the bank requires from them personally. The bank then reviews all the data, orders an independent Broker Price Opinion (BPO), runs the price through their valuation programs, orders an appraisal, and begins working with the “investor” to approve the short sale.
The bank is doing three things: 1) They are making sure that the seller is not lying about their financial circumstances by verifying all the required data and asking for additional paperwork if necessary. If the bank finds that the seller truly is in a hardship, then they approve moving to the second step. 2) The bank has to make sure they are getting fair market value for the home. They do this by ordering a BPO, an appraisal, and by crunching numbers in their valuation programs. If they find that the price is below market value, they will counter offer the buyer at a higher price. This happens a lot! 3) They are forwarding all this info the owner of the loan (the investor) to get their permission to sell at the final suggest price. Most banks no longer own the loans but have been given permission by their investors to negotiate the short sale approval process for them.
As you can see there are really three approvals: 1) approving the seller’s situation, 2) approving the price, and 3) getting the investor’s final approval.
If there are two different loans on the property this process is repeated for the second loan as well.
Here in Orange County, prices have continued to climb over the last 12 months for homes under $500k. So if you, the buyer, wrote an offer on a house 5 months ago, their numbers will probably come back higher than when you made your offer because the market is improving. You can expect the bank to counter offer you with a higher price.
I hope this information helps you as you navigate this tricky market. If you have additional questions, please feel free to contact me.