The Truth About Bargain Short Sale List Prices

great price riderI saw a short sale listing come on the market this morning for about 20% under market value.  It’s only the gazillionth time I’ve seen this happen.  Is this list price too good to be true?  Probably, especially since a call to the listing agent ended with him stating the property will probably sell for “way more than list price.”  So why did the agent list                                                                                        the house so low below market value?

The main reason some agents take this route is to to fetch an offer quickly so that it can be submitted to the sellers’ lender to find out what list price the bank would be more likely to accept.  Do I agree with this approach of taking and marketing a short sale listing (or any listing for that matter) with a list price that is grossly under value?  Absolutely, positively not.  Here’s why.

First and foremost, short sale lenders have learned some lessons since the real estate  bubble burst.  When the market first crashed, buyers could and did get fantastic deals on properties which contributed to the rapid decline in values.  Banks have since learned that they pretty much control the market.  Short sales where the sellers’ lender will take considerably lower than market value are few and far between.  Tell me, would you sell your house for less than market value if you didn’t have to?  Of course not.  Why would a bank  act any differently.  The won’t and they don’t – not anymore.  All sellers want the most money they can possibly get for a home.  Period.

As a seller, the short sale process can be tedious.  Tax returns, bank statements, pay stubs, and other financial filings will need to be reviewed by the seller.  The bank will want to know how much money is spent each month on everything from groceries, dining out, clothes shopping, car payments, utility bills and the like.  Banks dig deep, and they will know a seller’s budget and financial holdings inside and out.  This process can take some time since short sale processors are likely working on over 100 files at any one given time. This means delays in reviewing files and  requests to sellers for updated paperwork because the paperwork submitted 60 days previously has expired.  This can very frustrating and time consuming.

Once the bank has all of the paperwork required from the seller, the bank is going to send one of their representatives into the house to perform a valuation (BPO or appraisal) of the property.  At this point, the bank will be made aware that the house is under-valued and the offer they have in hand does not reflect current market value.

Listing a short sale too low will only lead to three things for a seller: a counter offer, additional unnecessary stress, and longer, drawn out negotiations.

When it comes to being a seller of a short sale, the best, most time efficient, least stress-filled approach to take is a straight-forward one.  There is no reason to add stress or time to a process that is already abundantly full of both by allowing an agent to list the property under market value.

As a buyer, under valued short sales are a nightmare.  It is the exception, not the rule, when a short sale is listed with a truly approved list price.  Even short sales that were “previously approved at list price” are likely no longer approved at the current stated list price.  Why? Just because a list price was approved once, does not mean it will be approved again because once a buyer walks away from a short sale, that file is closed and the process starts over when a new buyer is found.

Most times a new processor and negotiator are assigned to the file and the paperwork in the file is reviewed again.  Granted, the process can move quicker because a lot of the leg work has already been completed (tax returns have been submitted and the BPO or appraisal is already in the file) and updated pay stubs or property valuations can be submitted more quickly if needed.  But if anything changes, for example there is an outstanding lien accruing debt or interest, or an updated property valuation comes in higher or the asset manager/investors feel they need to net more, you can kiss that “previously approved list price” goodbye.

At this time, only HAFA approved short sales and FHA approved short sales (where the listing agent actually gets the FHA short sale approval PRIOR to listing the home for sale) are truly approved at list price.

The following is a real life buyer scenario of an under-priced short sale.  Mrs. Smith would like Agent A to show a property at 123 Main St..  The house is listed $20,000 under market value.  Agent A shows 123 Main St. and  points out to Mrs. Smith that the property is listed under current market value.  Agent A explains to Mrs. Smith that the house will likely sell for more than the current list price because similar, comparable houses in similar condition in the area are selling for more money than what the house is listed at, and banks want to get as much money as they can for a property – typically market value.  Agent A, who has newly started working with Mrs. Smith, continues by explaining the short sale process and advises Mrs. Smith that the bank is going to send out one of their representatives to perform a valuation of the property and said valuation will be taken into account along with the sellers’ financial status when reviewing the offer.  Agent A shows Mrs. Smith current comparable sales that clearly indicates market value is higher than current list price, but Mrs. Smith thinks Agent A just wants to close a deal or sell the house for more money to make a larger commission.  Mrs. Smith politely concludes the appointment with Agent A and calls Agent B.

Agent B is newer to real estate and not as willing to be upfront and straight-forward about the fact that said house is listed $20,000 under current market value.  Agent B writes a full price offer on 123 Main St. for Mrs. Smith (which is $5,000 below the maximum amount Buyer A is qualified to purchase at) and Mrs. Smith, according to contract, agrees to wait 90 days for the sellers’ bank to provide an approval to the short sale contract.  The offer is accepted by the seller.

While Mrs. Smith is waiting the agreed upon 90 day waiting period, several properties come onto the market that are appealing and priced according to market.  Mrs. Smith understands that the contract she entered into states that escrow monies will be forfeited to the seller should she terminate the contract prior to the agreed upon waiting period of 90 days.  Mrs. Smith cannot afford to lose the escrow money.  Mrs. Smith is unable to look at these properties;  one of which is a traditional sale that fits all of her criteria and is priced according to market.

Ninety days pass and fortunately for Mrs. Smith, Agent B is notified that the bank has responded to the offer.  Unfortunately for Mrs. Smith, the bank wants $25,000 more than the current price offered.  Agent B calls Mrs. Smith about the response and advises her that the bank wants $25,000 more than the current offer.  Mrs. Smith is upset since she submitted a full price offer.  Mrs. Smith doesn’t feel it necessary to pay more than list price since that is the price the house was listed for – she believes that is what it should sell for.  Agent B shows Mrs. Smith the comparable sales and a discussion about market value ensues.  Mrs. Smith is not able to get financing for much more than list price, but really wants the house.  Mrs. Smith counters at $5,000 more than the original contracted price as that is the most she can afford.  Mrs. Smith waits 2 weeks and the short sale lender counters back at $20,000 higher.  She cannot move forward with the purchase. The seller of 123 Main St. has to put the home back on the market at an increased list price, which will probably be listed as previously approved, and start the process all over again.

Meanwhile, Mrs. Smith is disappointed and mad for not being able to purchase the house.  She is also upset with Agent B since the sale was not able to go forward, and Mrs. Smith was unable to look at or make offers on any of the other properties that were within her budget that could have been a fit and closed.  Mrs. Smith is also upset with Agent B for not discussing the market up front.  Mrs. Smith realizes that Agent A was right all along.  Disappointed, upset and embarrassed, Mrs. Smith takes a short break from house hunting then calls Agent C whose advise and guidance Mrs. Smith listens to.  Mrs. Smith is finally able to purchase a home.

Moral of the story?  If you’re a buyer and it seems too good to be true, it usually is.  If you’re a seller, list it right the first time.  It will save a lot of time and trouble in the long run.

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One thought on “The Truth About Bargain Short Sale List Prices

  1. Lisa, this answered a lot of questions I had. As a buyer, the under valued short sales can be a nightmare. The purchase of a house isn’t the same as running down the street for a gallon of milk. For the milk, the purchase is as simple as there’s the milk at the store, go to the store, if you have the money in your pocket, buy the milk. A house on the other hand, especially when it comes to the “short sale”, isn’t that simple. Even if you have funding it doesn’t mean you can see the house and buy the house as easy as milk. They’re many variables that come into play and this article explains them very well. Thank you.

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