How Banks Evaluate Home When Approving A Short Sale?
Banks want to understand two things when accepting lesser amount than owed on the property. First, they want to make sure they are being taken advantage and the second, they want to know what they could sell the property if they foreclose and have to sell the home themselves. If they have option to achieve the better result opting foreclosure, they will not approve the short sale proposal.
Process of Short Sale Approval:
The perfect process of a short sale is something like a mystery, and every bank behaves in a different way. But, there are some standard procedure and rules and regulation that any bank will be following when approving a short sale.
1- They use the internal statistical model to get a rough estimate of current market price of the home.
2- They will use appraisals or Broker Price Opinions (BPOs) to get a real person to visit the home and estimate its value based on local market trends.
3- At the last, they will look for internal factors including cost to foreclosure, current inventory of distressed home and the pace at which they wish to incur the losses on their balance sheet for every quarter. “
But, BPO is the most important factor for deciding the current market value. The process and criteria that banks use to determine the value of the house is really consistent and remarkable. The bank will never BPO results with you being a buyer of the home because you can use the same price to give yourself an educated guess about the expected value of the property.
Here is the set of factors you should analyze yourself when estimating a BPO price:
- Find 6 comparable homes: 3 recently sold listings & 3 active listings
- Within a 1-mile radius of the property for urban & suburban areas
- Comparable sold homes with sale dates in the last 3-6 months.
- Age of comparable within +- 10 years of the age of the home.
- Above Grade Living Area (AGLA) within +-20% of the home. Above grade living is far more important than below-grade rooms. Finished basements count, but very little.
- Similar style & room count – An ideal comparable is the same style, with the same number of beds and bathrooms. Comparable with one more or less bedroom can also be used if adjustments are made.
- Comparable with similar condition, construction quality and views.
- Majority of the BPOs are “fair market” price consideration. It means that if there is a sufficient number of homes available for regular sale to be chosen, then the short sale and bank-owned property is ignored. Banks have an idea that short sale and REO properties are discounted, but they wish to have a price opinion that assumes a non-distressed listing.
- Once you obtain the list of these six properties, BPOs will regulate values for differences in each property. You can add or subtract the price of additional rooms to make the perfect price quotation. The goal is to come up with data that is most consistent with the configuration of the property that you are evaluating
- The final price is normally decided after looking at the regulated sale values. If you show three sold homes that are similar to the property with an adjusted sale price of $300k-$325k, then the final price of the home under question will be decided between these ranges.
It is not impossible to find out what the bank can think about the fair market value. The main thing is guessing the amount that can be waived off from the bank if they approve a short sale. This process is difficult and sometimes take longer time than expected.
Many homeowners want to ignore the short sale just to avoid the long and stressful process in favor of an easier transaction. How much of a discount is a mystery, and varies by the day and by the bank. There is a complex mix of decision making that needs to consider a number of things. A bank can give you a discount of 5% and other can provide you 10% discount. It is also possible that some bank simply reject short sale. It is very difficult to say something about the final decision of bank. Banks are not going to approve short sales offers that are 25%, 30%, 40% lower than the fair market value of the home.