SHORT SALE: HOW IS THE SALES PRICE DETERMINED?

QUESTION: Mike, who determines what the price will be in a short sale?

CRIBBIN REALTY'S ANSWER: Most lenders will request a BPO (broker's price opinion) or a full appraisal of the property. In some cases they will use a drive-by value or a computer analysis comparing other similar homes that have sold. In this real estate market, this is very difficult - there are few sod homes! This is where the negotiation begins. Some factors negotiated are such things as close proximity to power lines, railroads tracks, busy streets,high numbers of neighborhood foreclosures (blight), declining market, repairs needed, the banks loss severity rate in a foreclosure to justify our offer price. also negotiated hard is the lenders' Loss severity Rate.

I know you are wanting to know "what is Loss Severity Rate"? This is the rate of loss a lender incurs in a foreclosure. here's an example: In a foreclosure, the bank recoups only a portion of the mortgage balance plus they incur significant property preservation costs (aka maintenance costs), legal fees, liquidation costs, additional "carrying costs". The 'net' the bank receives after a foreclosure sale is divided into the total costs or 'balance' due which is now much higher than the original mortgage balance...resulting in the Loss Severity Rate. This rate has climbed to 40% or more. Much higher than a short sale!

Remember if you have a real estate related question or a topic you would like me to discuss please email them to: mike@cribbinrealty.com.