Short Sales – Another "Buyer Beware" Aspect

How does a seller price a short sale listing?

An email from Trulia pointing to a post titled Short Sale Saga, reminded me to write a post on the topic of how a buyer’s offer can be “used” to determine the list price of a short sale property. Back in December of 2007 when I wrote the post “Should You Buy a Short Sale?” , I didn’t touch on this aspect of the various “difficulties” you might expect to encounter, as the buyer of a short sale property. Today, the likelihood that the seller may be USING your offer to determine a list price, would be more commonplace than it was back in December of 2007.  While this may seem inappropriate from the buyer’s perspective, let’s look at the facts.

Say a seller has his home on market at $625,000 and owes $580,000.  The seller doesn’t have to show it as a short sale at that price, as he needs an offer at $575,000 to “clear the table”.  After 90 days on market with no offers, the owner wants to reduce his price, but would have to show it as a short sale.  Does he reduce it to $549,950 or $499,950 or what?  The seller has no idea what the bank is willing to take, and the bank won’t tell the seller until there is an offer on the table to look at.

The minute the seller is forced to say “short sale” of even “possible short sale”, the seller is going to get a lower offer than if he did not have to disclose this information.  The asking price has to be low enough to get an offer, and the price may be “false advertising”, leading the buyer to believe the seller has any info as to what the lender will take.  If the seller reduces the price to current market value, and the buyer offers full price, the buyer will feel duped (as in the Short Sale Saga) into thinking that a full price cash offer should be acceptable.

If a buyer submits an offer of 80% under market value, the seller should accept it.  Why?  Because that offer becomes the means by which the owner learns what the bank is willing to accept.  In the above case, let’s say the seller decides to list the house at $549,950 and the buyer makes a cash offer of $100,000.  The seller should accept it, leave the property on market, submit the $100,000 offer and get an answer from the bank.  The bank rejects the offer and says they will not accept an offer of less than $430,000.  The seller has learned, via the buyer’s offer, that he can list his house at $450,000.  The seller used the buyer’s offer to determine the list price that matches what the lender is willing to accept.

Here’s what I think.  I think all short sales should be listed for $1.00. By doing so, the seller is making a clear statement that he has no idea what the acceptable offer price will be, and the buyer is on notice that the seller can’t provide that information.  Until that time, the only short sales I have seen where the owner and seller’s agent are making any commitment to the asking price, are the ones who used a buyer’s offer to get a price from the bank.

Using the buyer’s offer to determine list price, under the current system, seems to be the only way for the seller to proceed. Many buyers being disappointed by the current system is not acceptable.  Offering the property at $1.00, and letting the buyers decide what to offer (vs. full price of a “fake” list price) seems to be a better alternative to the way we do it now.

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ARDELL is a Managing Broker with Better Properties METRO King County. ARDELL was named one of the Most Influential Real Estate Bloggers in the U.S. by Inman News and has 33+ years experience in Real Estate up and down both Coasts, representing both buyers and sellers of homes in Seattle and on The Eastside. email: cell: 206-910-1000

86 thoughts on “Short Sales – Another "Buyer Beware" Aspect

  1. Ardell, you’re assuming that:

    1. When the bank rejects a lowball offer, they will tell you how much they’re willing to accept instead.


    2. There is such a thing as a fair market value that will remain constant for more than one month.

    I disagree with both assumptions.

    The bank may or may not tell you how much they’ll accept, especially if there are two banks involved.

    And, in a market where values decline by 1 to 10% every month, there really is no market valuation that is valid for more than a couple of weeks.

    When making an offer on any property – short sale or not – a buyer should simply try to estimate what the price of the property will be in about a year. For now, a good indicator is 2004 or 2005 comparables.

    The buyer should put in a price based on what the property would have fetched in 2004 or 2005, depending on how much risk she wants to take. If the seller (or the bank in a short sale situation) doesn’t accept the offer, then the buyer should simply move on to the many other properties on the market.

  2. I’m new to real estate but i get the gist of what you are saying. I just had a friend that was going through a short sale, seemed to take forever.


  3. Sampai,

    I don’t disagree with you, but you are talking only from a buyer’s perspective. The primary issue addressed in this post is how does the seller determine a list price. The warning to a buyer is that the owner may be using your offer to flush out an answer from the bank.

    The bank will usually discuss what they will take with the owner, once an offer is submitted, but not before. Often they will do an appraisal after the offer is submitted and before they respond. True, if the offer is too ridiculous, they may not want to spend the money on an appraisal. But in most cases the bank does tell the seller what they will take. Whether the seller tells the buyer is another story. If the answer is too far above what the buyer offered, the seller may simply adjust the asking price toward the amount the lender told them they would accept.

    If a market is declining at a high rate, the appraiser will advise the lender and the lender will calculate the amount the value might go down if they don’t accept the offer on the table. If the appraiser thinks the lender can get more if they wait, they lender could merely reject the offer and give the owner some guidance as to list price.

    The point of this post is that most lenders will not communicate with the owner about price they will take, until an offer is submitted. So regardless of the price, you are helping the seller by making an offer.

  4. The seller could determine a list price in the same way the buyer determines an offer: use 2004 or 2005 comparables, depending on how aggressive she wants to be…

  5. No, they really can’t do that, Sampai, unless they had an indication from the lender that the lender would take that kind of number.

    If they price the house at $400,00 at a 2004 price, and the buyer offers full price, and the bank won’t take less than $500,000, the seller has created a big problem. If it appraises at $500,000 the seller has created a huge problem.

    The agent could sue the seller for bringing a ready, willing and able buyer for full price of asking price. The buyer could sue the seller for false advertising, suggesting the buyer could get it at $400,000 with NO basis for that number. The seller isn’t accomplishing their objective of selling the property before it forecloses.

    Listing a house for much less than current market value, makes no sense from the seller or the lender’s perspective.

  6. Banks are looking for fair market value when short sale offers come in.

    Realtors are paid to do things such as determine fair market value. Putting the list price at $1. seems like an incredibly easy way out.

    Setting a market rate for the list price is not false advertising, provided the seeking homebuyers are told, in advance, that the home they are looking at is a short sale.

    I see your point in trying to get the bank to show their hand in a reverse-engineering way. If this were my own personal home, I would be very worried about…..TIME. The sheer amount of time it takes to get loan servicing to send back an answer to the lowball offer might make the buyer move on to other homes.

  7. As to TIME, listing at a dollar puts the valution on the buyer’s agent and buyer and assures quick offers. Everyone will be looking at the $1.00 houses. It sure would be easier to find all the short sales 🙂

    Listing at a quick sale price, which would likely be slightly under “fair market value” would be best. But there would have to be a notice such as “seller does not guarantee that lienholders will accept a full price offer”.

  8. I post from different computers, and use a garbage e-mail address. Hence my different avatars.

    The reason I suggest 2004 or 2005 prices is because I believe the buyer will be able to buy the property at those prices anway. That’s a fair value for the buyer to offer. If the bank rejects it, the buyer should wait for the bank to foreclose and buy it at those prices a few months later. That’s what I would have done with my property.

    Also, when I was buying, I made it a point to ensure that the seller couldn’t accept other offers. Again, if they object, take your dollars elsewhere; that house will still be for sale in six months.

    If you do end up buying the short sale from the bank as an REO six months later, then you should lower your offer by 5% because REOs are worth less than short sales (poorer condition.) Plus someone has to punish the bank for their stupidity; it might as well be you…

  9. Sampai,

    I got used to you as the blue Cousin It with the pink hat on 🙂

    It’s not bad advice, except I’ve seen some houses where even 2004 prices were too high. But not bad as a rule of thumb for buyers.

    For sellers, they likely have to prove that they tried to get a better price before moving down to those levels. That is one of the things the bank checks. If they just did a refi with an appraisal for $650,000 and the owner puts it on market at $499,950 and gets a full price offer, it’s possible the bank will reject that if the seller didn’t first try $599,950 and then $550,000.

    Pricing too low and getting a quick offer could make the bank wonder how much they are leaving on the table.

  10. It seems simple to right click your “monster of choice” and load it us as your avatar. I don’t know what is on Cautious Buyer’s avatar these days. The picture is too dark and small. I liked him better as a monster of choice 🙂

  11. It’s a big cat. I’ll try to find a clearer one. I think the monster stays constant as long as you use the same garbage email.

  12. I recently put in an offer on a house that was listed at $114,900 and was a short sale. My offer was a little below listing price. After about a month of run around from the listing agent the bank did not accept my offer. I was told by the listing agent that the bank would not accept any offers at or below the listing price. So even if an offer came in at listing price the bank would not accept it. Their bottom line is about $20,000 more than the listing price. But, the house is still currently listed at $114,900. Is this normal? Is the listing agent expecting offers to come in above the listing price? I am so confused……

  13. That’s interesting…usually the bank will take it if it is near enough. It will cost the banks a lot more to wait it out or be stuck with a Foreclosure where they have to spend thousands marketing it and trying to get rid of it. It can be a loss that is not necessary if they have a bid that is close enough to the listing price. UNLESS the listing price is already a ridiculously low amount below what the bank wants to accept…that we don’t know…

  14. Sampai:

    Any basis for properties declining as much as 10% per month? Seems kinda extreme.

    2% per month would come out to 24% annually.

    Ardell, is there a methodology you recommend to arrive at a 2004 price for a particular property? Do Zillow, Trulia etc, offer such a thing?

  15. Just like with the stock market, there are good months for housing and bad months. If you look at the data for the last quarter of this year, it wouldn’t surprise me to see a 10% decline in, say, October.

  16. LB, let the bank foreclose. Let them list the house for several months and chase a declining market. Then take 5% off your short sale offer and buy it from them.

  17. Roger,

    This from my Sunday Night Stat Post on October 26th:

    ” But pending prices overall and closed prices in October to date are down almost 10% compared to the 3rd Quarter and almost 20% YOY. ” That’s a prediction for Nov. and Dec. closings. See below for October 2008.

    That was under single family homes, not condos.

    As to 2004 prices vs. today’s, you can use this for a ballpark:

    October 2008 King County Median Price Per Square Foot SFR sold is $196 which is $1 more than last quarter 2005

    Now you go back to one of my posts with the long chart, like this one:

    Which gives you all of the MPPSF figures back to 2004.

    First Quarter 2004 was $152; First Quarter 2005 was $173; Peak Price was $230

    Now you work the percentages.

    October of 2008 is $230 – $196 divided by $230 equals a 15% drop from peak pricing.

    October of 2008 $196 – First Quarter of 2004 was $152
    $196 – $152 divided by $195 = a 22% drop.

    October of 2008 vs. First Quarter of 2005 @ $173
    $196 – $173 divided by $173 = a 13% drop.

    You can see all MPPSF numbers by Quarter in the post link if you want to use last quarter of 2004.

    Now you take the October FMV of the subject property and reduce it by 22% to offer a 1st Quarter 2004 price or by 13% to offer a first quarter 2005 price.

    If you have the purchase price and date of the property, most short sales will, you can get the MPPSF for that timeframe of the chart for a more accurate formula. That way you are backing up from a known price for that specific house vs. trying to figure out October 2008 FMV.

    Let’s say the buyer bought the house in January of 2008. First Quarter 2008 from the chart in the link is $219 – $173 divided by $219 is 21% for a first Quarter 2005 offer.

    If the owner paid $650,000 in Janaury of 2008 minus 21% would be a “1st Quarter 2005” based offer of $513,500.

    If you don’t have a recent sold price, you can often back into it with the mortgage amounts from the refinance that caused it to go short.

    Another, and I think better way, would be to calculate the MPPSF for the immediate area, the way I have it in the charts for King County. If I were doing it, that’s what I would do as a median 21% down could be 30% in one area and 15% in another. If you are in the 15% area, then you would have erred in your favor. But if you are in the 30% or more area, you would have erred to your disadvantage.

    So finding any comps in the immediate area in 2004, 2005 etc and calculating the local MPPSF for those timeframes, would be the most accurate method of determing % change in values.

    This is not how I do a short sale offer calculation, but if someone wants to use sampai’s method, there is data in my Sunday Night Stats Posts to assist you.

  18. One of the reasons I do not use this method, is that price differentials evaporated during the hot market.

    House on a busy road differential was negligible when most houses were selling in days. If you use the purchase price from a hot market, you won’t be calculating the busy road differential correctly.

    House in bidding war popped up over market value even for its time. If you use that price as a given, you were be overestimating it’s current value.

    So best method is to calculate current FMV and then take your “I’m buying a short sale” discount 🙂

  19. sampai,

    If you say the last quarter has it’s weakness, and I agree BTW, then why would you encourage someone to buy in an April market vs. a November market?

  20. LB,

    That doesn’t sound right at all. Especially the part where the listing agent told you. Where’s your agent? Email me if you’d like to toss the actual specifics around. I’m assuming you are not in WA given the price.

  21. Sampai wrote: “Just like with the stock market, there are good months for housing and bad months. If you look at the data for the last quarter of this year, it wouldn’t surprise me to see a 10% decline in, say, October.”

    Did you mean November? We already know October.

    BTW, for the first time in months the median price of pendings (list price) is significantly higher than the last month’s median sold (King County, SFR). So the pending sales are at least not the drag down that they’ve been. I really wonder though what volume will look like. There were some pretty bad news weeks in October, and that could affect volume greatly.

  22. Kary,

    The median price per square foot of current pendings is $190 which is 3% less than October closings and 11% less than MPPSF of 3rd Quarter 2008.

    Where are you getting your data?

    Pending Sales – King County – Residential – as of this moment

    3rd Quarter 2008 – $424,000 divided by 1980 sf = $214.14
    October Closed Sales – $392,475 divided by 2000 sf = $196.24
    Current Pending Sales – $395,000 divided by 2078 sf = $190.09

    214.14 – 190.09 divided by 214.14 equals current pendings down 11% from 3rd Quarter.

  23. My mistake, I was remembering the wrong numbers. It’s solds and pendings since the beginning of the month that are showing the significant improvement. All the pendings are up too, but not “significantly” as I’d indicated. I’d note for others though that partial month solds do bump around a lot, so that it’s up doesn’t mean much.

    Still, all of these items are significantly better than in recent months where the pendings have been a real drag on the future.

    BTW, I don’t usually run current month pendings. I do usually run 2 month old pendings to exclude stale short sales. But I ran the current month just because the pendings do seem to be turning around a bit.

  24. “sampai,

    If you say the last quarter has it’s weakness, and I agree BTW, then why would you encourage someone to buy in an April market vs. a November market?”

    Because sellers still haven’t come to grips with just how far the market has fallen. They don’t read your Sunday Night Stats.

    If you wait until April, they will have seen houses selling all around them for way less than they expected. Banks will have foreclosed on a bunch of properties, and those foreclosures will hit the market as low-priced REOs. It’ll be easier to get sellers to accept a rational offer.

    Right now, I would avoid “normal” sellers altogether; they’re delusional about price. Deal with the banks (Short Sales and REOs); they’re likely to be more rational.

    Once Short Sales and REOs have helped set the market prices for an area, then you can deal with normal sellers.

    If a bank is being as delusional as a “normal” seller by rejecting your fair offer, then treat them like a normal seller: Give them a few months to come to grips with reality and offer again.

  25. Before you place huge bets based on the rantings of an anonymous commenter on the Internet, you should know this: I’m a first-time buyer. Until about a month ago, I barely knew drywall from escrow. I am, however, very, very smart. So I might be right about some things.

  26. sampai,

    If I didn’t feel you were right about some things…we wouldn’t be having this exchange and I wouldn’t be assisting people trying to use your method. It’s not bad, and it certainly served you well. There’s plenty of data to use right here in RCG.

    Speaking of which, remember these numbers?

    3rd Quarter 2008 – $424,000 divided by 1980 sf = $214.14
    October Closed Sales – $392,475 divided by 2000 sf = $196.24
    Current Pending Sales – $395,000 divided by 2078 sf = $190.09

    That last one is ASKING price. My expectation is that solds will be more like $385,000 and MPPSF more like $185

  27. Roger,

    Actually that’s good news 🙂 One of MSN’s articles today was Why Are They Still Building? At least Horton isn’t putting up new competition for resale in that location.

  28. It does seem odd whenever you see a house under construction. I noted one just yesterday, but it was a stand-alone, not part of a development. The hardest hit areas seemingly have the most new construction, and I don’t think that’s just a coincidence. In addition to just pure supply/demand, from what I’ve heard the banks are putting pressure on some developers to sell, and that puts pressure on resale prices.

    That there are fewer houses being constructed is contributing to unemployment (in a number of areas–not just pure construction).

  29. Great article, not sure if it work to list short sales at a dollar or not. Banks are definitely miserable to work with. I read somewhere that less than 20% of short sales actually close. I personally pass along to my buyers how miserable the process is, and basically let them know I refuse to sell a short sale property at this point.

  30. I’m not sure whether this is the thread Ardell mentioned this in, but unrealistically low list prices on short sale properties has come to the attention of the NWMLS. From a portion of a warning to agents:

    “November 24, 2008. NWMLS has received numerous complaints regarding published list prices. The problem seems most pronounced with short sale listings. Some listings contain a list price that is obviously far less than than the fair market value of the property and the amount of existing debt secured by the property and so low that it is readily apparent that there is no possibility that the seller and the seller’s creditor(s), who must approve the short sale, would be willing to accept any amount approximating the list price. In other words, the listing agent knows that such listings cannot be purchased for the list price or for a price even remotely close to the list price. Thus, the list price is not established in good faith as a reasonable sales price, but instead, a marketing gimmick or ploy designed to attract attention by misrepresentation. With such listings, the seller and listing agent have no intention of compensating a selling agent who procures a buyer willing to pay the list price, or anything approximating it. Thus, these list prices are published in bad faith and not as a price that the seller is willing to compensate a selling agent for procuring a buyer.NWMLS Rules require that all listing data be accurate and offered in good faith.”

  31. Need advice for Short Sale Buyer:
    I am interested in a condo property that is a short sale. The price was reduced from $224000 to $190,000. There has been alot more recent interest due to this increase. The assesment is at $278,000. How could it have been assessed so high? The buyers bought it for $304,000 in Feb 2007, they obviously overpaid. I feel pressured to make an offer, I am a first time buyer with excellent credit and a good job. Any advice for me? Should I get a private appraisal in addition to my home inspection? What is a reasonable offer? i want to get the best deal and Im not in a hurry to move in.

    Thanks in advance 🙂

  32. I received the above comment earlier as an email and responded directly. The property is not in WA. There should never be “pressure” to make an offer on a short sale, as anyone can pretty much make an offer If up until the time the bank approves a short payoff.

    In fact “being pressured into an offer” should never be a consideration. If anything, being pressured should be a turnoff.

  33. Regarding #36

    Reasonable is subjective. What are the safe harbor quantitative parameters or specifics defining a “reasonable

  34. I guess my response would be why would a bank approve a short sale at 280k when the comps say 400k? Sure they could save maybe 6 months of interest, which could be maybe 20k, but that still doesn’t get you to anywhere near 280k. So my inclination would be to say 280k is unreasonable.

    The real trick is determining the comps. For a short sale (if I did one) I wouldn’t go out further than 3 months.

    But I agree with your point that there needs to be a safe harbor. But then personally I think the MLSs should get together and slap the banks upside the head and let them know if they don’t approve a price first, no access to the MLS. Someone needs to get the banks in line, and clearly it’s not going to be the government that does it because politicians like the campaign donations made by banks.

  35. Short sale transactions take 5-6 months to close with an 80% failure rate. The listing agent and the selling agent don’t know enough about the process to be effective. The buyer has contingencies and the bank doesn’t like contingencies. The buyer gets tired of waiting, so they walk. If the property goes to foreclosure, the bank will end up with considerably less than $280k. REOs are not good for a bank’s balance sheet. When an all cash non contingent offer for $280k with a two week close shows up at the bank the bank is happy to approve the short sale. Banks know the probability of failure. A 20% probability of success on a $400k FMV equals an effective amount of $80k which is considerably less than the all cash $280k.

  36. Well the only reason the transaction would have only a 20% probability of success is the bank’s own doing! Using that analysis if banks became even more incompetent handling short sales, they’d have to pay us to take them! 😀

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