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.