Seattle Real Estate Blog by David Monroe

The Pre-Approved Short Sale Fallacy

Short Sale ApprovalI’ve received many calls from prospective buyers interested in my short sale listings asking if the listing price has been approved by the bank.  On a short sale, the seller owes more than their house is worth, so the seller’s lender(s) must approve the sale price and accept a discounted loan payoff in order for the house to be sold.  However, is it not common in these situations for banks to pre-approve a listing price for a house.

Because there are so many short sales on the market, buyers are searching for short sale information on the Internet and finding a wealth of information and advice on how to handle short sale situations.  I did some searching myself, and while there was some good information available, I found a lot of incorrect or incomplete information. 

Many websites advised buyers to ask the listing agent if the list price had been approved by the bank.  However, buyers aren’t necessarily getting the whole story.

Here are some situations that may lead a listing agent to claim that the bank has approved the listing price, along with some things to consider:

  1. The seller’s loan is an FHA loan, and HUD has sent the seller a letter stating the minimum net payoff proceeds that they would accept.  This can be fairly reliable as long as all of the conditions set by HUD are satisfied.  In this situation, you also need to know the following:

    1. When is the deadline for obtaining a signed Purchase and Sale contract from a buyer?  The HUD pre-approval is only valid for a specific period of time, usually around 90 days.

    2. What is the appraised value of the property?  The pre-approved price set by HUD is based on a percentage of the appraised value, usually 88%.  Since this is the net amount after all selling expenses (including commissions and closing costs), that translates to a purchase price of approximately 97% of appraised value.  However, HUD will often times accept less than the pre-approved amount depending on how long the property has been on the market—A buyer’s agent that specializes in short sales will know when you can make a lower offer that will net HUD less than their pre-approved amount and still have it approved by HUD.   If your agent doesn’t know this, you could be paying more than you should for the house.

    3. How long has the property been on the market?  This relates to Point (b) above—HUD may accept a lower payoff than their pre-approved amount depending on how long the property has been on the market.

  2. Verbal Short Sale ApprovalThe bank has verbally approved a listing price or has verbally disclosed the minimum payoff that they’ll accept.  This is possible, but rare.  Banks want the property sold at the highest price possible and don’t want to leave money on the table.  If they approve a listing price of $300,000 and the property could have been sold for $320,000, then they haven’t done their job of mitigating the loss.  Most banks prefer to receive an offer, then determine if the price offered is acceptable.  Also, if the price approval was not in writing, there’s no guarantee that they’ll follow through with their verbal commitment (banks are notorious for “forgetting” verbal commitments that they’ve made).

  3. The bank has given written approval of the listing price.  As in Point #2, banks rarely approve a price prior to procuring a bona-fide buyer for the property.  If the listing agent claims to have written approval of the listing price, ask them to send a copy to you in writing.  If they say they can’t because it contains confidential information, ask them to black out the confidential information with a marker and send a copy to you (make sure they don’t black out the borrower’s name or property address).  If the letter states an approved price, make sure it also states the net payoff proceeds that the bank will accept.  The bank is less concerned about the sale price—They’re concerned about the amount of money they’ll end up with after the deal is done.  You’ll want to avoid potential situations where the bank approved a listing price but comes back in the eleventh hour and says something like, “That price was based on 4% in real estate commissions, not 6%,” or “That price didn’t account for prorated real estate taxes, homeowner association dues, etc.”

  4. A previous buyer’s short sale offer was approved by the bank, but the buyer backed out or could not complete the transaction.  This situation would seem like a slam-dunk since the bank had already approved another buyer’s offer.  But beware—Just because the bank approved another buyer’s offer at the same price doesn’t guarantee that they’ll approve your offer.  The previous buyer may have had different financial qualifications and the terms of the previous offer may have been different than the terms that you’ll offer.  Maybe the previous offer didn’t include an inspection contingency, and that made it desirable to the bank.  Also, short sale approvals are usually good for up to 30 days, or sometimes 45 days.  If the bank finds out that a different buyer was substituted, they could reject the short sale.

    I had a recent transaction where we had a short sale approval (approved specifically for the original buyer), we sent in a new offer to the bank for approval at the same price, and the bank changed their mind and decided they wanted a higher price.  We had to fight with the bank for the next month to get them to come back down to the original price that they approved the first time around.

    My point here is that just because the bank approved an offer from another buyer doesn’t necessarily mean that you can just substitute a new buyer and expect the deal to go through.  The only way to assure that the bank will go through with the deal after the approved buyer backed out is to submit the new offer and get a new approval.  Depending on the bank, this could take anywhere from several days to several weeks.

    If you find yourself in this situation, ask the listing agent to send you a copy of the short sale approval letter.  Make note of the deadline.  Many banks will issue an updated approval letter for the new buyer but won’t change the date that the approval expires (the deadline for closing).

Keep in mind that I’m not saying that you should completely discount any claim that the price of a property has been approved by the bank.  Just make sure you know the facts behind the claim, so you’ll be able to set the proper expectations.

Most banks won’t start short sale negotiations or discuss any price they’ll be willing to accept until an offer is received from a buyer, although there are exceptions.  As time goes by, we’ll probably see more banks opening up to the idea of pre-approving prices for short sales to speed up the process.


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Authored by David Monroe, Realtor and Pre-Foreclosure and Short Sale Specialist.
Access Seattle area short sale help and foreclosure resources including selling in foreclosure, and 8 Ways to Avoid or Stop Foreclosure.

Copyright (c) 2010 by David Monroe (Home4Investment Team at Keller Williams Seattle Metro West).

Comment balloon 2 commentsDavid Monroe • February 24 2010 04:39PM

Comments

Well put and well written.  I prefer FHA loans for short sales -- when I'm on either side of the table.  They are much easier to negotiate, and the banks have to (in theory) follow government time-lines for responses.  But a listing is a listing and a sale is a sale -- so bring 'em all on! 

Posted by Richard Strahm, Lansdale and North Penn Real Estate (American Foursquare Realty) almost 9 years ago

Richard, I agree on FHA loans and short sales.  It's nice to have some of the guesswork taken out of the short sale process.

Posted by David Monroe, Short Sale Real Estate Agent (Keller Williams Realty) almost 9 years ago

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