Here is a question I'm constantly being asked by my students and other real estate investors.
The answer to it is not an exact science. First let's identify some common used terminology.
BPO (Broker Price Opinion): A generalized opinion or value of the property. These can be exterior and interior. They are ordered by the lender and sent to a third party or BPO company such as BPODirect, First American, etc.. The company has a list of Realtors in each state. They send out the BPO request to several Realtors. The first Realtor to respond to the request and accepts the offer get the order.
FMV (Fair Market Value): This is determined by a Realtor using the MLS. It is a comparative analysis showing sold comparable homes with similar square footage, bedrooms, baths, garage etc... that show how much properties are selling for in particular areas. The time frame used is usually 6 months to 12 months for the comparison test. If enough comparables (comps) are available a flexible formula to use is the following.
Take out the two highest comps and the two lowest ones and average the rest.
Example:
Comparable Sold Comps
Let's say you think a property is worth $200,000
A Realtor pulls some comps off the MLS that show the following.
$214,000
$216,000
$212,000
$209,000
$207,000
$211,000
$195,000
$190,000
$187,500
$182,000
$180,000
Using our formula you would take about the 214,000 and $216,000 comps as well as the $182,000 and 180,000 comps. That would leave 7 other comps. see below.
$212,000
$209,000
$207,000
$211,000
$195,000
$190,000
$187,500
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You take an average by adding up all the comps and dividing by the total amount of properties left. In this case the number is 7.
Total: $1,411,500 divided by 7 = $201,642
In other words you might expect to sale your house for $201,642.
ARV (After Repair Value): This is actually a slang term used with real estate investors. It basically means about the same as FMV. The difference could be argued stating the ARV is more of a guess or value that is derived by using comps from houses that were not sold by a Realtor. Hence they would not show up on the MLS. Of course an appraiser can use BOTH COMPS, but generally sticks to the ones off the MLS. Think of the ARV as a less accurate value than the MLS comps ... generally in my opinion.
Dealing with short sales you usually find is the FMV and / or the ARV will come in about 10-20% higher than the BPO ordered from the lender. If this is the case you might consider offering 60% of the ARV or FMV value. This of course depends on the amount of repairs needed for the property. If you have what is usually classified as a "Pretty House" ... showing very little repairs, let's say under under $10,000 ... don't expect to get a huge discount from the lender. If you cannot JUSTIFY a reason for the lender to accept either a small or large discount ... don't expect them to accept it. This also dispels the myth that all houses heading towards foreclosure are good short sale candidates.
I will provide two examples below for a better understanding of this.
PRETTY HOUSE
ARV/FMV: $100,000
REPAIRS: $5,000
BPO: $90,000 plus or minus 5%
UGLY HOUSE
ARV/FMV: $100,000
REPAIRS: $15,000
BPO: $80,000 plus or minus 5%
SCARY HOUSE
ARV/FMV: $100,000
REPAIRS: $35,000
BPO: $65,500 plus or minus 5-10%
Based on this evaluation model. If you had a PRETTY HOUSE and you submitted and offer of $50,000 to purchase it. Can you find anything to justify that? Probably not so don't make offers that waste both the lender, your and ultimately the homeowners time. Use the model above as a general guideline.
Now let's discuss the different loan types. I was speaking in front of a large group recently and I called this "The One Thing You Can Ask To Increase Your Short Sale Offers By At Least 50%"
Why? If you know more about any property if provides you better leveraging and ultimately negotiation strategies to target. Not all short sales are created equal.
CONVENTIONAL LOANS
These loans are found all over the place. They provide the most flexibility especially dealing with short sales. Using the $100,000 example; You might start out your offer submitting 60% x 100,000 (FMV) = $60,000 ... which the $60,000 is actually 70% of the BPO Price. However it is very common to see the lender accepting around 80-85% of the BPO price which would be around $68,000 - $72,250.
This model can fluctuate a little bit, but this is a common average. The BPO (value opinion also considered the PERCEIVED value of the house) to the lender is the MAIN FACTOR. Therefore in this example if you thought the BPO was going to come in around $65,000 ... You would take 82% of THAT number which would be $53,300. The lender may very well accept $53,300 based on what they perceive the value of the property (their asset).
OTHER LOAN TYPES
I repeat. This is not a scientific grading scale. It is model used by many short sale investors as a guideline. You can and will have other factors that make you stray from this. If you are dealing with a FHA type loan or any government backed loan, they are going to recoup a set amount if the foreclosure is completed. For example with FHA loans, the insurer will basically guaranty the lender 82% of an FHA Certified Appraisal amount. Notice I did not say BPO. For these loans you will need a FHA Certified Appraisal for the lender to consider in their evaluation process on the property. The BPO will not suffice on these types of loans. You can massage the numbers 1-2%, but 82% is listed in their guidelines. I provide a list of these in my course. You can go online to find them for free too.
VA (Veterans Affairs) type loans have a guaranty of 88% and FNMA (Fannie Mae) or FMAC (Freddie Mac) loans are around 90-92%. Something else to consider. All local banks, usually the smaller ones, will almost always NOT ALLOW more than a 10%-15% discount off the property depending on the amount of repairs. Repair to consider if the house is; Pretty, Ugly or just plain SCARY!
OTHER LIEN HOLDERS
On the average unless there is a considerable amount of obvious equity, consider junior lien holders being wiped out or at the very least accepting 10-20% of what is owed to them. It is not uncommon to see them accept $500 - $2,500 for their position. Yes, this means if the junior lien holder is owed $100,000 they might accept $2,500 for their position. In fact, a recently in NY our team of negotiators got an acceptance on a $220,000 loan owed to a junior lien holder to accept $9,000! It happens. The more short sale deals you get accepted you will start to recognize that in short sale investing ... NOT ONE SIZE FITS ALL! What that means is EVERY short sale opportunity has different dynamics associated with it.
The longer you work at completing short sales you will identify common factors and methods that work for you to liquidate them. You can save a COUNTLESS AMOUNT OF DOLLARS investing in more education from others that had positive and productive experiences working at them. Don't try and reinvent the "short sale wheel?. Why would you? Instead, learn from others that have made mistakes and paved the way for you to succeed at them. The price of the education isn't the issue as much as the cost of not having one.
YOUR SHORT SALE GOAL
As with anything worthy of your time, you must set a goal to complete it. You must have map on how to get to where you want to go. Many people will end up somewhere but, very few will end up exactly where they want to go without a goal. If you spend time praying about direction and goals you will consider the short distance to your destination. What is it? The shortest distance to anywhere from two points is a straight line. The straight line idea means setting goals, prioritizing them and taking massive action to move forward to reach them.
In the game of short sales negotiating with the lender to pay MORE out of their NET to help get your offer accepted is your goal. If the lender approves it you are golden and everyone involved usually saves over an expensive foreclosure. This means you serve everyone better and still make a handsome profit by accepting a small/large/huge discount the lender agreed to give you on the property.
Remember ... all the offers you DO NOT make will always be declined.
I hope this helps.
Remember ? be a servant,
Life has Ups and Downs so Enjoy the Journey,
but Stay Focused on Where You Want to Go,
Cory Boatright
Loss Mitigation Specialist
cory@shortsalefundamentals.com
www.shortsalefundamentals.com
http://www.shortsalefundamentals.com/external/blog.html
