Getting lenders to say “Yes!” to your short sales require that you know how a lender approves a short sale offer.
Often, an agent or an investor will ask me why their short sale offer is not being approved by the bank. They typically go on to explain to me that the property is in bad condition, it has been on the market forever without another offer, and after countless phone calls, emails, and voice mail messages, the lender still will not approve their very fair offer.
What the investor or agent does not realize is that, in every case, the lender thinks the property is worth far more than the current offer they have submitted. It’s really that simple.
The Approval Percentage
From my previous article, The Biggest Mistake Short Sale Investors Make you learned that lenders agree to a short sale based on a percentage of what they believe to be the current “as is” value of the property. Each lender has a different approval percentage, and it changes often.
[We developed a Lender Database to keep track of the short sale approval percentages for the major lenders across the country. This gives us the inside scoop on how much to offer. We don’t leave any extra money on the table and we offer just enough so the lender says, “Yes!” quickly.]
The BPO
Knowing the approval percentage is one part of the equation. The other part of the equation involves what the lender thinks the value of the property is. Lenders assess the “as is” value of a property using a variety of sources. The first and most prevalent is the the Broker’s Price Opinion (BPO).
A BPO is conducted by a real estate agent and usually includes 3 closed comparable sales, 3 active competitive listings, as well as local market conditions and other important valuation details. And there are two types of BPOs, interior and drive-by.
With interior BPOs, the agent has access to the property and is able to examine the property inside and out. A drive by BPO is just as you would imagine, the agent is unable to get inside the property so they simply “drive by” and make their assessments based on only viewing the exterior of the property. As you would guess, an interior BPO is far more accurate than a drive by.
The Appraisal
The second valuation a lender may use is an appraisal. Appraisals are conducted by licensed appraisers and typically cost about twice as much as a BPO. Although the industry may recognize the appraisal as a more accurate assessment of value over the BPO, due to the fact that appraisals only use closed comparables sales, we have found that a BPO is a far better value determinant. Some lenders, like Countrywide, will oftentimes order both an interior BPO and an appraisal to be mightily sure as to the actual as-is value.
Internal Valuation
The third valuation lenders rely on is an internal valuation from their REO or special assets department. Most lenders have access to many of the same tools that appraisers and BPO agents use and therefore can quickly glance at the comparable sales for the subject property and be able to verify if the BPO or appraisal is accurate.
In some instances, their “valuation” department may put together an assessment of the property’s worth (even though they are unable to view the property in person.)
With all this new knowledge, let’s now go back to the dilemma of getting the lender to say “Yes!” to your short sale offer. How does a lender determine what the current “as is” value of the property is? First, they locate the appraisal that the loan was based on. If the loan is relatively new, that appraisal will have some bearing on the final assessment.
Next, if the property has been delinquent on payments for any stretch of time, chances are the lender will have a “drive by” BPO completed. Then, if you make a short sale offer, the lender will usually order an interior BPO, an appraisal, or both. Finally, most lenders have access to a department who will supply an interior valuation.
To create the final tally, the interior BPO or appraisal will weigh the heaviest, followed by the drive by BPO, then the internal valuation and, in some cases, the original appraisal.
In the end, there is a number that the lender finally settles upon that indicates the current “as is” value of the property. They will agree to a percentage of that number. That’s it.
So, how much do I offer?
You may be asking, “How do I know what that number is?” Sometimes you can simply ask and the loss mitigation rep. will tell you. Other times, we employ a series of strategies that almost always uncover that number.
Further, even if you know what the interior BPO value came in at, that doesn’t mean the lender is using that number. They may incorporate an exterior BPO or their own interior valuation into the equation.
So there you have it, armed with the approval percentage and the determined current “as is” value, you’ll have the lender saying “Yes!” in no time.
It’s also important to know that you can reduce the lender determined value by controlling the interior BPO or appraisal. The concept is that you communicate directly with the BPO agent or the appraiser before they assess the property and educate the person as to your objective, so that hopefully they do not over-value the property and instead, value the property as low as possible.
Lenders have a few checks and balances that will disregard an ultra low BPO. There is a very fine line between a low BPO that the lender accepts and one that is inaccurately low and thrown out. We’ve spent a decade perfecting the art of controlling the BPO, so that the BPO report or appraisal is low but acceptable by the lender–a fascinating topic for another day.
So, the crux of the matter is that a lender approves a short sale based on what they think the current “as is” value is and their current approval percentage. If your offer is not being accepted, you are offering too low. That’s it.
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