We recently made a full price offer on a short sale home in Florida. We knew that the final selling price would be subject to bank approval. We recently were told that the bank would not accept our full listing price offer. We were told that an additional $42,000.00 would be required in order for us to purchase this house. We have received nothing in writing. Is this a legal “bait and switch” tactic? Any suggestions on how to proceed?
Yes, listing agents should try to list a property at a price that would be acceptable to the lender. Unfortunately, many agents do not have a clear understanding of how the short sale process works. First, each lender has their own “loss severity rate”. This is a numerical reflection of how much a given lender is writing off on deals gone bad. Today, it is not out of the question to see a lender with a LSR of as high as 60%. This means that they are only recouping 40% of the mortgage balance at closing. Each different lender has their own loss tolerance level. This is important to know because if you can keep their loss below that threshold, your odds of success are much greater.
Additionally, each individual lender has their own “sale to market ratio”. This is the lender’s in-house guideline indicating what percentage of fair market value will be acceptable. Most lenders want 90% of fair market value. Some 85%. We have worked with one lender that can go all the way down to 75% if the property is in Florida. Knowing this number is likewise important. Again, your odds of success are much greater if your offer falls within these parameters.
Often, the lender will respond with a counter such as you described. Sometimes they want the seller to sign a promissory note, sometimes they want cash. Sometimes, they want to attach a mortgage on another property owned by the seller. Remember that the first counter is not likely the last. You can always go back with another one. Submit additional comps to help justify the price that your offered. Sometimes, it is helpful to submit a new appraisal. Ask the negotiator before spending the money on one though.
The other wild card is the seller’s financial condition, which you will not likely be privy to. If the lender believes that the seller is much better off than he is reporting, the lender will take a much tougher stand.
You rarely get anything in writing when it comes to counters from the bank. Short sale negotiation is not a regulated process. It is not something that the bank has to engage in at all. There are no hard fast rules, only general guidelines. And the guidelines change weekly.
Hope this helps, and good luck to you!