Short sales are becoming less popular but they still exist. If you're still pursuing short sales now is the time to revamp your negotiating strategy. Because the seller won't see a penny in the transaction totally changes the dynamics of everyone's negotiating strategy.
The buyer and seller aren't negotiating with each other. Instead, they are negotiating with the lender to approve the short sale. Whether you're the buyer or the seller makes no difference in the strategy change. The first thing you want to do is make sure the seller understands the change in the rules.
Buyer and Seller are Negotiating With the Bank
Once both sides are onboard with the fact that the true negotiation is putting together a package the lender will accept. The buyer needs to disclose to the seller the top price they are willing to pay. However, the seller should not disclose this price to the lender because it will not be the first formal offer.
As long as comps support it, the first offer to the lender should be between 15% to 20% below the highest price the seller is willing to pay. In this upside down real estate market, that lower price actually works to the seller's advantage.
Assuming the seller has a real estate agent, some people are going to mistakenly believe it's a breach of fiduciary ethics for the selling agent to submit an offer to the lender for less than the highest possible price. The agent's financial responsibility is to the seller, not the lender. In this case, a low-ball offer leaves room to mitigate costs that the seller might otherwise be stuck with since there is no possibility they will come out of the deal with a profit.
The Lender's Counter
Often, the lender counters with an offer requiring the seller to kick in a few thousand dollars towards a partial payoff of a second mortgage so that the second lender will sign off on the deal. Having a low-ball offer in place creates a cushion for this to be possible without costing the seller a dime. The same applies if the lender insists the seller cover some of the closing costs.
If you are the seller in a short sale, this puts you in the unfamiliar position of calling the buyer and asking them what their maximum price is going to be. Naturally, you assume they submitted a low-ball offer that you would counter with a higher price.
If you are the buyer, before submitting an offer, you call the seller to disclose the highest price you are willing to go to.
Before these highly nontraditional negotiations can take place, you need to be 100% sure the other party clearly understands that the negotiation is not between the buyer and seller but rather between the two of you and the lender.
How This Works for the Buyer and Seller
Of course, the buyer loves this strategy because it creates the possibility that the lender will accept the original low-ball offer and the buyer gets a better deal than they originally anticipated.
The one pitfall is how the lender handles the deficiency - the amount the lender does not recover in the short sale. There are several ways the lender can approach this. Typically, the acceptance letter will be vague on the subject, leaving the lender wiggle room to go after the seller at a future date when they might be in a better financial position.
It's the seller or seller's agent's responsibility to make it clear to the lender that the acceptance has to clearly state the seller will not be held responsible for the short fall. This needs to be accomplished early in the process. If the lender indicates they will hold the seller responsible or leave the possibility open, it again changes the dynamics of the negotiations. Then, the seller again wants the highest possible selling price to minimize the outstanding amount the lender intends to hold them responsible for.
The dynamics of today's short sale market are very different from anything investors have seen before. It only makes good sense to fully understand today's market before making a short sale offer.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.