Rich Dad Education Blog

To start, let’s define a short sale. A short sale occurs when a property (usually in foreclosure) is being sold by the owner and the lender accepts a payoff amount that is less than what is actually owed on the property mortgage. In other words, the lender is willing to discount the mortgage payoff rather than go through the complete process of foreclosing on the property.

Why would a lender take a discount on the mortgage note? Why wouldn’t they just foreclose and sell the property? The truth of the matter is that the bank probably would foreclose if the property had substantial value above the mortgage balance. If a property has a current market value substantially above the mortgage balance, the bank can reasonably expect to foreclose on the property, take title, and resell the property at a high enough price to recover their foreclosure expenses and the outstanding mortgage balance. But do most properties in foreclosure today have current market values higher than their outstanding mortgage balances? Most certainly not!

When highly mortgaged properties go into foreclosure, the last thing the banks want to do is actually complete the foreclosure process, take title to the property, and try to resell. The banks stand to lose a lot of money. The proceeds from the property sale usually do not cover the outstanding loan balance, let alone the expensive foreclosure costs and fees. Loans in foreclosure, classified as nonperforming loans, can’t be leveraged into more borrowing power for the bank. The banks are not only losing money on the non-performing loan, they are losing money on the lost opportunities of making additional new loans.

By agreeing to a short sale, the bank may be losing some money, but not as much as if they completed the foreclosure process. It is a buyer’s market, and the banks know that when they do sell the property, it will have to be at a substantial discount. Most wise banks and lenders will choose to approve a short sale.

However, this does not mean short sales are easy! On the contrary, short sales can be very difficult to complete, and banks seem to take forever to make decisions. Successful short sales require cooperation between the stressed-out property owner, the lender, the property buyer (quite often a real estate investor), and, many times, a real estate agent who has the property listed. And if the real estate investor’s goal is to quickly resell the property, the investor’s end buyer needs to be included in this ever-expanding group.

The person facilitating the short sale has to first educate the property owner about how the short sale works and let him or her know what documents will be required to be submitted to the bank. If the property owner agrees to fully cooperate and try for a short sale, he or she then provides a letter of authorization allowing contact with his or her lender about his or her loan. The person coordinating the short sale then proceeds to contact the bank who owns the mortgage note and requests a short-sale package.

But who at the bank (or lender) needs to be contacted in order to get the short-sale package? It certainly isn’t the teller at the drive-up window, or any of the local loan officers, or even the president of the local branch. Sometimes just finding the right person to speak with at the bank can be challenging.

Banks have a special department, usually called the loss mitigation department, that handles loans that are in default. When a loan goes into default and the bank decides to start the foreclosure process, someone in this department will be assigned the loan. Note that individuals in the loss mitigation department can have 50 to a 100 or more defaulted loan files that they are working on at any given time. The person coordinating the short sale for the homeowner needs to locate the specific person in the loss mitigation department who has been assigned the homeowner’s loan file. This person (the loss mitigator) will be the one who receives the short-sale package and coordinates the bank’s review process that results in either an approval or disapproval of the short sale.

The short-sale package provided by the bank gives the specific requirements and instructions for submitting the documents the bank will need to review in order to approve (or reject) the short sale. Once the short-sale coordinator knows what documents the bank requires, he/she works with the homeowner. He/she assembles the package and the completed package is then submitted to the bank or lender. Note: it is very important to make sure the package really is complete and includes every document and record the bank has asked for. The price offered for the property will be based on what the investor is willing to pay and the bank will have to decide if they are willing to discount the mortgage note to that amount and accept the offer, willing to counter offer with a higher price, or reject the offer all together.

The loss mitigator usually has the authority to approve a short sale if the offer price is within a certain percentage of the value of the property. For example, if the property were valued at $100,000, the loss mitigator may have the authorization to approve offers that are within 18 percent of the $100,000 value. An offer of $82,000 or above would be automatically approved (assuming all of the other documentation is in order and shows the homeowner(s) really has a hardship and can no longer make the mortgage payments).

But if the offer were lower than the $82,000, the bank would probably counter the offer with a higher price closer to the $82,000. So, no matter how good a short-sale coordinator (usually the real estate investor) is at putting together a great looking, complete, and neat short-sale package, no matter how good they are at educating the homeowner, no matter how good they are at talking and negotiating with the loss mitigator, if their offer is not within the required percentage of the property value, the short sale will most likely not be approved.

How does the bank determine the value of the property? The bank’s loss mitigation department is probably not very close to the foreclosure property and is most likely located in a completely different state, clear across the country. The loss mitigator (or someone from his/her office) can’t just take a long lunch and go out and look at the property to determine its value. What do they do? To determine the property value, the bank has to rely on what is called a BPO (broker’s price opinion).

What is a Broker’s Price Opinion (BPO)?

A BPO is a tool used by lenders and mortgage companies to determine the value of a property in situations in which they don’t want the expense and delay of an appraisal. The BPO is most commonly performed when a property is in default and the bank or lender wants to know what the value would be if they had to take the property back and resell it as an REO (real estate owned) in the current real estate market. Thus, lenders are looking for a quick-sale value, a price the home would most likely sell at in 90 days or less.

BPOs are typically completed at the request of the REO department or the loss mitigation department. Real estate agents who work in the area of the subject property are requested to perform the BPOs, since they are more familiar with their local real estate market and are best equipped to determine a quick-sale value.

What is a BPO report?

The BPO report is a combination of information, not just a value of the property. Although it is not as detailed as a full appraisal, it still contains enough information for the bank to get an idea of the property condition, how saleable it is, and its quick-sale value. Many banks or lenders requesting a BPO will have their own forms they want filled out for presentation of the information.

What are the two main types of BPOs?

There are two major categories of BPO’s, the drive-by BPO and the interior BPO. The reason for the BPO will determine which type of BPO is ordered by the loss mitigation or REO department. If the reason for the BPO is a short-sale offer, most likely the loss mitigation department will order an interior BPO, to better establish the value of the property.

Basic Information Required in a Drive-By BPO:

In general, a lender requesting a drive-by BPO will want, at a minimum, information on:

• Property location
• Type of neighborhood
• Type of zoning (SFH, multiple units, etc.)
• Conformity to zoning and neighborhood
• Property age (when built and age of any additions)
• Property type and style
• Condition of all exterior features (roof, siding, foundation, etc.)
• Occupation status of the property
• Estimated square footage of the property
• Estimated room count
• Estimated lot size
• Type of parking (garage, carport, RV parking, etc.)
• Minimum of three photos: one of the front of the property, one photo that verifies the address, and one street scene (and perhaps one of the side or back of the property)
• Three currently listed comparable properties (with all detailed information)
• Three sold comparables (within the last three months). The most recent sales are the best, especially in a declining real estate market)
• Quick-sale value of the property
• Broker or agent information

As you can see, even a drive-by BPO requires a lot of work.

Basic Information Required in an Interior BPO:

An interior BPO generally requires all of the information included with the drive-by BPO and the following additional information:

• Detailed square-footage measurements (of the home and property)
• Individual room measurements
• Exact room count (number of bedrooms, baths, etc.)
• Interior features (fireplace(s), special treatments such as decorative molding, custom kitchens, hardwood floors, etc.)
• Condition of the interior
• Specific interior damage, including repair estimates
• Estimate of costs for removing trash
• Estimates for cleaning of the property
• Detailed pictures of the interior and its condition
• Specific pictures of areas needing repairs
• More exterior pictures showing condition of the yard and any out buildings
• Comments on how to secure the property if it is vacant
• Comments on need to board up the property if it has broken doors and windows
• Other information as required by a specific lender

Banks and lenders use these BPOs to establish the value of the property and then use that information to evaluate the short-sale offer price. If the BPO comes in too high, it will kill the short sale.

Investors working short sales need to be involved in the BPO process. They need to do their own BPO and make sure the comparable properties being used truly are good comps and reflect the condition of the subject property.

Look for future articles discuss short sales and ways the investor can help the BPO agent with their job and make sure the BPO value submitted to the bank is accurately based on the current real estate market and true condition of the property.