(This is the final article of a 5 part series entitled Short Sale Basics)
If the net payoff on a given HUD-1 for the sale of a home does not meet the standards set by the investor as a percentage of the BPO (Broker Price Opinion) then there will be a gap. For example, if the $100,000 offer yields a payment to the lender of $90,000 after all costs are calculated -AND- the lender is willing to accept no less than 88% of the BPO -AND- the BPO is reported to the lender at a value of $110,000 then $90K suddenly becomes 81.8% of the BPO (90 divided by 110.) The bank will not approve the deal unless it’s 88%. This is a general estimate and close to what many banks accept. If 88% is the magic number, then it means we need to bring the bank $96,800. We’re $6,800 short.
Closing the Gap
(Often confused with the concept of counter offers in a short sale, and not always a step in every short sale process.)
There are many ways to close this gap. One way is to continue to negotiate with the bank to prove the buyer’s offer is more realistic than the BPO report claims to be. This is done through a BPO dispute. It doesn’t work every time, and sometimes there’s not enough time before the house goes to auction to achieve this goal. In some cases the market has changed enough from the time the offer was submitted to the time the bank evaluated the BPO that the buyer’s offer no longer stands up.
Another way to close this gap is to have the buyer raise their price. This is a sensitive direction to go considering the buyer may simply walk away if they hear any talk of raising the price.
Yet another way to do this is to adjust the HUD-1, legally, to be as accurate as possible. You see, it’s common to submit a HUD-1 with padded costs to the seller in order to have wiggle room to negotiate once you reach the stage of closing the gap.
Commission reduction is an option, but it’s the last option because we work very hard to obtain approvals for our clients and since the seller is typically not coming out of pocket at all because they’re in the middle of a financial hardship, we aim for a full commission as allowed by the bank once they approve a lower net payoff.
One last option is to have the seller come to the table to close the gap. This is tough to do, but often can save a house from foreclosure. This is more common when we see people strategically defaulting on their homes as they intentionally quit paying their mortgage and begin stockpiling the payments. If this is you, my advice would be to set that money aside and consider it not available to you and to be used solely in aiding the process of short selling. After all, the two major concerns for a seller are whether or not the lender will be able to pursue them for the difference between what the sale pays the bank and what they owe, and whether or not their tax situation will yield a tax liability for the deficiency. The two simple questions are, 1) will I have to pay taxes, and can they sue me? These can only be answered by the corresponding experts in those two fields…a real estate C.P.A. and a real estate attorney.
In Closing, the bank’s perceived market value of your property compared to the net payoff as a result of the sale will determine whether or not money needs to come to the table to get the deal done, and often times the bank is wrong, which is still mind-boggling, as the process of foreclosure will cost them far more than closing the gap.