The Biggest Mistake Short Sale Investors Make

I’ll cut right to the chase, the biggest mistake short sale investors make is the way they determine the amount of the short sale offer they make to the lender.

There’s the wholesale offer, as I call it, where the investor uses the ol’ 65% of as-is value as the highest they are willing to go, so they start well below that number, or say, 50%.

Then there’s the classic random offer, where the investor arbitrarily just sets a low percentage, say 40% of the current as-is value with the attitude, “You never know.” Both of these may appear to be good ideas, but sadly, they are wrong and destructive.

What’s the harm?

A question I have been asked for years, “But Phil, what is the harm in offering 40% of the as-is value? What’s the worst that could happen?” And the worst case scenario is that nothing happens. The lender ignores the offer; doesn’t tell you the offer has been ignored; doesn’t return your calls; doesn’t respond to faxes or emails; and ignores all correspondence.

Meanwhile, the property barrels toward foreclosure. So, the worst that can happen is that nothing happens–absolutely nothing. And in the end, the property goes to foreclosure.

This is the cause of so much frustration in the short sale investing world. Investors simply have been given bad advice on how to make the initial offer. They present the offers incorrectly, and the lenders ignore them–all the while not telling the investor the offer has been ignored, and months go by with no progress.

I’m going to end this frustration for you once and for all. Here’s the cold, hard truth: Lenders approve or deny short sales based on one simple rule–whether or not the offer amount is above their approve percentage threshold. That’s it; nothing else.

Another point to clarify: Lenders do not accept lower amounts because of a borrower’s financial hardship. Actually, the loss mitigation department is an extension of the collections department and could care less about a homeowner.

The whole “You have to have a hardship to do a short sale.” bit is just a trick lenders use to get sensitive financial information out of the borrower to figure out if the borrower has any assets.

If the borrower has assets, such as a 401k, the lender will attempt in many cases to ask the borrower to empty the 401k despite the penalties to cover the bank’s short fall. So much for banks trying to help borrowers!

Further, my students and I have done tons of short sales when the borrower is still current. Only in FHA situations does the borrower actually have to be behind on payments. All this to say that the initial offer comes down to one simple rule: Does the amount fall in line with the approval guidelines for that lender?

What are the approval guidelines?

We call them approval percentages, they vary from lender to lender, and they change frequently. The way our group keeps track of all these percentages is with our Lender Database. As students obtain approval letters, we determine the approval percentage. Each new successful deal helps us understand what is going on with that particular lender and if there has been any changes.

As a community, we are able to keep everyone in the group up-to-date on how to work with these lenders. For example, as of today, our Lender Database is telling me that GMAC’s approval percentage (although this could change at anytime) is 84%

If you offer 50%, GMAC will ignore you. If you offer 84%, they will immediately start the short sale process, order a BPO (broker price opinion), and actually respond to your correspondence. Magic formula, isn’t it?

Okay, 84% of what?

You may be asking–84% of what? Good question. It’s 84% of what GMAC thinks the value of the property is. Another example: What if a property will sell for $500,000 in this market and GMAC thinks the value is $400,000.

We know that GMAC (as of today anyway) will be happy with $336,000 (84% of $400,000). Now we’re talking! $336,000 for a $500,000 house is a great opportunity. Just ask one of my students, Michele Evans. She recently made $90,000 on her first short sale with a scenario similar to that.

On the other hand, what if GMAC thinks the value is $600,000 when the house will really only sell for $500,000? Now we have a problem. Because the most GMAC will accept (again, as of today), is $504,000–hardly a number that could make you any money. This is where understanding the process of how GMAC determines a property’s value becomes critically important. A topic for another day…

Now you know the biggest mistake short sale investors make and how to avoid it. It starts by removing the random 40% offer strategies and shelving the wholesale idea of anything below 65%.

Then, you progress to understanding the approval percentage for the particular lender to whom you are making an offer, as well as how the lender determines the property’s value. Finally, you can construct an initial offer amount that falls within their accepted approval guidelines, and your short sale will move along as planned.

And in the process, you will avoid the biggest mistake short sale investors make. Happy investing!

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