How much loss will a bank accept?

Have you heard that banks will accept a certain amount of loss on their default real estate portfolios as a rule of thumb across the board?

Have you heard that all banks are willing to take 20% less than the listing price?.

Have you heard that all banks over price their listings because they know they are going to take a less on their properties?

If you believe any of these rumors, urban legends, or false hoods then, you have just been suckered.

Let me explain how banks determine their price when they go to list a home.

First, they order an appraisal as soon as a home goes into foreclosure or as soon as they receive the first offer on the home. In an effort to be clear, let me tell you what an appraisal is. An appraisal is an estimate of your homes Market Value by a professional.

It is important to understand the difference between Market Value and Price. Market Value as defined by the USPAP (Uniform Standard of Professional Appraisal Practices) says, "...a type of value, stated as an opinion, that presumes the transfer of a property (i.e., a right of ownership or a bundle of such rights), as of a certain date, under specific conditions set forth in the definition of the term identified by the appraiser as applicable in an appraisal." So, in other words, it's the opinion of a trained professional as to how much the property should sell for in a fair market.

So, I bet now you are wondering how these appraisers analyze a property in such an un-certain market as that we are in now, right? Well, that can be answered by the definition of Market Value used by the residential mortgage financing industry and it says,  " ...the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale." So, in other words, adjustments for any reason, are made to the comparables sales price not the subject property.

Ok, I am sure this may be confusing but let me explain it this way.

You want to put an offer on 1000 Money Pitt Lane but the asking price is $150,000.00, which you think is too high because it's a foreclosure.

Well, the bank isn't going to care if it's a foreclosure, short sale or once belonged to one eyed, one horned flying purple people eaters because, they have comparables, from the appraisal, showing that similar homes that are true comparables, alike in almost (no property is ever the same due to it's uniqueness and immobility) every way sold for or above $150,000.00. So that offer of $115,000.00 you put in thinking that banks are taking less because that is what they do, is foolish and a waste of everyone's time.

Well, maybe the Appraiser was smoking some serious blow that day and you (as the buyer) know that the home just isn't worth $150,000.00 so you want to stand by your offer and have it submitted.

Truth is, the bank isn't just relying on the Appraiser to get the appraisal right. By the time you submitted your offer, they have accumulated approximate 2 appraisals, 1 from the previous homeowner and 1 upon foreclosure, and they have had a Realtor provide a BPO (Broker Price Opinion) monthly for the time before it hit the market and while it was on the market. My point here is, the bank is going to know the value of the home, the monthly average depreciation for the neighborhood and how long they are willing to wait for the "right" offer to come in the door. On average, per my friend at one of America's largest banks, they have 5 price analysis on a home before it is every put on the market so, they know, you can bet on it.

Ok, so now that I have explained that, can you see why thinking a bank doesn't know how much a home is worth is just silly.

Granted, banks are dumping some properties due to the large amounts of real property on their books however, that isn't because they have made some secret policy that they will accept a general loss on all their properties. In reality it's more about that specific home and how much loss they are willing to take and, that isn't something they are advertising.

So, if you come across a great deal, then most likely you were at the right place at the right time with a Realtor who was looking out for you versus, anything else.