How much loss will a bank accept?

By
Real Estate Broker/Owner with Liberty House Realty LLC

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.

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Re-Blogged 1 time:

Re-Blogged By Re-Blogged At
  1. Peter Testa 01/09/2009 11:51 AM
Location:
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Ambassador
1,118,240
Russ Ravary ~ Metro Detroit Realtor call (248) 310-6239
Real Estate One - Commerce, MI
Michigan homes for sale ~ yesmyrealtor@gmail.com

It does depend on each bank and each situation whether ou get a deal.

Jan 09, 2009 11:15 AM #1
Rainer
55,585
Sean Dreznin
NAI Tampa Bay - Sarasota, FL
Commercial Investment Real Estate Agent

Jesse,

This sounds like a logical formula... and using your last couple paragraphs as example, I can only imagine a bank NEEDS to seriously look at all offers within reason.  Now if the asking price is $150,000 and the above diligence has been performed, then $115,000 seems to low... But in this market and economy I would hope a bank would at least look at that offer.. I digress..

Here is an interesting link you might enjoy...

http://money.cnn.com/2009/01/08/real_estate/thousand_dollar_homes/index.htm

Thanks for the post,

Sean

Jan 09, 2009 11:17 AM #2
Rainmaker
205,005
Kent Anderson
Coldwell Banker Realty-Schweitzer Mountain, Sandpoint, Idaho - Sandpoint, ID
from Schweitzer to the Lake

Good info and I agree.  Banks are every bit as informed as most, if not all, of the realtors in town.  I'm working on a short sale now...I just hope the bank has a large inventory built up so they will cut the seller a deal.

Jan 09, 2009 11:20 AM #3
Rainer
24,603
Keith Pound
EXIT REALTY CRUTCHER - Louisville, KY
Realtor, Auctioneer - Louisville, KY - 502-645-5950

Great stuff, it's a fun game trying to figure out just how much the banks are willing to take and how soon they will take your offer

Jan 09, 2009 11:21 AM #4
Rainmaker
223,439
Brian Brumpton
Keller Williams Boise - Boise, ID
Boise Idaho Real Estate

You're right banks aren't dummies they know there numbers and they weigh it all out very carefully. 

Jan 09, 2009 11:40 AM #5
Rainmaker
530,677
Peter Testa
Nationwide Homes - Danbury, CT
PETER TESTA

I spend a lot of time these days demystifying the process for 1st time buyers of bank owned properties. A buyer's agent experienced in closing foreclosures can usually make a great judgement call on what the bank wants to see on the offer. I think the biggest misconception by inexpereienced buyers is that the bank is giving these properties away- thats when I know I'll be explaining for awhile. Good post.

Jan 09, 2009 11:50 AM #6
Rainmaker
487,080
TIM MONCRIEF
Tim Monciref - Austin, TX
Over 2,000 homes sold…..

Well stated.  It is quite amazing the lack of logic that is out there.  I just had someone that wanted to make an offer of $600k on an $850k home and the home was sold and the buyer backed out.  Maybe the value is $770k to $800k.  I explained what you said but the perception is the public thinks that the government is involved in each deal and deals like this are feasible.......

Jan 09, 2009 11:52 AM #7
Rainmaker
249,757
Mike Klijanowicz
Cummings & Co. Realtors - Perry Hall, MD
Associate Broker @ Cummings & Co. Realtors

From what I have heard, they are willing to take on average about 17% off of what was originally owed and no more than that...

Jan 09, 2009 11:59 AM #8
Rainer
59,868
Nate Rowe
Oakstone Properties, Homes in Richmond VA - Richmond, VA
Realtor, Homes in Richmond VA

Thanks for the info.  I have seen homes that were not in foreclosure get dumped for 20% below market.  Lowball, Lowball, Lowball. 

Jan 09, 2009 12:28 PM #9
Rainer
82,850
Jim McNinch
Trademark Loss Mitigation - Spring, TX
Short Sale Specialist, Texas

An article I've read from the Mortgage Bankers Association about six months ago gave the following average loan discounts from a short sale:

Conventional:  80% - 92% (although there are a few investment backed loans that are stead fast closer to 100%)

FHA: Fixed by HUD at no less than 82% (but can't be lower than 68% of total payoff).

VA:  88%

There are always exceptions to the above, depending on extent of home damage, which lending institution is carrying the loan (and maybe calling the shots on payoff acceptance), is it Freddie or Fannie (they tend to be closer to the 90%), if there is PMI - some PMI groups can be pretty tough, not to mention the BPO as discussed above.

Nevertheless, a prudent agent will always do the necessary steps to ensure that the lender's BPO comes in as accurate to the current market value as possible.

Jan 09, 2009 01:11 PM #10
Ambassador
627,862
Roland Woodworth
Q Realty - Clarksville, TN
Q Realty - Power In Real Estate

Jesse: I'm not sure if there is a such rule of thumb for what the banks will or will not do.

Jan 11, 2009 12:40 PM #11
Rainmaker
65,143
Carol Judd
New Star Real Estate - Vernal, UT
Vernal Utah Real Estate

I have been told 10% lower than the asking price.  I am sure there is not set rule and right now I am sure many things keep changing.

Jan 11, 2009 01:13 PM #12
Rainer
71,526
Patt M. Judd
First Realty Company - Cookeville, TN
Realtor - Your Cookeville Connection

In tennesse its down about 3 to 5 persent, its slow but not so bad here yet, hello CAROL JUDD, i am a judd to . thanks  

Jan 12, 2009 06:49 AM #13
Rainer
55,551
Kelsey Barklow
Hurd Realty - Johnson City, TN
423/948-9154

I've seen quite a few here in NE TN that have sold for more than 25% below the asking price.

Jan 20, 2009 11:31 AM #14
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Liberty House Realty LLC

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