If you were to stand in the center of Scottsdale and spit in any direction, chances are good that you’d hit a home with negative equity. Thus if you’ve been shopping for a home, chances are equally good that you have come across a short sale listing or fifty along the way. If you are willing to subject yourself to the short sale process for the right home, there is a mental hurdle that must be navigated when sitting down to draft an offer.
Prevailing wisdom holds that a Scottsdale short sale seller doesn’t give a fig about the ultimate sales price. Seeing that he won’t walk away from the transaction with one wooden nickel in his pocket, what would he care about the size of the loss that the bank(s) that holds his mortgage takes? The same bank that qualified him to buy a $750,000 home with zero down and an adjustable rate on a stated income loan. The same bank that bilked him of taxpayer bailout funds while he’s stuck with that albatross of a house. Screw the bank. He’d gladly facilitate a deal that calls for the lienholder to absorb as large a loss as possible while carving his initials in the front door on the way out, right? Right?
Not so fast, Johnny Oversimplifier.
There are several reasons why a seller with an interest in actually completing the transaction will attempt to negotiate the most favorable terms from his side of the table. First and foremost, the seller wants to submit an offer to the bank that has a chance of succeeding. If you come in with an offer of $200,000 on a $400,000 short sale listing, there is little chance that approval from the bank (the ultimate decision maker in the process) will be forthcoming. Knowing that, the seller will not be receptive to tying the bank up with an unrealistic offer. The higher the price the seller can negotiate before the package is sent to the bank for approval, the better the chances of getting out from under the house.
While gaining approval constitutes the lion’s share of the concern a seller will have with your supremely low offer, the approval itself will raise additional considerations. The larger the loss the bank takes, the larger the possible tax ramifications the seller faces for the forgiven debt (The Mortgage Forgiveness Debt Relief Act of 2007 has limitations on residence types and amount of the debt forgiven). Further, assuming full release from the lien is obtained from the bank once an offer is approved (something that cannot be taken for granted and should always be reviewed by a Real Estate attorney prior to ratification), the seller may be asked to bring additional monies to the table as part of the approval. Especially in instances in which there is more than one loan, the larger the loss, the more likely one of the banks will try to shake the seller by the feet to see if any loose change falls out of his bank account at closing.
Long post short, the seller has legitimate reasons to negotiate in full capacity against your initial purchase offer. Just because he stands to gain nothing in terms of cash at closing, he does stand to gain substantially. A new lease on life and release from the responsibilities of an underwater mortgage are pretty high stakes, after all.
Moreover, the seller that willingly accepts your lowball offer without a fight might not be interested in actually selling his home. There is plenty of gamesmanship and hidden motivation at play in the short sale arena at present. Your low offer may be forwarded to the bank merely to stall foreclosure. Knowing that it will never gain approval, the seller buys a little more time for rent-free living while the bank processes the file and ultimately returns with a rejection four months later.
The seller who counters your initial offer is doing you a favor. Not only is he demonstrating an interest in a successful conclusion to the sale, but he’s giving your offer a chance. If he signs off on your lowball without a fight, he is just prolonging the agony.
I’d recommend getting comfortable in that studio apartment you are renting if you are floating lowball offers on Scottsdale short sale listings.