How much should my offer to the bank be for on a potential pre-foreclosure short sale?

The initial offer to a bank regarding a potential short sale of a property facing foreclosure depends on the circumstances of the property itself. A potential buyer needs to have a discussion with the seller in which the following questions are answered:

1. How much is owed on the original loan?
2. Are there any deficiencies (i.e. tax liens) filed against the property?
3. What is the fair market value of the home currently?
4. How much would it cost you to finance the home?
5. Has there been an appraisal ordered for the property recently?
6. What is the condition of the home?

You can find out the answers to many of these questions through the seller, but questions involving the value of a home will have to be answered by ordering an appraisal of the property and conducting a survey of the fair market value of the home, usually done by a Realtor through MLS.

The bank will order a Broker Price Opinion (BPO), an assessment by a third party of the home's value. They will use this BPO in most cases to measure any offers submitted by potential buyers. You can expect your fair market value assessment to come in at roughly 10% above the BPO. Submitting an offer of 60-70% of the home's fair market value is a good starting point.

The condition of the home plays an important role. If the home is in good shape, with relatively few minor repairs to make, lenders will be reluctant to accept a significant discount off of their BPO or asking price (whichever is higher, generally speaking). Since they usually only reveal their asking price in a counter-offer (which means you have already submitted an offer), you will have to raise your initial offer to a higher percentage of the home's value. If the home is in poor condition, though, you can expect the hidden asking price to be lower, so you can submit a lower offer.

Generally speaking, the BPO and the home's condition will be the main factors in determining your offer, as well as the amount still owed on the loan. If the current fair market value of a home is $150,000, and $150,000 is still owed on an original mortgage of $200,000, then the bank would ideally want $150,000 to sell the home in a short sale. If the home is in great shape, it would be difficult to offer lower than 70% of the desired amount (which would be $105,000). If the home is in poor condition, offering a lower percentage is acceptable.

Let's say that the FMV of a home is $125,000 on an original mortgage of $200,000, and $150,000 is still owed. The home is in fair condition. The bank currently is out $150,000 on the property, which is $50,000 more than what the home could sell for today. You could feasibly put in an offer of anywhere from $75,000-$100,000 and be accepted, which would still be, at a minimum, $25,000 below the market value. The bank would lose a maximum of $75,000 on your offer, but that number might be much higher if the bank has to make significant repairs to fetch a reasonable price at foreclosure. When it is all said and done, that home could cost the bank over $100,000 once you factor in repair costs, property taxes, upkeep, legal fees, and the remaining balance on the loan. In this situation, even your lowest offer is a bargain. If they accepted your offer of $75,000, they would essentially save $25,000 by not going through foreclosure.