SSP 010 : Short Sale Help: How to decide on the RIGHT Price for your next Short Sale

The Short Sale Podcast for Real Estate Agents

In this episode, we’re going to discuss how to set the price of your next short sale listing.

How to decide on the RIGHT Price for your next Short Sale

Pricing is a really tender subject for most agents because they never develop the skill to deal with pricing effectively with a seller. It’s especially a critical component of helping sellers, especially when they’re in distress, as you may be dealing with those folks that are having challenge meeting their obligations or perhaps they owe too much on their house and they’re really looking to you for advice.

But I want to give you a couple of truisms about short sales. And the first one, as it relates to pricing, is very simple. Properties that are put on the market at too high of a price are at much greater risk going to auction, than those that are priced appropriately or aggressively, meaning that they’re priced correctly.

And truism number two regarding short sales, Properties that are sold at auction, those would be the ones that did not involve a real estate agent, will always sell for less than those sold when a real estate agent is involved.

So how do you know whether or not your new short sale listing is overpriced? What’s the easiest way to know? Well, you know it’s overpriced if A, You’re not getting any showings. That’s pretty obvious. B, If you’re getting showings but no one’s writing an offer. Maybe not as obvious… But when you think about it, getting showings but no one’s writing any offers, priced too high. Or C, You’re getting showings and you’re only able to eeck out a single written offer. That’s how you know that your listing is overpriced.

Is there a formula for how to price a listing properly when you’re dealing in short sales? Absolutely!

The pricing model that I’m going to recommend that you become familiar with is the Wholesale Investor Price Formula. There are some things that you’re going to need to know in order to follow along with this, but understand this about pricing. There’s retail, and that’s the highest price possible to sell something for when you have ample time and you’re not in a distress situation. And then there’s the other way, which I would refer to as wholesale.

Wholesale is where you sell a property in the existing condition it’s in, but you sell it at a reduced price, a wholesale price. You’re not expecting first time home buyers to come along and buy it. It’s not really for them. It doesn’t mean you won’t sell it to a first time home buyer but first time home buyers are typically looking to buy retail as opposed to wholesale.

How do you get to that price, the formula, if you’re not familiar with how real estate investors think? You’re going to love this next part because I’m going to tell you the formula that they use, and as an active long-time real estate investor, this is a formula that we all use.

First of all, you have to have a good understanding of what the property would be worth in mint condition. Investors refer to this as the ARV, after repair value. For this example, let’s say that the property that you’ve got, forget how much they owe on it, but if it was put in tip top condition, and there was no distressed component, no risk of foreclosure and you’re selling it for retail, the estimated after repair value we’re going to use for the example of $150,000.

Second thing you’re going to have to know, how much rough estimate is it going to cost to get the repairs done? Now this is a tough one for most agents, because you’re not typically asked to know this information. But you can guesstimate and guesstimate high if you have to but let’s say that in this example the estimated cost of the repairs is $15,000.

Third item you’re going to have to know. What costs are going to be involved in the transaction? And these are the costs as the investor. Such as how much is it going to cost the investor to acquire the money or hold on to the money? Cost of funds is the cost to the investor of coming up with the money. Holding cost would be the money he has to pay, he or she, in order to keep the property and that’s going to go on as long as the repairs take.

And once the repairs have been made marketing costs; that would be your commission. And then there’s always going to be an Oops allowance. An Oops is for things you didn’t even think about. As you’ve done this more and more, you don’t have as much of an oops allowance. You get a little bit better at your estimating but in this case we’re going to allow $5,000 for oops. We’re going to figure it’s going to take 3 months to do the repairs and we’re going to allow $1,000 a month holding cost, and we’re going to look at selling it at the after repair value of about $150,000, which means the marketing cost, your commission, is going to be about $9,000. All together, it comes out to $17,000.

The fourth item you’re going to need to know is investor profit. Yes, investors want to make a profit. They’re not going to take the risk for free. They’re not just going to do it because they’re kind. There has to be a financial gain for them. So on a small flip house in this price range, an investor might want to make anywhere from $10,000 to $20,000. In this case, we’ll use a high number and let’s say that the investor is going to want to try and make $20,000 for their time. That number may go up. That number may go down, but what we’re going to do is take the $150,000 and after repair value, minus the $15,000 we estimated for the cost of repairs, minus the $17,000 other costs, that’s the cost of money, marketing, holding and then profit of $20,000, which means that as an investor I would have to buy the property for $108,000 and that’s what I would refer to as wholesale purchase price.

But of course I can hear you out there saying “But Scot, wait a minute. My sellers, they don’t want to price it that low.” But remember short sale truism number two, where I told you that Properties will always sell for less at auction than they will if in the hands of a real estate professional. So if you think that selling it for $108,000 is too little, I mean, that’s what they’re telling you, is we don’t want to sell for that little, their logic for not wanting to sell it for that amount is typically based on the alternative.

They don’t know the alternative but here’s the alternative. I put it on the market for $108,000. I get an investor to come on and buy it, or someone else to buy it at an attractive price. Or we do nothing and let it go to auction. I guarantee you, if it goes to auction, it will sell for less. It will not sell for more at auction. We will sell it for the most by being in control of it.

And why is that? Well, the reason why, I truly believe and I hope you do too, that it will not sell at auction for more is number one, less than 1 out of 10 properties that go to auction actually sell to a third party. 9 out of 10 of the properties that go to auction actually sell to the lender or the guarantor of the lender.

Second, there’s much greater risk to an investor who’s buying at auction. They’ve got to move quick. They get very limited information and as a result they expect a much better deal if they’re going to buy it at auction. Third, properties that sell at auction take away all the control from you, the seller.

So, is it better to put it in the hands of an agent who’s going to price it aggressively? Yeah, because we have a very clear pricing objective… Our job is to get the property sold quickly. We want to create the least amount of interruption, disturbance to the sellers. We really want to generate a feeding frenzy, because it’s priced aggressively, which also allows you to be more selective on picking the best buyer.

How long should it take to get the property sold? Well, if you’re following along with the way I teach my students to do it, what you should consider is this. In some areas of the country, you can’t do it exactly this way but my belief is you put the new short sale listing in the MLS on Thursday. Try to delay showings at least for 1 day and then put on your MLS listing that all offers will be opened Monday at noon.

By putting it into the MLS, by delaying showings for at least a day, you start to build up the frenzy, if it’s priced right. And if it’s not priced right, do the same thing the following week. Follow the same structure except lower the price by 10%, remembering short sale truism number one and short sale truism number two; that the properties that are put on the market at too high of a price have a greater likelihood of not selling and going to auction — and properties that are sold at auction always sell for less than those that are sold in the hands of a real estate professional.

Thanks and Happy Learning,

Scot Kenkel, Instructor

P.S. What do you think? Leave your comments below. Thanks.

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