A short sale involves several steps that help the seller's lender determine whether to allow a sale price that's short of the mortgage owed. Appraisals on a short sale tell lenders on both sides of the deal -- the seller's and buyer's -- how much a home is worth and its condition. Whether you are selling or buying a short sale property, you can expect the home to undergo at least two appraisals before completion.
An appraisal is an evaluation report that includes a home's estimated value, plus details about the home's characteristics and its surrounding area. An appraisal usually involves an appraiser walking through the home and visually inspecting its major visible components. The short sale lender, which holds the home's current mortgage, orders an appraisal, also known as a broker price opinion, or BPO. The buyer's lender requires its own appraisal to avoid financing more than it should. A buyer that pays for a short sale in cash may opt for an appraisal to avoid overpaying for the home.
Serving Lender Purposes Only
Although a buyer usually pays the cost of his lender's appraisal, and lenders tack appraisal costs to the seller's total indebtedness, appraisals serve only the lenders' purposes. Appraisals do not warrant a home's condition, nor do they substitute for a buyer's home inspection. They protect the lenders' financial interests, helping them minimize losses and risk. The seller's lender may allow a short sale if it results in net proceeds meeting a minimum percentage of the home's appraised value. The buyer's lender finances up to a certain percentage of the home's appraised value, known as a loan-to-value, or LTV.
Appraisal Ordering and Protocol
A short sale lender can only approve the sale after receiving BPO appraisal results. The lender may order its appraisal upon receiving a seller's short sale request, also known as a hardship package, or may take several months to review the package before ordering its evaluation. Protocol and time frames vary by lender. A short sale buyer's lender may wait to order its appraisal until it receives formal proof of short sale approval from the seller's lender.
A buyer benefits from his lender's appraisal as well as an independent home inspection, especially when purchasing a short sale home. Because sellers in a short sale often lack the funds or willingness to maintain or repair a house they are losing, buyers face the risk of extensive and expensive repair work. The buyer's lender must ensure that the home is habitable and that no major defects hurt the home's value or use. A buyer may also use his lender's appraisal as a negotiating tool in the event that the appraised value falls short of the short sale lender's asking price.
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