An often asked question is, who picks the price on a short sale?

The listing price of a short sale is selected by the owner and listing agent and this process is no different then a normal sale except that usually there is a time constraint so the price picked needs to be competitive.  The limited time is because of a possible looming foreclosure sale. 

The listing price should be the market price and the market price is dictated by market forces which can be heavily influenced by REO or lender owned sales, other short sales and motivated normal sellers.  The short sale home has to compete against all these to attract a buyer.

Short sales have much going against them.  For one thing there is additional risk of not closing or for something to go awry that results in a dead contract.  This was especially true when we had lots of lender owned homes out there.  When you can buy an under-priced home and not have the risk of a long short sale transaction why would you even deal with a short sale?  You'd deal with it if the choices were limited. 

In 2008 very few short sale transactions closed.  Buyers either got tired of waiting, lenders were uncooperative or some other stick in the wheel interfered. 

As 2009 progressed this statistics improved.  In May 2009, 42% of short sales closed which was up from 33% April 2009, 26% in first quarter of 2009 and 13% in late 2008.

In the sale fashion the sales price to list price has been increasing as a result of lower inventory, but lets get back to pricing.

The listing price should be the market price, but the market price is elusive because establishing value in such a market is very difficult.   There are however some silly tactics used to attract buyers which really just waste time and put all parties in jeopardy.

For instance.  A home which sold for $2,200,000 in 2007 and peaked in 2008 is now worth about $1,000,000 because there were recent solds of similar homes for this price.  This short sale went on the market for $400,000, a listing price.  Of course, it got some offers hear and slightly above the $400,000 asking price.  I know banks, at this point, are bureaucratic nightmares with many files and other short sales to deal with, but they are not that stupid to let someone buy a home for $400K when it can sell for over twice as much. 

The listing agent used a tactic of underpricing to "just get offers in", "to start the process." but the process will simply be a fruitless exercise. 

Before an offer is accepted by a lender, who is about to take a huge hit, it is thoroughly reviewed including several BPOs (Broker Price Opinion) and other pricing opinions.  The price opinions are supposed to be objective reviews of the current value of a property.  If, like in the case above, the price comes in at $1,000,000 form other sources, how likely is it that they will accept the $400K?

The case above is extreme, but it happens all the time.  Sometimes the BPO's are off as well.  If a property just wont sell but it keeps receiving offers lower then asking price over some period then the market is rejecting the higher price.  Which brings us to the question of negotiability.

Is the listing price negotiable for a short sale?  Yes it is.  It's negotiable both ways, down and up.  When selecting the sales price you want to list your home for make it near the market price or when placing an offer you want to submit be aware of the market and all it's nuances.

The process, in simple terms, works like this: the seller and listing agent come to agree on a listing price, one that is hopefully market price to help the transaction: they obtain an offer and the seller agrees to it.  At that point the contract and all supporting dozens of pages of documents are submitted to the seller's lender for review and possible approval: once the agreement for sale has been obtained then the transaction proceeds pretty much as normal to a close.  It really does not matter what price the seller agrees to because it's all subject to the lender's approval.

Should you stay away from short sales? No, but just be aware of how they work and the additional time and work necessary.  It's has become a smoother process and more short sales are selling.  Who ultimately picks the price?  The market forces, which in detail are the individuals willing to pay a certain amount and the sellers and lenders willing to accept it.