I had the pleasure of attending a very informative presentation on short sales by Bank of America last Tuesday. The presentation was provided by my company RE/MAX Equity Group, Inc. and was held at OMSI. We had approximately 400-500 RE/MAX Equity Group, Inc. Brokers in attendance. It was another example of the pro-active stance our company takes in educating it's Brokers with what is important in today's marketplace.

The presentation lasted about 3 hours and gave a wealth of information in regards to the Short Sale process in general and specifically with Bank of America. Although I am already a CDPE (Certified Distressed Property Expert), I came away from the meeting with important additional insight that I feel made the time spent very worthwhile.

One of the items shared, that I feel was most important, was the behind the scenes process that gives you the exciting "Hooray!" approval of your Short Sale offer! Or, the "What in the world are they thinking?" crazy counter-offer that causes a deal to fall apart. What makes it more frustrating is you will see them accept an offer on one deal that makes perfect sense, but then turn around and reject the next similar one!

We have all seen the scenario, where a good current market price short sale offer has been made, only to see it turned down by the bank and have them make a crazy counter-offer, with a price that has no basis in today's reality. We see the deal fall apart and watch the house fall into foreclosure.

Out of curiosity, we keep an eye on the property to see what happens. Sure enough, months down the road it finally sells for much less than the original short sale offer. You scratch your head in wonder at the stupidity of the bank. You say to your friends and co-workers, "I knew this would happen, look how much money that idiot bank just lost! No wonder the economy is in such a mess. These greedy banks are run by fools."

What you didn't know was the behind the scenes process that caused that scenario:

Most of the loans made and serviced by Bank of America have been packaged into bundles and sold off to investors. This is how the system works, that is how the bank can continue to make new loans. If they didn't follow this business model they would eventually run out of money to loan.

As per Bank of America; of all the loans that the bank services, they have the delegated authority to make decisions on less than 30% of them. What this means is when there is a Short Sale offer made, the bank has the authority to make a decision on less than 3 out of 10 offers! The other 7+ out of 10 offers must be presented to the investors on a per case bases. This is where it can get very complicated and time consuming. This is why some short sales process through the system fairly quickly, while others drag on for what seems like forever.

The additional time and paperwork involved in wading through the investor decision making process can cause the transaction to bog down as if it was stuck in quicksand.

For Example: When the bank presents an investor a short sale offer of $325,000 on a $500,000 loan they can go into shock. The investor responds with "But I have a note for $500,000 that I bought, I want my $500,000." The bank responds "Yes, we know. But the loan is in default and the market value of the property secured by your note is now $325,000. This is a good offer, for today's market and here are the comparables, BPO and appraisal to prove it. Do you want to take a $175,000 loss now, or take a chance on what we can get after we foreclose on the property and sell it later?" The conversation goes back and forth until either the investor sees the light or sticks their head in the sand and tells the bank they are only willing to discount it down to $425,000. The bank then counters the short sale offer with $425,000 and the buyer walks. The property gets foreclosed on and then sells for $250,000 as an REO and we all shake our heads in wonder.

The investors were not prepared for this real estate meltdown. They are reluctant to take a loss, due to the fact that in many cases they have not felt the pain of the non-performing asset, because they are still receiving their 6% coupon payment on the whole investment bundle.

When a property finally gets foreclosed on and is put back on the market as an REO, the bank has total delegated authority to liquidate the property which is secured by the note. Of course they still have a fiduciary duty to the investor, but it is within the parameters of the current market value at the time of the sale. That is why you will see REO sales on a property for far less than an original Short Sale offer made on the same property several months before.

When you see some of the behind the scenes workings of the Short Sale / Foreclosure process it all starts to make some sort sickening sense.

Donn