Short Sale Pricing (82% rule)

I have an opportunity to do my first short sale on a SF-Brick Bungalow in Chicago… The outstanding balance on the loan is 152k & in average shape the home could go for about 185k. Problem is, it’s in crap shape… the owner moved out into a rental place to be closer to his job and thought he had a deal for someone to buy it, he was wrong. He turned off the heat in the home and the pipes froze and burst in several walls and the home is in need of about 30k of rehab work based on my contractors walk thru(Structural/Cosmetic). Once rehabbed I could sell the house for between 200k-205k and my holding time would be under 90 days or less…

In it’s current state the place might appraise out for 160k… Do I write my offer for 82% of that price or 82% of the balance owed…I was told that was the magic number that most lenders will consider when looking at a short sale… Thanks for any and all info

  1. I’m concerened that you say average value is $185 but after rehab you’ll get $200-205k. That’s a pretty big jump. Also assuming holding time would be under 90 days with that big of price premium is probably optimistic.

  2. Calculate your offer based on the amount of profit that’s acceptable to you.

$185 * 0.7 - Costs = Offer

That seems to be the formulat the experienced investors prefer. It’s the rule of thumb for a reason. For that’d mean an offer of $99,500 with a selling price of $185k. That’s only counting your rehab costs.

Marcus, thanks for the feedback. By average I meant average condition of the home and not average selling price…WIth the rehab, the place would be in excellent condition and that’s what I was calculating the 200k-205k price point off of. I did 4 rehabs, 2 complete guts, in 05 in that area so the value should be good…Thanks for breaking down the formula, that gives me a different way to look at it…I’ve never done a short sale before so hopefully, I can pull this puppy off…

In your experience is it realistic for a bank to accept an offer with a 33% discount off of the existing mortgage on a home that is in bad shape and in danger of foreclosure? I have planned on offering 119k+35k for the work+10k in miscellaneous (including debt service, security, advertising…) Thanks for any and all feedback


I’m not sure. I only tried one short sale and the bank absolutely wouldn’t budge. The sad thing is they were the 2nd mortgage and lost it all on the foreclosure auction. The primary bought it for what their costs were and it whiped out the 2nd. I guess their loss mitigation department is on some pretty good herbs or something.

I think a lot will depend on how convincing your estimates are to them and how hot/cold the real estate market is where the property is. You have to remember. They have more costs when it goes to foreclosure. They have legal costs, holding costs, real estate comission costs, etc.

This is somewhat related since you are in Chicago. In Illinois there is a law that just passed the State Senate and is now in the State House…

SB 2349 Mortgage Rescue Fraud Act
Don’t Pass
Current Status Bill passed it’s 3rd Reading in Senate - today, March 2nd. It is moving to the House of Representatives for approval.

Defines how investors can do business with distressed property owners. Rather than enforcing laws against fraud, forgery, and deceptive practices it sets up unreasonable rules for engagement, and adds new penalties. Will limit the options of people who are losing their homes. On its 3rd amendment.

The Illinois Senate just passed a bill (SB2349) that targets the practices of real estate investors working with people that are in foreclosure, behind on their property taxes, or are more than 90 days in arrears on any loans secured by liens on their property. It is a complex bill with many aspects that are problematic. It rather broadly defines and then restricts the activities of “distressed property consultants”, and “distressed property buyers”. The bill is supposed to protect homeowners from criminals that are targeting folks in distress and using fraud, forgery, and deceptive practices to gain control of their property. While there is no doubt that such criminal activity is taking place, there is also no reason to add new complex legislation to address it. We need to enforce the laws we have. Eliminate crooks, not choice.

Here are a few of the standout issues in this bill.
• Any “Distressed Property Purchaser” must pay at least 82% of fair market value as determined by an appraiser. This “one size fits all” approach restricts the homeowners right to choose, and make the best contract to fit their circumstances. Government intends to interfere with the homeowner’s right to contract.
• All liens on the property must be paid off in full, when a “Distressed Property Purchase” takes place. This once again restricts the market, and will force more properties to go through the process all the way to the auction. Most properties that make it to the auction go back to the lender, or sell for $1 over. The homeowner loses all of their equity.
• The homeowner has an automatic right to cancel a contract for “Distressed Property Consulting” up until the time that all of the services have been completed. No payment can be required until after all services are complete. This part of the bill excludes “protected classes” like attorneys and mortgage brokers, but includes friends and relatives. So innocent people trying to help their friends could end up being criminalized by this legislation.

This complex bill can be read in its entirety at

Please take the time to call or fax your Senator about this bill today, and in the next few days place a call to your State Representative. Their information, phone number, and address can be found at – look under “legislator lookup”. You can put in your zip code and it will show your representatives’ information.

Please forward this information to any other investors you know. We need as many calls and faxes to hit the Senators and Representatives desks as possible in the next few days.

Ryan, that info was dead on and much appreciated. You seem experienced on the topic of short sales…In my particular case with the balance on the home being 150k but it needing a ton of work to get it done, what would you offer…The owner of the home now has 2 mortgages and he has been current on each one so far but beginning either this month or next month, he will not be able to make the payments on 1 or possibly both…It’s a SFR Brick Bungalow in Chatham, so I am 100% sure that after my 35k investment on the rehab side + another 5-7k in miscellaneous costs, i could sell it for 200-205k…I had planned on offering 119k which is about 79% of the balance owed, but my appraiser got back to me and told me in it’s current condition she would only feel comfortable with an appraisal of 137k and 82% of that is 112k…Obviously I want to get the place for as cheap as possible, but my bigger issues is putting together a compelling enough case to get the bank to bite…Thoughts? I know it’s always an uphill battle


Go to for NARHRI’s response to the proposed Illinois law.

A rule of thumb that I use is this.

ARV (After repair value) x .70 = whatever you get. Some even take it a step further and subtract repairs and holding costs from that number. It seems absurd to offer such a low price but a person told me that if your not embarrassed by your offer then your offer is to high. Ha!

Case in point… I bought a bank owned property in Jan. It had been on the market for 7 months. They had it listed for 59K last August. When I put an offer on it the price was at 46K. I offered 38K and we settled on 40K. 20K rehab and ARV is at 80K. Short sale or not make sure your numbers work and if the deal doesn’t materialize then move on. There are more out there. Just my two cents. Continued success,


Please influence the appriaser that comes in to perform the
BPO on behalf of the bank.
I would suggest that you plug in a low number and then
request that the bank do a full BPO. When the appraiser comes
point out all the details and tell him/her why you want it at that
Substantiate with Comps in the area, fix up estimates from
3 contractors including holding costs for the timeframe.

Case in point, you can always go up a bit higher, should the
bank whine about the offer. But they will just go by the BPO.
I heard a seminar by a loss mitigiation rep. The rule was that
the final discount percentage depends on the bank.
Anywhere from 75% to 92% is the final purchase price.

Good luck

Control your own escrows.
Get your own appraisals.
Never go above 70% minus repairs when rehab is involved.
Work with the best and pay them top prices.
Build teams.
Vacant houses preferred.
Don’t overlook zoning.
Do building code due diligence.

Da Wiz

Gary, I have followed your heated posts with other members for the past few months and I appreciate you taking time out to join this thread… Since I have done a few rehabs here and there, I have developed a good support team behind me. I have an appraiser whom I’ve worked with for years, 2 General Contractors, and a decent real estate attorney. This past year I got licensed as an Loan Originator in Illinois just to be more knowledgeable on the subject and help facilitate the rehabs that I complete to getting quickly moved… Question to you and Krish… I have comps of places that support my initial offer of 121k. I have 3 quotes for rehab. I have also helped the owner create his hardship letter. Should I pay my appraiser to go out and do a full appraisal and submit that with my offer as well… Or better question as Krish mentioned " please influence the appraiser". Since the appraiser works with the bank how much leverage do I have as far as getting his appraisal to reflect the price I need?

Thanks for all the feedback and if I close this deal i will get you all a $50 gift certificate to Lettuce Entertainment…I’m feeling lucky.


There is no 82% rule. I’ve seen lenders go 40% and 50% on first position notes, and lower than that (a LOT lower) on 2nds.

I assume the 82% is for the proposed new Ill law and not an arbitrary number? thanks

82% is somewhat of an industry standard. But, it is DEFINETLY not set in stone. This figure really depends on the particular deal.

I personally would not pay for my own appraisal. In my experience, most LM depts will require their own BPO/appraisal; usually once they are aware of a short sale potential. A SS will require management approval; especially if you are really going to try and beat them up. One of the negatives about not being a RE agent - access to comps.

Lenders base their SS approval on the BPO/appraised value, and not on what’s owed. Your offer should be based off that figure. That’s the trick, figuring out their figure.

“In your experience is it realistic for a bank to accept an offer with a 33% discount off of the existing mortgage on a home that is in bad shape and in danger of foreclosure? I have planned on offering 119k+35k for the work+10k in miscellaneous (including debt service, security, advertising…)”

Remember, that 82% rule, is a “NET” figure. Your offer must net the seller 82% …or higher…or lower…it’s all deal specific. Lenders figure if the offer doesn’t at least net them this 82%+, then they’d rather take their chances with the foreclosure. Or, at least thats what I’ve been taught.

Thanks REO, lucky for me I am a licensed RE Agent…Although I am currently inactive and the only deals I seem to close are my investments or deals for my friends in which I split the commission with them, and it is still not worth the headache :-). I pulled up 3 comps and my fingers are crossed on this one. I know the owner needs to sell in the worst way…He got a 100% LTV loan and the house has taken a beating…He has zero shot to sell thru a realtor…I’m faxing him the Authorization to release info tomorrow so hopefully I will have it back and can get to moving on this one…

Here’s a copy of the hardship letter I helped him work on. Please give me feedback…Too litte or too much detail? Does the owner need to go into his finances more and why they are so bad? Would a credit report showing a trail of late payments be worth including? Thanks for all of the feedback

Dear: Harris Bank

Re: Loan Number -123456

Please accept the offer being made by this buyer for $119,000 for my home @ xxxxx Chicago Illinois 60619. Currently & for the foreseeable future, I will not have the income needed to sustain this monthly mortgage payment. This home, in its current state, is in need of immediate attention from both a cosmetic & structural standpoint. I have included a detailed estimate from two licensed and bonded Construction Companies that have quoted me out repairs that would total upward of $36,000 to bring this home back to a livable state. The plumbing problem, which actually forced me to vacate the premises over 45 days ago, had gotten to a point where human excrement soiled over 10% of the basement floor and I included pictures for documentation purposes. This portion of the rehab alone would cost me over $9,000, not including the cost of City of Chicago plumbing permits. I believe this offer is more than reasonable. This potential buyer has a history of working with dozens of families throughout the community & seems a viable candidate to help bring closure to this burden for me and potential burden for your institution. It is my intention to avoid bankruptcy if at all possible & your quick attention to this offer would be greatly appreciated so that we can avoid the time and expenses involved. I made this purchase in good faith but my financial circumstances have become overwhelming and I don’t have much recourse as far as continuing to make my monthly payments. Please work quickly and let me know if there is anything I can do to facilitate the process…
Thank you

Please contact me at your convenience by phone at

Any suggestion on upgrades are appreciated…Thanks

Looks good, lets see what Harris says. Good Luck


Regarding your Hardship letter…I personally would not submit a letter written like this one. A hardship letter is suppose to explain the owners “hardship”. What has happened in their life to cause them not to be able to make their mortgage payment. Loss of job, lay off, death of spouse, etc. I never go in that much detail concerning repairs. Having the owner state, they can’t afford to make needed repairs is one thing thats important, but really no need to break out all the figures in this letter. The letter should tell the lender the owners pitifull awful story that proves they can’t continue or catch up the loan. Explain “why!”. I always have my client write the letter themselves with some direction from myself on what to address in the letter. But always in their words not mine. Very informal.
LM reps and managers will be reading this letter. They read thousands. Your letter seems way to formalized and rehearsed imo. The owner never explained why his financial circumstances have become overwhelming. Not saying your letter won’t work, but just some friendly suggestions from someone who writes a lot of them. Oh, I also have the owner write the letter in their own handwriting, if they can write legibly. If not I type it for them and have them sign it. I include the original in the package.

Remember, one of the conditions for SS approval, the owners must prove hardship.

good luck

I’m still in the learning process for short sales, but I’d like to ask a question to the folks on this thread. I thought that a lender won’t even consider a short sale until they have sent the NOD to the owner. Luxuryjones stated that the owner has all of his mortgage payments current. Do you seriously think that the lender will give a discount on the note when there’s no evidence that the owner can’t pay, regardless of the hardship letter?

Anyone can write a hardship letter - I wouldn’t think the lender would bite until they have proof of non-payment.

Like I said, I’m still learning, so please correct me if I’m wrong…

REO thanks a lot for the feedback…This is my first short sale so any and all feedback is appreciated…I will speak to my seller and have them tweak there letter… I see your point that the letter really doesn’t tackle the issue of why the hardship has occurred and I will make sure the seller describes in detail why he will not be able to make the payments…?, is two pages too much or will the lender just want the owner to sum it up in 1 page…Also, as far as the previous question, with out a NOD being served does it matter with the bank or can the hardship letter paint the picture I need ?


Keep the Letter short and simple. Do not go into great detail. No reason the letter needs to be a full page. One paragragh at the most. I try and keep mine to just a few sentences that only support the hardship. You the investor/buyer should never be mentioned in the letter. Trust me, SS deals will be denied based on the Hardship letter. Keep it simple, generic and to the point, always supporting the hardship.

For a SS, the borrower must be behind on their payments. The hardship letter has nothing to do with this. Not sure in your state, but in Florida, the homeowner might be several months behind before the Lis Pendens is filed. The LP filing is irrelevent regarding a SS. I’m working one now, where the HO is over 3 months behind, but the Lis Pendens has not been filed.

Hope this helps.