How to Negotiate on a Bank Owned REO Property
on March 30th, 2010
No matter your level of experience beginner or old timer you probably wonder what exactly are bank owned REO proptery managers thinking when they negotiate a deal. I have come to realize from the many offers I have made both successful and unsuccessful that banks don’t need to sell. Contrary to popular belief banks will not be giving away a house for insanely cheap anytime soon. This isn’t to say you can’t get a great deal though.
Here are some rules that I personally follow. They might not be correct, but they have defintely steered me in the right direction on more than one occasion.
1. If a house comes onto MLS and is priced aggressively(it is priced well below Full Market Value) you should jump on it with a full price offer. Over the years when I have seen a new REO listing that is a great deal I don’t hesitate in making a full price offer. Yes, I would love to get another few thousands off list price but when a deal is a deal don’t hesitate. I remember one house in particular that was priced very low. I am a night owl and it didn’t pop onto MLS until about 3:00 AM. I just happened to be scanning that area and saw this huge price discrepancy. I instantly wrote up a full price offer with zero contingencies. At 8:00 I drove over to the house to inspect it. This was a winner at the list price. I went directly home and faxed over the offer. The bank accepted it even though an additional 12 offers came in to the agent after mine. Just to tell you how good of a deal this was I turned down an offer 50k higher than what I paid in as-is condition. Once again if it is a smoking deal act right away.
2. Don’t expect the bank to take 50% less than what they are asking for a house. I hear stories all the time about the guy making 50 offers a week. He is truly wasting everyone’s time by doing this. I make on average maybe 2 offers a month. Most of my offers are within striking distance of the asking price. For example. Let’s say the bank is asking 100k and it has been on the market for 100 days. The bank is much more flexible in their price now. If it was a fresh listing you might be able to get the house for 90-95k. Since it has rested on the market for so long the banks regulations start to loosen a bit. You might be able to get this house for 75-80k now that it has sat for so long.
When you make an offer your goal is to be in the range that the bank will even consider accepting or countering. My goal is always to make an offer that allows the bank to at least counter my offer. I know that if I can start a negotiation I can usually get the I want for the amount I would like to pay.
3. As mentioned before days on the market is a huge factor in the bank deciding if they will be more aggresive in taking a lower offer. I use this always in my decision on how I should bid on a house. If a house is new to the market I will not even consider making an offer 20% off asking price. I know it is just going to be a waste of time. Now 10% would probably be an acceptable discount.
4. So you make an offer and the bank counters at full price. Should you just give up or try again? I know a ton of people think when the bank does this they should just walk away as the bank cares nothing about negotiating. When this happens I always go back with about a 1-3k increase in my offer. This almost always starts the ball rolling in the direction I want it to.
5. Never offer the full amount you are willing to pay. Offer a few thousand dollars lower than what you want to pay for the house. This will allow you to increase your offer during negotiations and show the buyer that you are very interested in the property and willing to come up in price. You will often get the house for less than you want to pay by doing this.
6. Keep out all the contingencies. Real investors are either paying cash for the house or dropping all contingencies. I remove all contingencies and offer a huge earnest money deposit. My current EMD is about 10k and I think it really makes the bank happy seeing you are willing to deposit so much up front cash. They know when they see this that you are a serious buyer and not going to mess around. If you are a big baller and have the cash don’t hesitate to offer to put the entire purchase price in the form of an earnest money deposit. So if you offer them 50k also put the 50k as a EMD. Banks love seeing this kind of thing and you will often get a huge reduction in price by doing this.
7. If you have the cash you will get a better deal when dealing with REO’s. Banks love to see cash offers. It just makes their lives a 100 times easier. I have lost out on deals when I offered them a financing contract and the cash buyer offered them less money and was going to pay cash. I have seen the bank accept $1500 less cash offer than I was willing to pay. They love cash offers. The bank will gladly accept a little less cash knowing they will have much less work to do and less risk of the house going back on the market if the financing falls through.
The managers of REO bank owned houses think without emotion. They can easily remove all emotions since it isn’t their money. This puts them in a great negotiating standpoint. If they mess up a negotiation who cares. They can just sit and sit and have the house on the market a year without any regard. Keep that in mind the next time you make an offer on a bank owned property. More than likely the manager of the REO has a certain guideline he must follow when negotiating. He always knows the % amount he can lower the property and must stay within that range. Sure he wants to get as much as possible but he will also settle at the bottom of that range. The manager wants to do the thing that is easiest for him, which is usually not the thing that will yield the bank the greatest return.
