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.
on March 25th, 2010
Well I can’t speak for the other parts of the country but here in DFW I think the 150k and under market is going to tank. Maybe not in regards to prices but certainly in regards to volume. Basically anyone interested in a house in that price range is buying now. The buyers pool is going to completely DRY UP for I am guessing about 6 months or maybe even for an entire year. 6 months from now puts us nearing the end of the year and lets face it that time and the early parts of the year usually are not amazing buying times.
Going forward I am going to do one of two things. Either travel the world for a few months to let the market become a true market again(I hate the 8k). Or I am going to concentrate on higher end homes. In the DFW area that is pretty much anything over 200k. At these prices you are not attracting first time home buyers. Therefore the market will go along trucking identically to what it always is. The 8k has not affected that market in any manner.
on November 17th, 2009
Over the years I have purchased many HUD Homes. I was feeling good about making an offer on a house recently so I decided to make another offer on a HUD Home near downtown Dallas. Now this is out of my comfort zone for sure. I have never purchased a house in this area before. The thing about real estate though is you can often jump out of your comfort zone and if you land on your feet you might just make yourself a lot of money.
When I bought my third house it was a townhouse. I was very scared and thought long and hard about it. And it was only 35k. Eventually you just have to realize that you only have so much downside potential. It is certainly worth more than zero. So then what is it worth? Well who knows what the rock bottom price was but it definitely wasn’t less than 20k or so. So ultimately I was taking a 15k risk which I can live with. If I lose 15k I will be pissed but I am not going to go bankrupt or anything. I can bounce back. I have since made probably 75k off of this neighborhood alone. I have owned 4 properties in this exact neighborhood and will buy more if they come available.
So I have ventured near downtown Dallas. When I don’t have any investments going on I often broaden my horizons. I step out of my normal boundaries in search of deals. I have no choice I either put my money to work or I make nothing. I would rather make something than nothing if the investment looks sound and requires no more extra work on my end.
So the one thing I don’t like is comps are a little harder to come by in this area. No two properties are alike. One townhouse community is nothing like the other community down the street. You are basically comparing apples to oranges and if you do this you often get lemonade. A recipe for disaster in the making. Just like with my 35k purchase years ago I am having a hard time with this one. I have thought long and hard over this one and I have decided my downside risk is very low. Extremely low even which made me pull the trigger. I fired in at 60k and have a feeling I will be getting this one.
My exit strategy is about 7-8k in work and list it way below market for a quick sale. I could probably sell it without doing any work but why would someone buy from me for more than the bank is asking? I plan on giving the townhouse a nice face lift and updating it to todays standards. Even though it was built in 1984 it is defintely looking dated. I am going to put in new light fixtures, granite, paint, and probably redo the bathtub and tile surround. I don’t plan on doing any of the work and think I will get out for around 7-8k or so. I could probably do this remodel in about a week to 10 days. It is definitely very minor. I will then list the property at 99k and hope for a quick sale. If it sells quick and for 99k it will yield about a 22k profit after all fees and expenses. I would be insanely happy with that result. This property is on the tax roles at 135k and should probably be listed at about 115-120k but I want a fast sell.
One mistake I believe I have made in my investing career is pricing all of my houses at the absolute top of the market. While I have had some that have sold for nice prices I have also had some sit for a long time. I will never go back and run numbers but in my head I can tell this was a mistake. If I would have priced my properties slightly below market they would have sold faster I am sure. This would have resulted in a NET gain over the method I used. Holding expenses add up quick and end up costing you tons of money. For example I sold a house about a month ago. It took me about 9 months to sell it and I dropped the price 20k over that period of time. If I would have dropped that price originally I would have ended up making about 8k more in profit. That is how much the holding expenses were and that was on a sub 100k property. Another example that even proves my point and hurts very badly. I sold a house this year for 375k. I held it for just under a year. If I would have just listed it at 375k to begin with I would have made about 30k more in profit. That is some serious money.
on November 15th, 2009
For the last four years I have made well over 90% of my income from investing in real estate. For the most part this has consisted of buying a house that is in horrible condition, repairing it and bringing it back to life, and selling it for a profit. Putting laziness and complacency aside I have done very well. This year I have not bought a single house though. At the beginning of the year I believe I had four houses in inventory and they took forever to sell. Not only did they take a long time to sell I got way less for them than I anticipated. This basically made me very scared about the market.
Before this year I had an average turn around time of only 5 months. So from the day I bought the place, all rehab, on the market, and closing was only 5 months. This year however that number has bumped all the way up to 8 maybe even 9 months. So on even a low end house that is an extra 3-5k in holding expenses. Even worse than the cost of owning it is the stress it causes. You are constantly wondering will this thing ever sell? Will I have to lower the price? Am I going to lose money? This has also made me very scared of the market.
For the better part of the year most of my money has been tied up. The money I did have I was just too scared to put it into play. I had to keep my risks low and thus I have not purchased a property this year. In the business I am in if you are not buying houses you are not making money. Simple as that. In the area of investing I am in there is a saying. You make money when you buy, you get paid when you sell. That is absolutely 100% true. So in essense you can argue I have not made a dime this year.
I finally put my first offer in on a house last week in probably 5 months. It was a good feeling and while I thought it was a long shot I was excited and hopeful I would get the house. I will give you guys some stats on it. It is a bank owned property. They were listed at 70k and it had only been on the market for 15 days. The house is a wreck. Someone went in and decided they didn’t like the floor plan and just demolished about half of the inside. I have no idea what they were thinking I just have to go on they were on crack. Not only did they do stupid stuff they did it in a shoddy manner. Even if I wanted to use their remodeling I couldn’t as it is just idiotic.
Normally I can walk a property in 5-10 minutes and know exactly what my remodeling plan is and about how much it is going to take. This property took me 40 minutes because I just couldn’t figure out what this jackass did to the place. My plan is to bring it back to the original floor plan and it was very difficult figuring out how it was layed out.
I get home and come up with right about 20-23k to put this place back into the condition it should be. That figure is with me not lifting a finger and subbing everything out. At first I want to make a 40k offer but you have to fire in at a number that the bank will even consider countering. If the property had been on the market for 6 months I would consider 40k a reasonable starting offer. Since it is a fresh listing though I decided to go in at 47k with a goal of getting at 50kish. I fire in at 47k with a 10k Earnest Money Deposit. I also make my offers with no option period and no inspection period. I want the bank to know I am serious, I have already inspected the property, and I won’t be backing out without losing 10k. Does this help? I don’t know but I would assume it does.
They fire back at 68k and then the next thing I know they have multiple offers. I hate multiple offers. People start bidding crazy amounts during multiple offers. In fact I have even just backed out before during multiple offers as I rarely win them. I have won a few though so I decide I will go ahead and fire in again. Before the multiple offer subject came up I had it in my head I would pay a max of 55k if I had to. I believe this place is worth 120k but I am running all my exit numbers on 100k to be super safe. I don’t feel like wasting my time and not making any money as I have done on a couple of my last deals. So with all these numbers in place I will walk with 15k in profit if it sells for 100k and I have an upside potential of about 20k. So in theory I could walk with 35k which would be a home run deal in my opinion.
I will probably know tomorrow about this deal. The deadline was today.
I hope I get it.
