REO offer procedure questions

REO offer procedure questions

Developer · Staten Island, NY · Member since 2009 · 88 posts · 9 votes

My partner and I spent all of our saturday searching local REO properties in our area. All together we looked at 28 of them mostly semi-attached, single-family or 2 family homes. Now, we got out of the car, checked them out, saw if they had curb appeal, looked if they had any cosmetic problems that we could spot out early, peaked through the windows to see if the interiors were beat up and basically determined if we would want to go any further with them. All in all, we figure probably could get a deal if we could make offers on them.

So, that being said, how exactly does the offer procedure go about? My partner is going to call all the listing agents Monday, and schedule walk-throughs for next weekend. After that, I assume we would make our offers. I've read on other threads that you would only make the offer to the listing agent, and that it should be in contract form. Others have said it should be a cover letter that you give to the agent. I would prefer it to be more of a letter instead of a contract because we will be making several offers, and don't want to be contractually obligated to do anything before we see which figure out which property will be most ideal for us (even if we get accepted on multiple properties).

So whats the best way? I would assume I'd include the following
- Make an offer 70-80% of asking price
- We have ability to close within 30 days
- Paying cash (we will not be using conventional loan)

Should it be notorized?
Should we offer to make a deposit or offer earnest money?
Also, many people say that we should include a pre-approval letter, but since we are using a private loan from a private lender, what should we provide as proof of funds?

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J ScottPro Member

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Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes

To add to what Jon said...

- If the property is a good deal, it won't last until next weekend, so schedule your walk-through for sometime in the next day or two. If the property is still available next weekend, it's likely not a great deal anywhere near the current list price.

- You don't need to deal just with the listing agent. I know a lot of people suggest it, but on your first couple offers, I think there are more advantages to using a buyer's agent to represent you. If you go directly to the listing agent, that agent represents the SELLER, not you! This means, he or she will allow you to do something stupid that hurts your position and helps the seller's position. If you find your own agent to represent you, that agent is required to make sure your best interests are put first; this may keep you from doing anything really stupid. So, go find an agent that is accustomed to making offers on REOs, and ask that agent to represent you. He or she can walk you through the house and then write up your offer for you if you're interested in submitting one.

- When you're ready to submit an offer, the agent is going to want to know some basic information:

o Your offer price
o The amount of earnest money you want to put down
o The date you want to close
o The name you want to make the offer in (your name, company name, etc)
o What contingencies you want and for how long (financing, inspection, appraisal, etc)

If you give the agent these basic pieces of info (he or she will tell you what they need), they can write up the offer for you.

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
First, I've had zero luck with banks accepting offers at 70-80% of their listing price. I've heard of people getting such offers accepted, but its never happened to me.

Second, why are you basing your offer off the listing price? Figure out your exit strategy (buy and hold or fix and flip), figure out the rent or the ARV, and back into what the property is worth to you. Base your offer on that price. The asking price is an indicator of your likelihood of success. If the value to you is 60% of asking, you're not going to buy it until the bank drops the price a bunch (that does happen.) If your value is 100% of asking price, you have a shot.

If you're using a private lender, you're not paying cash. You'll need to put in a financing contingency in case your lender flakes out. You will need a pre-approval letter from the lender.

Just use the listing agent's contract. They will most likely use the standard state contract, but with a bunch of addendums from the bank. Sometimes you have to sign these with the offer, other times they get signed when you get the offer accepted.

Banks typically want to see an earnest money check with the offer. You can try saying "earnest money to be provided by certified funds within 72 hours of contract acceptance".

When you start submitting offers, you ARE going to be contractually obligated if the bank accepts your offer. If you include financing and inspection contingencies, you can get out if something happens on either of those, though.

Since you're dealing directly with the listing agents, you want to try to build a strong reputation with those agents. You want to show you're a real buyer and can really close. Your hope is that you can establish yourself as a good investor with those agents, and have them let you know as soon as a new listing is coming or a price is about to be dropped.
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
16y
To add to what Jon said...

- If the property is a good deal, it won't last until next weekend, so schedule your walk-through for sometime in the next day or two. If the property is still available next weekend, it's likely not a great deal anywhere near the current list price.

- You don't need to deal just with the listing agent. I know a lot of people suggest it, but on your first couple offers, I think there are more advantages to using a buyer's agent to represent you. If you go directly to the listing agent, that agent represents the SELLER, not you! This means, he or she will allow you to do something stupid that hurts your position and helps the seller's position. If you find your own agent to represent you, that agent is required to make sure your best interests are put first; this may keep you from doing anything really stupid. So, go find an agent that is accustomed to making offers on REOs, and ask that agent to represent you. He or she can walk you through the house and then write up your offer for you if you're interested in submitting one.

- When you're ready to submit an offer, the agent is going to want to know some basic information:

o Your offer price
o The amount of earnest money you want to put down
o The date you want to close
o The name you want to make the offer in (your name, company name, etc)
o What contingencies you want and for how long (financing, inspection, appraisal, etc)

If you give the agent these basic pieces of info (he or she will tell you what they need), they can write up the offer for you.
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Robert Mack
Real Estate Investor · Bergen County, NJ · Member since 2008 · 390 posts · 72 votes
16y
Originally posted by J Scott:
So, go find an agent that is accustomed to making offers on REOs, and ask that agent to represent you. He or she can walk you through the house and then write up your offer for you if you're interested in submitting one.

I agree with J Scott about finding an agent who is knowledgeable with REO's and investors to represent you. A good way to find one is through networking at your REIA, and through BP. I found my agent here through BP, and he has provided me with a wealth of knowledge on how to make offers, what's happening in the market, who the players and wannabes are etc...
I've gotten two deals under contract so far with him and none have been his own listings. I believe J Scott also has an agent on his team so he doesn't use the listing agent to make offers on either... the key is finding a competent and knowledgeable agent to be on your team.

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Eddie Ziv
Investor · Mableton, GA · Member since 2009 · 1k+ posts · 465 votes
16y
I would second most of what said here, mainly with regard to buyer's agent. BA not only can walk you through the process but would also allow you to put in multiple offers while dealing with only one agent. With regard to offers, every market is different. I assume that Jon could not get such low offers at the door is because Denver, CO seems to be much tighter market than many others. Jason Scott is right about the fact that if the deal is good, it won't last, however the longer the property is on the market, the better chance that a lower offer would be accepted. Make sure your agent tells you how long those properties are on the market (You can also find out at Realtor.com).
Lastly, make sure that you have everything in place before proceeding with any offer. If you plan to use a loan, secure it first. Get pre approval and know how much you've been a proved for. If you plan to buy cash, make sure you have the cash (Real or transactional) and also havean exit strategy.

Good luck.
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Phil M.
OP
Developer · Staten Island, NY · Member since 2009 · 88 posts · 9 votes
16y
When it comes to my offers, I know what the value is for me. I've come to the 70-80% of asking price because most of the homes I've looked at arn't really a deal without a price drop. If I could get them down 10-30%, then it might be worth it for me. If a place is asking $200k, and I think it would be profitable at $180k, and I offer 80% ($160k), hopefully I would get countered 90% or the price that I deem profitable. I know what would create a cash flow, and what would be good to create value by fixing it up and flipping it at the retail value.

Also, many of the homes I've looked at have been on the market for more than 2 months. So I figure they're ether do for a price drop, or the bank would be more likely to take an offer to get it off their books.

In my case, I really don't have a financial contingency at all because thats our only option. We have little of our own funds, can only show low incomes and reserves and won't be approved for a loan.

I'll look into a buyer agent in my area. I could see that we will probably need one to help us not get swindled by the listing agent/seller.

I've been told to submit offers on a bunch of homes. What if multiple banks accept my offer? Could I just say "whoops, my financing flaked out"?

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
Eddie may be right that Denver is tougher than other markets. Certainly there is almost nothing to be had at prices that work for rentals. If you've figured out your price and make offers based on that, you're doing all you can.

I will say I have used a buyer's agent on my previous REO purchases. I think it would be tough to do this without your own agent. I can nearly guarantee at least a third of the houses you looked at are already under contract. You just can't see it because you don't have the level of access to the MLS you need to see that a contract is already in place. Even so, you might still get them.

If you say "Could I just say "whoops, my financing flaked out"?" and you don't have a financing contingency in your offer, then the bank will say "whoops, no problem, thanks for the earnest money."

You said you were using private money. That's a loan, and so you MUST use a financing contingency. If you don't, and your lender does flake out (entirely possible, if you're never done a deal with this lender before) then you WILL lose your earnest money.

My experience is that banks won't even bother countering a low ball offer. If they do, they would come down from $200K in your example to $197K so some such BS. The trick is to watch carefully and when a price drop occurs, resubmit your offer.
1 Reply
Phil M.
OP
Developer · Staten Island, NY · Member since 2009 · 88 posts · 9 votes
16y
New York City is also a tight market, especially in Staten Island which is mostly suburban, so we'll see how well things turn out in the case of offers.

If the banks counter with something like 197k from 200k than I would just move to the next house on my offer list because that home would simply not be profitable for me. I'm just looking for one place that will accept my offer, because I already know my offering price will be profitable.

I'll check out a buyer agent immediatley. Does anyone know of any on BP in the NYC area or any websites that have listings of them?

How can I even make offers on more than one house without the possibility of being forced under contract?

What are my options for a financial contingency? Our private lender was our only option for getting funds, so what can I do?
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
16y
Originally posted by Phil Mondiello:

If the banks counter with something like 197k from 200k than I would just move to the next house...

In my experience, banks will generally make a first counter-offer very near full-price (or even AT full-price), but the fact that you got a counter instead of a flat-out rejection is a good sign, and often the second counter is much better.

For example (I'm making this up based on my previous experiences), if a property I'm going after is listed at $65K, I might offer $45K. Oftentimes the bank will reject the offer outright, but sometimes I'll get a counter-offer at $62-65K. When that happens, I'm fairly confident I can get them down to at least $55K. I'll re-counter at $48K, and will expect the next counter from the bank to be well-below list (maybe $56-58K). I might come back at $52K, and then we may agree on $53-55K.

So, the fact that you got a first counter-offer is a GOOD sign...and I would suggest you make another counter at just above your original offer, and see what happens.

How can I even make offers on more than one house without the possibility of being forced under contract?

The key is to have a financing contingency in each contract (or some other kind of contingency). Based on what you write below, I think you are misunderstanding what a "contingency" is...

A contingency is something you put in your contract that gives you an "out" if you need it. For example, an inspection contingency gives you the ability to inspect the property, and back out (and get your deposit back) if you find something wrong that you didn't expect. A financing contingency gives you the ability to verify that you can actually get your financing in order, and if you can't you can back out and get your deposit back.

By putting a contingency in every contract you submit, if you get one accepted, you can use that contingency in each of the other contracts to back out and get your deposit back.

What are my options for a financial contingency? Our private lender was our only option for getting funds, so what can I do?

See above...I think you're misinterpreting the definition of "contingency" in this context...
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Phil M.
OP
Developer · Staten Island, NY · Member since 2009 · 88 posts · 9 votes
16y
Okay, so the contingency is just a clause in the contract giving me an 'out' if I need it, and also giving me the ability to make many offers at the same time.

Some more questions would be:

- When do I give earnest money to the bank im making the offer to?

- Would I submit an offer to the listing agent after I walk through the home, but before my inspection and appraisal?

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Matt Mathews
Real Estate Consultant · yucaipa, CA · Member since 2008 · 233 posts · 109 votes
16y
Great advice and comments here. I would like to add-Forget about the listing agent, they work for the seller/bank. Find a Exclusive Buyer Agent/Investment Specialist to represent and protect your interests throughout the transaction. Negotiating with the banks asset managers takes some specialized skills and knowledge. An experienced buyer agent knows what to say and what buttons to push to get your offer accepted.
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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
Banks will typically want to see the earnest money with the offer. You can try adding the verbiage "earnest money to be provided by certified funds within 72 hours of contract acceptance". They may still want to see a copy of a personal check for the earnest money.

You would only do appraisals and inspections once you have an accepted contract.
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Eddie Ziv
Investor · Mableton, GA · Member since 2009 · 1k+ posts · 465 votes
16y
In my experience, banks would accept a copy of the earnest money check with the first offer, which should be in your realtor's hand by the time an offer is accepted. At that moment, the check is to be sent to the seller's realtor.
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Phil M.
OP
Developer · Staten Island, NY · Member since 2009 · 88 posts · 9 votes
16y
What would be a typical amount of earnest money?

Should it be based on the asking price?

I hear of people making earnest money deposits of $500.00-10,000.00, so what should I base my earnest money amount on?
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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
The listing will specify the minimum amount.
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Eddie Ziv
Investor · Mableton, GA · Member since 2009 · 1k+ posts · 465 votes
16y
Again in my experience if you asked me this question about a year ago, I would've said $500, now it is $1,000 or 1% of the offer. Again I'm talking REO. I think HUD is still $500.
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
16y
Originally posted by Phil Mondiello:
What would be a typical amount of earnest money?

Should it be based on the asking price?

I hear of people making earnest money deposits of $500.00-10,000.00, so what should I base my earnest money amount on?

Minimum $500...
Generally $1000 is standard practice...

The more the better, and the more likely your offer is to get accepted...

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Eddie Ziv
Investor · Mableton, GA · Member since 2009 · 1k+ posts · 465 votes
16y
One thing I notice lately is that investors are dropping contingency requirements such as inspection. Couple of my investors lost bids to offers with no contingencies...
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Phil M.
OP
Developer · Staten Island, NY · Member since 2009 · 88 posts · 9 votes
16y
Originally posted by Jon Holdman:

If you're using a private lender, you're not paying cash. You'll need to put in a financing contingency in case your lender flakes out. You will need a pre-approval letter from the lender.

Okay, I could include a pre-approval letter from the private lender, but will the bank take that as proof of funds? I ask because our lender is just a man, not an institution..

Originally posted by Eddie Ziv:

One thing I notice lately is that investors are dropping contingency requirements such as inspection. Couple of my investors lost bids to offers with no contingencies...

Well without a contingency than how can I protect myself from losing earnest money or being contractually obligated? Should I include just a financial contingency and forgo the inspection contingency?

A few more questions I have about Buyers Agents include:

1. How much do buyers agents typically charge for their services?

2. How do I go about finding a buyers agent? Are they the same as a listing agent just on the other side of the table? Are there any websites recommended to find them in my region or is there a way to find through BP (Didn't find any through BP search for Staten Island, NY)?

3. Are there any questions I should ask the buyers agent or certain details about the agent I should inspect beforehand to help verify if he/she is competent in helping me achieve my real estate goals?

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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
16y
Originally posted by Phil Mondiello:

Okay, I could include a pre-approval letter from the private lender, but will the bank take that as proof of funds? I ask because our lender is just a man, not an institution..

You have two options...consider it a cash deal (in which case you won't have a financing contingency) and have the guy provide a bank statement as POF.

Or consider it a financed deal, have the guy provide a pre-approval letter (on company letterhead), have a financing contingency, and just treat it like any other loan you might be getting. The bank won't dig into your loan...they'll just want to know how long you'll need to ensure you'll get the loan (the financing contingency period).

Based on the fact that you want the contingency, I'd go the second route...

Well without a contingency than how can I protect myself from losing earnest money or being contractually obligated? Should I include just a financial contingency and forgo the inspection contingency?

You will need some kind of contingency to ensure you don't lose your EM. The key is to keep the contingency period as short as possible. 7 day is better than 10 days; 5 days is better than 7 days; 3 days is better than 5 days.

Interestingly, many REO sellers these days will have an inspection contingency in their contract addenda (7-10 days) whether you asked for one or not.

A few more questions I have about Buyers Agents include:

1. How much do buyers agents typically charge for their services?

2. How do I go about finding a buyers agent? Are they the same as a listing agent just on the other side of the table? Are there any websites recommended to find them in my region or is there a way to find through BP (Didn't find any through BP search for Staten Island, NY)?

3. Are there any questions I should ask the buyers agent or certain details about the agent I should inspect beforehand to help verify if he/she is competent in helping me achieve my real estate goals?

1. They don't charge YOU anything. They get a commission from the seller when they bring the buyer. So, if you're a serious buyer, they're going to be happy to work with you, as you'll generate a commission for them.
2. You don't need an "exclusive buyers agent." That just means someone who doesn't represent sellers, ever. They just represent buyers. When buying an REO, your agent will likely make you sign a buyers agreement, but don't sign anything that obligates you to using ONLY them...you should be free to use other agents to offer on other properties.

As for finding an agent, talk to other investors, visit your local REIA, etc. Not every agent has worked with REOs before, and they can be a bit quirky, so you want someone who does have REO experience. Ask around to other investors, and you'll surely find a couple.

3. Again, having REO experience is probably the most important thing. Close second is working with investors. If they've done both of those things, move ahead. There are certainly good and bad REO agents, but it's hard to tell them apart when you're new to this...you'll eventually learn...

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Phil M.
OP
Developer · Staten Island, NY · Member since 2009 · 88 posts · 9 votes
16y
I see a lot of cons to having a buyers agent in the Anyone use a Buyers Agent to offer on REO's? topic. A lot of the cons include:

- Having a buyer's agent, the listing agent may submit your offers to the seller last
- The Listing Agent may not submit your offers to the seller (bank) at all
- Perhaps it makes your offers less attractive to the Listing Agent
- The Listing Agent may give preferential treatment to potential buyers without buyers agents

For REO, do the pros really outweigh the cons in having a buyer agent? Is it a definite necessity for an inexperienced investor?
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Matt Mathews
Real Estate Consultant · yucaipa, CA · Member since 2008 · 233 posts · 109 votes
16y
An Exclusive Buyer Agent as was mentioned in a comment work for Buyer Clients Only-Never Sellers. In order to use the word Exclusive-the agents broker cannot take listings for sale. and must be a member of the National Association of Exclusive Buyer Agents NAEBA.org. In my opinion anyone purchasing property should hire a EBA to represent them exclusively. As a EBA myself, I am contractually obligated under law to represent my buyer clients only-never the seller. I protect your rights throughout the transaction and negotiate your Price and/or terms. Go online and check out their web site and see if they have a referral for your area.
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
16y
Originally posted by Phil Mondiello:
For REO, do the pros really outweigh the cons in having a buyer agent? Is it a definite necessity for an inexperienced investor?

If you're confident that you know what you're doing, don't need an agent to represent your interests, trust that you can negotiate as well as an agent, and can read/understand the contractual documents that go along with REO purchases, then by all means work directly with the listing agent.
But, if you want or need someone to represent your interests and help you through the process, the listing agent won't do that for you.

Personally, I think the best solution is to get your license yourself...then you have the information you need, and have advantages over those who have a buyer's agent AND those who go right to the listing agents.

Btw, many REO listing agents are not allowed to work directly with buyers...they are required by their brokerage to accept offers only from other agents. In this case, you'd need an agent on your side either way...

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Bienes Raices
Orlando, FL · Member since 2009 · 2k+ posts · 282 votes
16y
Having just been through the process, I think it was good to have the realtor there to point out some things about the houses that I might not have noticed as a newbie.

The issue I found is that you have to be aggressive when a seemingly good deal shows up on the MLS, because your BA may not be available to show the house to you for a day or two. I think you have to get comfortable making offers on some houses you haven't been inside of yet.
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