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REO List Price Doesn’t Mean Squat Anymore

by Ken Corsini on October 17, 2012 · 14 comments

  
REO listing price frenzy

I remember not too long ago when banks set the list price of an REO foreclosure at a particular price, but with the anticipation of settling on a lower offer.  Investors built entire models around bidding at a certain percentage below asking price knowing that a predictable portion of those bids would get accepted.  This was especially true for HUD properties where many investors knew the exact formula for minimum bids that would be accepted by HUD. It seems those days are long gone.

In recent times, asset managers and REO brokers have changed their strategy. Rather than setting a high price and waiting for that one offer to come in somewhere close, they set the asking price low and let the frenzy begin. With thousands of investors competing for (declining) inventory, listing agents know that a lowball asking price will create a lot of interest and competition from multiple buyers.  I suppose the theory behind this is to create a perceived urgency and auction-style mentality amongst the multiple bidders.

As a very active buyer, I honestly cannot remember the last time I bought an REO property where the property sold for less than asking price or there wasn’t a multiple buyer situation where the listing broker came back and asked for a “highest and best” offer. Just yesterday I put an offer on a property for $9,500 over asking price thinking that this would certainly be high enough to beat out other bidders.  I found out this morning that it went to another buyer who bid $12,000 over list price! Did the asset manager really expect this house to sell at list price? Not a chance.  It was very clear that this property had been listed intentionally low in an effort to generate an auction style bidding war … and to their credit, it worked.

I’ve talked to a number of investors and buyers over the last several months who have been discouraged by the inability to get property under contract.  I think most of these folks simply haven’t come to the realization that the game has changed.  List price is increasingly becoming the starting bid, not a suggestion of value.

I’ve said it before – offers should be made based on your formula and investing strategy. If it makes sense to bid some amount over asking price, by all means bid above asking price.  It doesn’t necessarily mean you are getting a bad deal.  Most banks expect you to bid the property up. Understanding how your real estate market has changed and is changing will help you be more competitive and successful in your attempt to acquire real estate investments.

Photo: annethelibrarian

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{ 14 comments… read them below or add one }

Dale Osborn October 17, 2012 at 9:18 am

If the banks would just eliminate the real estate agents in the middle – investors would fix the inventory glut of REO homes. Many agents are taught to try to get a higher price for the property by asking for the highest and best offer even though there are no multiple offers. They want to stir up the so called “feeding frenzy” to get a higher price so they can get a higher commission. When an agent comes back to me – I explain I do not play those games. By delaying the sale another offer has time to come in and take you out even though it was not there to begin with. Shyster that operate like that should have their license taken away.

Dale.

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ECFahrner October 17, 2012 at 12:49 pm

It is the FIDUCIARY DUTY of an agent to his/her client, to get the highest possible price and the best possible terms for the client.

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Dale Osborn October 17, 2012 at 2:22 pm

Is it Fiduciary Duty or Commission that is the driving force?? Why use smoke & mirror tactics as a way of doing day to day business??

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ECFahrner October 17, 2012 at 2:48 pm

As an investor who is – presumably – attempting to maximize his profits by investing in real estate, you don’t have a problem with real estate agents earning a fair commission, do you?

Oh, wait… “If the banks would just eliminate the real estate agents in the middle…” I guess you DO.

Dale Osborn October 17, 2012 at 4:01 pm

Main item of contention is shyster tactics they are taught to use as an agent like “I have multiple offers”, when they actually do not – then another offer does come in bumping you while agent was negligent in his/her FIDUCIARY DUTY! I have submitted offers for REOs and the stumbling block in the middle did not submit them as the commission was not high enough for him. Where does that fall when discussing FIDUCIARY DUTY that you bring up??

Dale

ECFahrner October 17, 2012 at 8:09 pm

SOME do use shady tactics. Most don’t.

I don’t know HOW many times buyers and/or their agents asserted that I had no other offers on a property – when they were all right there in my folder.

ECFahrner October 17, 2012 at 8:12 pm

In passing, it seems to me that that any number of people who make offers that end up ultimately being rejected, seek someone to blame.

Dale Osborn October 17, 2012 at 8:40 pm

Under the FIDUCIARY DUTIES as well as the Code of Ethics – aren’t all offers supposed to be submitted to the Seller? I was licensed for 10 years 2 with a brokerage and 8 years with my own office. I turned my license in as I did not want to be associated with many of the agents and the way they conduct business.

Jeff Brown October 20, 2012 at 12:18 pm

Dale — With all due respect, do the math, and then repeat what you just said.

If an agent is so bent on upping his commission dollars, here’s how it works in real life.

By getting the buyer to pay $10,000 more than the investor was thinking, the gross commission to the brokerage firm rises an earth shattering $300. The agent will normally get 50-90% of that amount. Does anyone really think an agent is gonna go through all that effort for a lousy extra $150 to $270?

The whole ‘agents boost price to get paid more’ was laughable when I was licensed in 1969, and remains so today.

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David October 21, 2012 at 4:43 pm

As a REO agent myself, I would suggest that you go directly to the LA and let them represent you. Another tactic is find out who lists most of the REOs in the area you looking for and take a few to lunch, get to know them on a personal basis. LA’s have a fiduciary responsibility to our seller to get the best price we can for the listing. Money motivates, and double ending a property makes us twice the money. If a LA has a property and has his own buyer who do you think submits the best and final last?

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Melodee Lucido October 17, 2012 at 9:20 am

Great post Ken and valuable info. I live in Santa Barbara Ca where the props do get bid up almost to retail and sometimes above—just crazzzzy.

It’s up to us to know our market and be wise in our offer making. It does seem like the margins are smaller as a result of the game you mention in your post. But I do hear that some are still finding some deals. Investors I’ve spoken to say they remember the day . . . now they’re happy to get half of the margins they were used to “back in the day”.

Success to you

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Mike Woodward October 17, 2012 at 9:21 am

Thanks for the article Ken. It’s always good to hear what’s going on in other parts of the country….especially with how quickly things are changing in real estate right now.

I invest in a relatively small area (compared to large metro areas) in east TN so I don’t experience the same dramatic fluctuations that some places are seeing. Right now the REO bidding pattern is pretty much the same as it’s always been. I’m closing on a project that was an REO listed at around $86k. The numbers from my analysis told me that I needed to stay under $80k to make it a viable project. Long story short…they rejected someone else’s offer of $75k and accepted mine at $79k.

My theory (guess) about what might be happening in your area is that you have an REO “sellers” market that’s developed from an over-supply of investors. Hopefully your market won’t get so saturated with investors that the opportunities dry up. Watch out for an investor’s “bubble”. Good luck to you!!

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ECFahrner October 17, 2012 at 12:56 pm

It is important to remember that the client sets the price & marketing strategy, NOT the agent. The competent agent provides information and advice.

I don’t know how many times – when Buyer’s agents tried to pick my brains for insight on where to come in at price-wise on an offer – that I replied, “you’re an agent: run your own comps and trust your own judgement.” Seems to me that that the agents who went straight to the kill and offered their ‘highest and best” right out of the chute were the successful ones.

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Karen Rittenhouse October 25, 2012 at 8:46 am

If you want to be successful as a real estate investor, asking price is NOT the important thing.

As you stated, you MUST have your own formula and STICK TO IT.

If the numbers work for you, proceed. If they don’t, move on.

Thanks for your post.

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