Real Estate Investing Basics

How NOT To Negotiate an REO Property

Expertise: Real Estate Investing Basics, Real Estate News & Commentary, Flipping Houses, Mortgages & Creative Financing
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This week, I'm going to depart from my usual attempt to be informative and insightful, and instead use this space to share an interesting email exchange I had with a particular non-professional REO listing agent (and yes, I ended up taking a very non-professional tact as well). Actually, I think this post will be informative and insightful, but only as an example of what you probably shouldn’t do as a listing agent or an investor/buyer.

To set the stage, we made an offer on an REO last week. Before submitting the offer, my wife (my agent) called the listing agent to verify that the property was still available. He told us that the property had received multiple offers and that we should submit our “highest and best” offer to the seller.

So we did. The property was listed at $35,000, and we offered $28,500, with $5000 in EM, no due diligence and a quick close.

A couple days later, we received the following response from the listing agent:

The seller has countered your counter offer. Here are the details:

Purchase Price: $35,000 (cash)
Earnest Money: $5,000(certified funds to [LISTING AGENT FIRM] – money orders not accepted)
Inspection Period: 10 days from seller’s verbal acknowledgement date.
Other: Deed Restriction – Buyer may not resell or refinance for greater than 120% of the purchase price within 3 months of purchase.


Please let me know what your buyer wishes to do.

Hmmm…we submitted our highest and best, and the seller came back with a full-priced counter-offer. Okay, the seller has every right to do that, but since I had already submitted my “highest and best,” I wasn’t going to change my offer.

My wife responded on my behalf (*our* behalf actually, as she is 50% owner of the company) with the following:

Thanks [LISTING AGENT NAME},
Buyer will keep his highest and best offer as it was originally submitted. Please note, this includes NO deed restriction, as seller has countered with…

Seemed like a reasonable response. We figured that we might as well mention no deed restriction now, so that we could potentially use that as a negotiating concession at some point in the future.

I fully expected the agent to come back with an indication that the seller had rejected our offer, which would have been fine — we would have waited for another price drop to resubmit.

But, instead, this is the response my wife received in return:

That is a non-negotiable item by the seller. Is buyer really thinking they can fix it and flip it at a value greater than 120% of their purchase price, within 3 months of sale. My bet would be no. The restriction is a small intrusion on the buyer’s rights. I see no good reason for their objection. If you hope that the seller will concede to your offer price, then you should be a bit more flexible towards other terms. Buyer has made no concessions to this point.

WOW! Never expected that!

The listing agent — who we had never worked with in the past — apparently felt it was appropriate to lecture my wife and myself about how we should negotiate our offers, how we should run our business, how we should react to a particular contract restriction and how unrealistic it is that we might be able to rehab and resell a property in under 90 days (despite our doing it many times in the past). In addition, telling us that a particular term is non-negotiable (when we know it *IS* negotiable) doesn’t seem like the best representation of his client.

My wife was livid, as was I. We put together the following response:

First, I don’t know why you are taking such a tone in your response; it is uncalled for, unprofessional and unappreciated. It’s not your place to question my buyer’s ability, intentions or objections and if you’re going to take business negotiations personally, perhaps you’ve chosen the wrong profession.

Second, when you say that my buyer has made no concessions so far, keep in mind that it was your seller who cut off my buyer’s ability to negotiate by asking for highest and best. If your seller wanted to keep negotiations open and continue to expect concessions from my buyer, he shouldn’t have asked for highest and best as our first offer. My buyer is a professional investor and isn’t going to be swayed by emotion – when he was asked for highest and best, he factored in all the concessions he was willing to make into that offer. Your seller has every right to request highest and best if he wishes, but you and he shouldn’t be so surprised when a buyer is unwilling to increase their offer or make additional concessions after that point.

Third, while my buyer appreciates your investment advice, if you are so convinced that it would be impossible for him to rehab and resell in less than three months, perhaps you should just advise your client that this deed restriction is unnecessary. For reference, my buyer has purchased a dozen properties from this seller, and has negotiated out the deed restrictions on many occasions; so we’re quite certain this is negotiable if the asset manager chooses.

After going back and forth a few times, we decided it probably wasn’t appropriate to send that response…

So, instead, we sent this one, which was much more satisfying :):

Thank you so much for your helpful response, particularly regarding the deed restriction! My buyer is relatively new to investing and has only rehabbed/resold 23 properties in the past two years, so he didn’t realize how difficult it might be to rehab and resell in less than 90 days (he’s only been able to accomplish that about a dozen times so far, and admits he may have just gotten lucky in those cases).

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I’ve spoken to my buyer about your advice, and now that he realizes how difficult it would be to rehab and resell in the time frame he’s accustomed to, he re-analyzed the investment given the additional holding costs he faces and realized that he probably offered too much.

So, here is his revised offer:

– $23,000 Purchase Price
– $5,000 Earnest Money
– No Due Diligence
– 90 Day Deed Restriction In-Place
– Close as Soon as Seller Would Like

If your seller questions why we reduced our offer price, please let him/her know that it was based on your excellent feedback and advice to my buyer.

As you can expect, the response from the agent wasn’t pleasant and he actually tried to get us to retract the new offer (my guess is that if he had submitted it, he would have had to explain to the seller why our offer was lower, and that would have made him look bad). But, we had calmed down by that point, so we took the time to politely explain to him that his initial email giving his “advice” was inappropriate for someone representing the seller.

In the end, we ended up having a civil discussion with the agent, and ultimately we’re still on good enough terms that I don’t imagine it would hinder our working together in the future. In fact, in his last email, he said he was going to re-submit one of our bids again to the seller (no idea which one, though).

I’m sure there are those out there who will agree that this agent acted inappropriately. And I’m sure there will be those who agree that I acted just as inappropriately. Most will probably agree that we both acted inappropriately. So, post your comments…I’m curious what those here have to say!

J Scott runs a real estate company that invests in several parts of the country and that specializes in new construction, as well as purchasing, rehabbing and reselling distressed properties. J is ...
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    Glen Wilson
    Replied over 9 years ago
    I find it amazing that you have been able to get Fannie Mae (I’m guessing) to waive the 90 day deed restriction. I have never been able to do that.
    Tim
    Replied over 9 years ago
    As soon as I saw your second offer, I said to myself, “Beautiful.” It’s not the agent’s duty to lecture you or educate you (obviously). He pushed with a little sarcasm, you pushed back in a way that told him that this isn’t your first go-’round. And the readers of your blog and these posts know that this isn’t how you normally roll. Hopefully it taught him a lesson that he’s not as smart as he thinks he is. But, I doubt it. You and your wife make a helluva team. I’m very happy to read of your successes.
    Anson Young
    Replied over 9 years ago
    Interesting exchange for sure, glad you went with the 2nd response. Coming from the other side, we have no worries about a reduced offer making US look bad, but the buyer instead. If it was Fannie/Freddie w/ the deed restriction, those can be sometimes non-negotiable, but I know some people who un-check the addendum or the like and get away with it. Thx for the post J!
    F. Alexander
    Replied over 9 years ago
    good reading. i’ve been investing and flipping, on and off, for 15years and i have just recently stopped being utterly annoyed by the broker-agent “inappropriateness”. i will use your example and continue to take the high-road. cheers, YA
    Anonymous
    Replied over 9 years ago
    Good approach in the end. Definitely a smart idea to go with #2. Entertaining post, Thanks! Reply Report comment
    Anonymous
    Replied over 9 years ago
    Good approach in the end. Definitely a smart idea to go with #2. Entertaining post, Thanks!
    Anonymous
    Replied over 9 years ago
    Good approach in the end. Definitely a smart idea to go with #2. Entertaining post, Thanks!
    Anonymous
    Replied over 9 years ago
    Good approach in the end. Definitely a smart idea to go with #2. Entertaining post, Thanks! Reply Report comment
    J Scott
    Replied over 9 years ago
    Thanks for the feedback, folks… Certainly not a negotiating strategy I recommend, but it just doesn’t sit well with me when someone tries to tell me how to run my business. I most certainly wouldn’t have done this if this had been a larger REO agent, but still not the best tactic. That said, if you read my blog, you know I always talk about the good AND the bad…as well as my own stupidity… 🙂
    J Scott
    Replied over 9 years ago
    Glen – Of the dozen or so FNMA offers I’ve had accepted, about 1/3 of them the asset manager forgets to check the box with the deed restriction, about 1/3 of them I’m successfully able to negotiate it away, and about 1/3 of them the asset manager isn’t willing to budge on the restriction. So, while it’s not easy to get the restriction negotiated out, it IS possible. It also helps to have some leverage. For example, the situations where I did get it negotiated away fell into one of two categories: 1. No competition for the house and it probably would have sat for a long(er) time if I wasn’t going to buy it; 2. The seller was having trouble getting clear title and they didn’t want me to back out of the deal. Under typical circumstances, it’s much more difficult to get it negotiated out…
    The Ronald
    Replied over 9 years ago
    I’m developing a course for Realtors on how to increase the sales of their listings by 25% … knowing about the 10 ways investors buy properties in today’s market when banks aren’t lending. I will add your example in the case studies of “why there are so many unsold listings” (modeled after “why the jails are full”). I run into at least 2 good examples per week on the contracts we submit. When we have more time, we’ll start requesting some of these listing agents licenses get suspended. We need fewer listing agents, and a higher percentage that are competent.
    Dan Cass
    Replied over 9 years ago
    Hi Ronald, I too would like a copy of the info you’re putting together. Thanks….DC
    Lance
    Replied over 9 years ago
    Hey Ronald, I’d be interested in your course when you get it done. Drop me a line. Thanks Reply Report comment
    Lance
    Replied over 9 years ago
    Hey Ronald, I’d be interested in your course when you get it done. Drop me a line. Thanks
    Dan Cass
    Replied over 9 years ago
    Hi Ronald, I too would like a copy of the info you’re putting together. Thanks….DC
    DeeOhio
    Replied over 9 years ago
    J, really enjoy reading your post. I’m new to investing and I always learn something new from you. Thank you
    Bilgefisher
    Replied over 9 years ago
    I think you played it right. If you deal with him again, he likely will not play games with you. He will deal with you again. Your a solid buyer and he wants his commission. Good entertaining post. Jason
    Dave Gibson
    Replied over 9 years ago
    You did the right thing, JScott. Putting your first response “on ice” must have been a bit difficult, but it was the right thing to do. “What goes around, comes around”…..wouldn’t be surprised at all if you get some business in the future from that same agent due to you taking the high road….wishing you and your wife ongoing success.
    Dave Gibson
    Replied over 9 years ago
    You did the right thing, JScott. Putting your first response “on ice” must have been a bit difficult, but it was the right thing to do. “What goes around, comes around”…..wouldn’t be surprised at all if you get some business in the future from that same agent due to you taking the high road….wishing you and your wife ongoing success. Reply Report comment
    Dave Gibson
    Replied over 9 years ago
    You did the right thing, JScott. Putting your first response “on ice” must have been a bit difficult, but it was the right thing to do. “What goes around, comes around”…..wouldn’t be surprised at all if you get some business in the future from that same agent due to you taking the high road….wishing you and your wife ongoing success. Reply Report comment
    Matt
    Replied over 9 years ago
    Chuckle…I’ve had a couple of rougher listing agents I’ve dealt with but nothing on that level yet…
    Leslie Arnold
    Replied over 9 years ago
    Fascinating post! I loved both your emails, but have to agree that the revised one was probably wiser. Having had the pleasure of negotiating directly with you, I would say you’re an excellent negotiator. That’s something that I’ve always feared, but am getting much better with practice. I find I can be much bolder with email, but have to be careful to not be offensive. Thanks for the helpful and informative info.
    Seth Phillips
    Replied over 9 years ago
    What is most unfortunate in your story is how you gave up on the deal. You emotionally decided to react with indignation rather than trying to make the deal work. I hope your attempts at teaching that listing agent a lesson where worth the potential loss of income.
    J Scott
    Replied over 9 years ago
    Seth – Yes, my attempts to teach that listing agent a lesson were MOST CERTAINLY worth the potential loss of income… That said, there is no loss of income. First, the listing agent in this case needs me more than I need him (not a common thing for REOs these days). He doesn’t do many REOs, and the ones he is selling are the types that need MAJOR rehab — I’m one of the few buyers in that area that buy the types of houses he sells. In fact, if he would have spent 5 minutes looking, he would have seen that I had just purchased the house next door to this one that was selling (both were flooded last year). Had he seen that, he likely would have been a bit more professional and taken me a bit more seriously. Second, after this whole exchange, he resubmitted my offer to the seller without me even asking, so clearly he’s not looking to shut me out of the deal. Of course, the seller came back with the same counter offer, and I told the agent that when the seller is prepared to drop the price 15%, I’m happy to renegotiate. My guess is that when this happens — assuming he doesn’t have another buyer — I’ll get a phone call.
    J Scott
    Replied over 9 years ago
    Seth – Yes, my attempts to teach that listing agent a lesson were MOST CERTAINLY worth the potential loss of income… That said, there is no loss of income. First, the listing agent in this case needs me more than I need him (not a common thing for REOs these days). He doesn’t do many REOs, and the ones he is selling are the types that need MAJOR rehab — I’m one of the few buyers in that area that buy the types of houses he sells. In fact, if he would have spent 5 minutes looking, he would have seen that I had just purchased the house next door to this one that was selling (both were flooded last year). Had he seen that, he likely would have been a bit more professional and taken me a bit more seriously. Second, after this whole exchange, he resubmitted my offer to the seller without me even asking, so clearly he’s not looking to shut me out of the deal. Of course, the seller came back with the same counter offer, and I told the agent that when the seller is prepared to drop the price 15%, I’m happy to renegotiate. My guess is that when this happens — assuming he doesn’t have another buyer — I’ll get a phone call.
    Seth Phillips
    Replied over 9 years ago
    J Scott I find it interesting that the title of your post is “How NOT To Negotiate an REO Property” and yet you continue to defend your tatics. Agents can act legally and ethically and still influence a seller against your offer. If you get into a pissing match with them and than think they won’t you are living in denial. I won’t waste anymore of my time on this discussion because contrary to your post title you can’t admit that there might have been a better way to handle it.
    Tate Brown
    Replied over 6 years ago
    Seth, You seem to have a bone to pick with J. Scott. I understand the point you are trying to make, but I think you are misguided here. J. Scott handled the scenario in a professional and up front manner. Great post J Scott, congratulations to you and your wife! Tactics*** Tate Brown
    Seth Phillips
    Replied over 9 years ago
    Bottom line is when you bring your personal indignation and/or sarcasm in writing into the offer process very rarely will that EVER make you more money. So if proving you are right or smarter or more important is worth the adverse effect on your income go for it. Remember as much as you may not like it listing agents will always control the inventory.
    J Scott
    Replied over 9 years ago
    Sean, Sorry, but you’re off base here. First, if the listing agent acts ethically and legally, how can I possibly lose income by doing what I did? Listing agents have a legal obligation to submit my offers to their client and a fiduciary responsibility to advise their clients when they believe they’ve received the best offer, REGARDLESS of what their personal feelings may be towards that buyer. So, the only way that letter would impact my income is if that listing agent chose to act unethically and if he chose to break the law. Second, as for listing agents controlling the inventory, I believe you have a somewhat grandiose idea of the role of a listing agent. They no more control inventory than a taxi driver controls where people go. Agents are REPRESENTATIVES of those who control inventory — the buyers and sellers. If they don’t represent their clients appropriately, they end up looking for another line of work.
    Joshua Dorkin
    Replied over 9 years ago
    I love it when someone so perfectly puts into words exactly what I’m thinking. I agree completely J!
    J Scott
    Replied over 9 years ago
    Seth — I’m sorry, I didn’t mean to call you “Sean” above…mistype…
    Anonymous
    Replied over 9 years ago
    HILARIOUS! I looovvveeee the sarcasm in the second response!
    Joel Owens
    Replied over 9 years ago
    I can understand both sides. The listing broker/agent probably doesn’t want to make the life of the Asset Manager harder by removing these restrictions I am sure some things get by asset managers and it closes.They get their butt chewed out and you get away with great terms for yourself. I agree they should not have responded to you like that and simply submitted and let the AM make the decision to work with you or say NEXT. I never make decisions for my sellers because you never know what they will do until you ask. The best thing to doing a transaction is focus on an acceptable offer and getting to closing. I deal in the commercial arena with investors that have ZERO emotion. It’s either the deal works or it doesn’t. I know at 30k that broker is working for peanuts and probably won’t clear 1k in commission. That’s why I don’t do residential especially in Atlanta as there is alot of work for little to no money. I think it’s great that you are able to buy on your terms just by asking.The listing brokers loyalties lie with the bank as they want repeat listings and with you they may never see you again.
    Joel Owens
    Replied over 9 years ago
    I can understand both sides. The listing broker/agent probably doesn’t want to make the life of the Asset Manager harder by removing these restrictions I am sure some things get by asset managers and it closes.They get their butt chewed out and you get away with great terms for yourself. I agree they should not have responded to you like that and simply submitted and let the AM make the decision to work with you or say NEXT. I never make decisions for my sellers because you never know what they will do until you ask. The best thing to doing a transaction is focus on an acceptable offer and getting to closing. I deal in the commercial arena with investors that have ZERO emotion. It’s either the deal works or it doesn’t. I know at 30k that broker is working for peanuts and probably won’t clear 1k in commission. That’s why I don’t do residential especially in Atlanta as there is alot of work for little to no money. I think it’s great that you are able to buy on your terms just by asking.The listing brokers loyalties lie with the bank as they want repeat listings and with you they may never see you again.
    Chris
    Replied over 9 years ago
    I liked your second response Scott. It really put the agent in their place. It is best to keep your emotions out of any real estate transaction as you know. Best of luck. Hope you can flip it in 60 days!!
    Stevenson Deisr
    Replied over 9 years ago
    I am a Real Estate Broker in Georgia. Your analysis and response are correct. Were I in your place, I would have sent the stronger response (the one you backed out from). By the way, the listing agent’s fiduciary responsibility is not to the lender. It is to the Seller, that is the person in pre-foreclosure. The lenders have not understood that. If you have seen a Wells Fargo’s addendum you will understand. They think that they own the listing agnet.
    dewayne68
    Replied over 9 years ago
    I loved your last $23K offer and the sarcasm in it … it is put gently and used in a positive light for thank you, it just cost you about $5500 dollars and wisdom of what you overlooked. I would not worry about the loss of income because you did not loose income; you are just back looking for another opportunity. And we all know there are plenty of those these days. They need us a little more than we need them. I have walked for $1000 difference and the auction company said HUD would not budge so we walked. The deal died …. Until the next day the auction house called late in the afternoon and asked if we would still buy it for the $27K which our numbers said was the max we could spend but not the $28K which was HUD’s bottom number. We agreed we would still do the deal so the dead do come back to life. Cash is still King and I believe most buyers that can get financing are Queen.
    Suzan
    Replied about 7 years ago
    Dear dewayne68, Would you please let me know how I can contact you via email. Thank you. Suzan
    Michele Galloway
    Replied over 9 years ago
    J Scott, I think it’s good to have a little fun while you are “working” and I understand how you felt with the response of the agent. What would an appropriate and professional response be to the agent’s first response? Mi
    J Scott
    Replied over 9 years ago
    Hey Mi – Had the agent been a larger REO agent who we really wanted to maintain a strong relationship with, I likely would have responded with something simple, such as, “Thanks for the info…my buyer has chosen to hold off countering the bank’s offer at this time.”
    Adam Negri
    Replied over 9 years ago
    I think the way you handles the REO agent was perfect. I also think it was wise to put your first response in the desk as we have all been told. You exercised GREAT restraint. I have learned over the years that the best way to humble someone is to make money off of them. When you finish this project I would sent a package to this agent as you would and investor looking for money. Make him eat his words. When he sees what you have accomplished you may get more deals without asking. Sometimes your best teacher are those people we dislike the most. Great job Adam Negri
    D Opgenort
    Replied over 9 years ago
    The declining offer is a really good way to call a bluff if you are willing to walk away. Let’s face it – full price as a “counter” isn’t much of a negotiation, so this deal was going nowhere anyhow. Doesn’t the agent sort of remind you of of a teenager who has had his driver’s license for 6 months? They think they know everything, yet they crash often!
    D Opgenort
    Replied over 9 years ago
    The declining offer is a really good way to call a bluff if you are willing to walk away. Let’s face it – full price as a “counter” isn’t much of a negotiation, so this deal was going nowhere anyhow. Doesn’t the agent sort of remind you of of a teenager who has had his driver’s license for 6 months? They think they know everything, yet they crash often!
    Ms Williams
    Replied almost 7 years ago
    When submitting offers to the listing agent did you do it via a purchase agreement or was it just a typed e-mail memo with a few lines?
    J Scott
    Replied almost 7 years ago
    All offers must eventually be on an officially Purchase & Sale Agreement. I highly recommend writing up the contract yourself to save the listing agent the work, but if for some reason you can’t do that, you can provide the terms of the purchase the listing agent and let him/her write it up. That said, if you’re not comfortable writing up your own contract, you should have a buyer’s agent who can represent you and help you through the process.
    quinney
    Replied over 6 years ago
    Thinking to buying . Reo home but not to flip but live in its listed for 45k, but was taken off about a year ago at 25k, could i start with that as my offer? And do i need to get a realtor involved or could i do it myself?
    Frank Smith
    Replied over 4 years ago
    Leave your ego at the door