Bank REO 40% rule ?

Question

I wanted to know is it true,  when making your offer you start of with 40% of the asking price?

I mean is this a good rule of thumb for reo flips?

Dell Schlabach · Answer

Seems like a very bad rule of thumb to me. It doesnt tell you anything sbout if its a deal or not. There are plenty of properties that are goid deals above list price. We got one this week that we paid 12,000 over list. Good solid deal that we will mske 20-25k on.

We were in four multiple offer desls this past week on bank owned properties, we got one out of the four. One of the properties had 14 offers, to offer 40% of asking price on these would be silly and a waste if time.

Many properties we look at are not deals even at 40% of list price.

I personslly dont see any logic in offering 40% below list, except maybe on hud houses that have been on tbe market for over 60days, or probate that have been on the market a long time, and you have done your analysis to make sure its a deal at that price.

My take

William Hochstedler · Answer

@John Brown

The wonderful thing about low-balling banks is that there is no emotion.  If you make a ridiculously low offer, they will counter, reject or accept.  If they reject, make a slightly higher one.

The main risk you run is someone coming in and getting it under contract at a reasonable price while you're dilly-dallying way below market.

Other threads here indicate that discounts that deep aren't getting any traction.  We're seeing sales at much higher percentages of asking.

Sarah Ziehr · Answer

Never heard of this, and it sounds like a terrible idea if your intent is to actually purchase real estate.

In my market most REO's sell for very close to the asking price, often times above the asking price.

Diane Stults · Answer

I use a 70% rule based on after repair value and factoring in rehab costs. For example...if the ARV is 250k and it is going to cost 50k to rehab, your offer should be no more than 125k (250k x .7 = 175k - 50k = 125k). If you are planning on wholesaling, you should build in an extra 10%. If you only consider paying a percentage of the listing price and fail to look at ARV and rehab, you run the risk of not making a return.

Account Closed · Answer

@John Brown  everyone here has great insight. The bottom line is you have to offer within what your pockets can afford.  I live in Northwest area of Nj and for the most part I'm a newbie, however, I'm about to close on a home that I got for $9000 below the bank asking price. I'm not saying this is the norm but it can be done. DO YOUR NUMBERS!!!  Don't get discouraged, put your plan in action and move on it. Good luck.

Account Closed · Answer

Hi John,

I believe it's 70%. I offered 70% on the list price and negotiated from there.

Brett Tousley · Answer

Dell and many others are right on the money!  I recently had some new investors straight out of a guru program that wanted to offer 50%-60% of list price without regard to whether it was a deal or not.  Of course most often it would be a deal but not always.  I pulled up a cma of all the REO homes that have sold in the past year in my market and pointed out that they averaged around 97% of sales price to list price.  That was helpful to them and they worked to get a handle on their true numbers.  Shortly after that they bought their first HUD home and successfully flipped it for a profit.

Find that ARV, deduct your rehab budget, costs and desired profit then make your offer and move one.

Ron S. · Answer

Never heard of that "rule" before. It wouldn't even get the courtesy of a response in my bank.

For us, we sell REO at market. The days of REO stigma are more urban legend now than reality, at least in a regular MSA geographic area, and at least for us. If you are in a Podunk village with a population of 1,500 people where there is no data or history to support a particular value or ratio of value you might try this tactic but if you are in any area with any semblance of economic activity, if you aren't planning on paying at or close to market, you aren't going to get the property.

That said, the REO we sell at market, has to mirror the properties for sale at market. If my property is a piece of shined up you know what, I'm going to pay in the form of net proceeds reduction but, if my property looks the same, is in the same condition and has the same characteristics as every other home on the open market, mine is going to sell at the same price the other ones are going to sell it.

I get lowballed every day. Sometimes the agents even preface their client's offer with "Due to it being REO...". I reject. I don't suffer any marketing time in excess of what the others in the area suffer. I don't suffer any list to sale reduction any more than what the others in the area suffer.

So, like others have posted, especially Ned, offer what makes sense to you.

Ned Carey · Answer

@Dell Schlabach nailed it. Offer based on what makes sense to you, not what list price is.

By the way in my 12 years of real estate investing and being very active in forums like this one I don't every recall hearing of this "rule"

Shaun Reilly · Answer

A few years back I heard a lot of people being lazy and just saying they threw out a ton of offers on REOs at half of the list price.

As others have said bad strategy in both directions.  If the property is priced reasonably then you are just wasting your time and on the other side it might be so out of line that paying that price might still be a bad deal.  Not as much these days but a few years ago there were many places that 40-50% of the listed price would have been way over paying.

Put in the small amount of effort to get a rough idea of value and do your offers off of that.

Bank REO 40% rule ?

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