Techniques: Getting the bank to accept your offer

Techniques: Getting the bank to accept your offer

Real Estate Investor · CA · Member since 2009 · 19 posts · 1 vote

I'm sure there are a few posts for this floating around, but I wanted to bring it up again and open up some ideas.

How do YOU get the banks to accept your offer, either short sale or REO?

My first (and only, to date) investment property was a 4 year-old house owned by the bank. I jumped at the opportunity to own a near-new house as a rental in an up and coming neighborhood. The list price was $119,000. I offered $101,000, and eventually accepted an offer for $107,100. The house was worth approximately $155,000, not too bad for my first time.

I did this all wrong. Knowing what I know now, I would have done some things different. As soon as you walked in this house, there were some obvious problems with the house, MOLD being the first one. I feel if I had taken pictures (lots of them), and had a mold inspection done on the spot with proof that the home had mold, and submitted all of that evidence to the bank with an offer of say $85,000, I just might have gotten it, or gotten a good counter offer way south of my actual accepted offer.

What do YOU do? Test for mold? Test for lead paint? Get several contractor estimates to fix it up, and submit the HIGHEST one, knowing it won't actually cost that much? What are the pros doing to consistently get the bank to become very, very motivated and accept an offer much lower than their asking price?

Chime in!

Adam

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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15y
Originally posted by Alex K.:
A question for J. Scott:

An offer with no inspection contingency means you have either spent a lot of time inspecting the property yourself or you are taking a big risk. If you spent a lot of time, that will add up to a big waste of time with a lot of unaccepted offers. If you don't take the time to inspect each property in the pre-offer stage, you could get stuck with major hidden problems. How do you avoid the risk and/or time wasting?

First and foremost, remember that you always have a day or two (or potentially many more if the listing agent is slow) between the time you get verbal acceptance and the time you have to sign the addendum and turn in your earnest money. You can always use that time to do more detailed inspections and if you find something you don't like, you can back out.

Not a good practice to back out of deals after they've been accepted with no contingencies, but if you use this option very sparingly, it gives you a big advantage.

That said, you still need to be able to do basic inspections and ballpark repairs costs.

A few things that help me:

- Most of my rehabs tend to be at-least full cosmetic, so I'm replacing all flooring, all light fixtures, all plumbing fixtures, all appliances, cabinets, etc. Therefore, I don't much care about whether these things are working or not. I know that for a typical property I do, a full interior cosmetic rehab runs about $15K, so I budget that -- if it turns out I can save some stuff in the house, I save some money, but I don't expect it.

- In terms of rough electrical, plumbing and HVAC, I tend to use some general rules of thumb with respect to age and building materials:

o For electrical, all my houses are less than 30 years old, so unless I see evidence of major electric issues, I assume there are none (and there never have been).

o For plumbing, assuming the plumbing pipes are not made from a substandard material (like Polybutylene) and assuming I don't see anything that indicates a major plumbing issue, I assume there are none. If there is Poly, I will budget to replace it, regardless of whether there appears to be an existing issue. And as for finding surprises with plumbing, this is going to happen sometimes. In fact, in the past 3 houses I've done, there were burst pipes that I didn't know about. But, even if you have to run a whole new main line or repair a major burst pipe, you're probably not looking at more than $1000, so it's really not too big of an issue (especially since I always assume an extra couple thousand to be conservative.

o For HVAC, if the unit appears to be older than 15 years, I assume it needs to be replaced. If the condenser is gone, I assume the system needs to be replaced (since it can be tough to match coils from existing systems). If the condenser is there, looks clean, the furnace appears clean, and there are no obvious leaks from the furnace, I will assume a couple hundred dollars to clean and maintain the system. This is one of the bigger risk areas if you don't have an inspection, as a new HVAC system can run $3-4K. Worst case I'll bring in my HVAC guy to take a look *AFTER* the contract is accepted but before I sign it.

- For roofs, I've gotten pretty good at telling if they need to be replaced, and if it appears to be older than 15 years, I budget for it. If it turns out the roof can be saved, I just added to my profit.

- Obviously, structural issues are concerning, as they can be expensive. I've gotten good at identifying potential structural issues (cracks in foundation/sheetrock, doors that don't close, bowed walls, etc), and if I see a potential structural issue, I won't put in an offer without a due diligence period to get my engineer out.

Based on all that above, it's hard to get into too much trouble, assuming you are reasonably adept at estimating, can identify potential big issues (structural, specifically) and are conservative in your estimates.

The worst thing that will happen is that being conservative will tend to drive your offer price down, and you'll miss out on some deals that you might have offered more on had you gotten more inspections.

That said, I think the tradeoff is worth it. I can inspect and estimate a rehab in about 10 minutes these days, and am comfortable enough that I'll put in an offer with no contingencies just based on that.

But again, being conservative is key.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    15y
    Originally posted by Adam Smith:

    I know you are a flipper, whereas I'm buying and holding, but getting back to making a "clean" offer, what is the formula that you use to do so?

    First, the amount of the offer has nothing to do with whether it's a clean offer or not. I can offer $100 on a $100,000 house, and if there are no contingencies and I put down the full amount in earnest money, it's a clean offer from my perspective.

    But, the amount of the offer is very much going to depend on your goals. Like you said, the formula for determining an offer for a flip is going to be very different that the formula for determining the offer for a buy-and-hold.

    For a flip, I use my "Flip Formula" to determine my maximum purchase price:

    http://www.biggerpockets.com/renewsblog/2010/03/10/determining-maximum-purchase-price-mpp/

    For a buy-and-hold, I'm going to run the numbers on cash-flow, cash-on-cash return, long-term IRR, etc to determine what the maximum investment I would make is. From that maximum investment, I would subtract out rehab costs and other fixed costs, and that would be my maximum purchase price.

    In terms of what I offer as a percentage of list price, it will depend on the amount of competition I think I have. If I think there is a lot of competition, I'll make my best offer upfront. If the property has been sitting for a long time with little interest, I may offer 70-90% of my max offer, depending on how far from list I am.

  • Boulder, CO · Member since 2011 · 6 posts · 0 votes
    14y
    Originally posted by Will Barnard:
    There is a notbale large difference between REO and short sales, so with that in mind, offers (and justifications for offers) vary between them.

    As for the main points, both REO and short pays, your BEST chnace of success is a high EMD, all cash offer, no contingencies, and quick close. In addition, many banks these days have become aware of investor wholesalers and strategies to get around the no assignment clauses. As such, when I make an offer now on a deal I plan to take down to rehab and flip (rather than wholesale) I also put in my offer that I am willing to accept a 30 day deed restriction and I include a corportae letter of intent which states what I intend to do with the property (which is buy it, vest it in my company name, I explain the history of my company, and that I will rehabilitate the home, and then sell for a profit. This gives the bank the comfort to know I am the actual buyer and no creative flips are taking place. I have found that some banks have even been requesting such things lately so I know just make it my standard offer and that is just one more positive that seperates me from the rest of the competition.

    As for justifications for offers (low offers), more often than not, the listing agent has provided the asset manager the key factors and elements of the home to support their suggested list price (BPO) so for you to reiterate this will likely not help anything. For short sales, I believe it is imperative that such justifications are made and backed up with as much evidence as possible (photos, bids for remediation/repairs/replacements/etc.) and of course the hardship letter.

    Excellent advice! Question: Have you had any success employing the above techniques but submitting an offer as an investor during a "first look" period? I know the offer cannot be accepted but does a listing agent keep it handy for when the first look period expires and therefore you are at the front of the line?

  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y
    Originally posted by Will Edington:
    Excellent advice! Question: Have you had any success employing the above techniques but submitting an offer as an investor during a "first look" period? I know the offer cannot be accepted but does a listing agent keep it handy for when the first look period expires and therefore you are at the front of the line?
    Great question. Rather than waste time submitting offers that can not readily be accepted during these owner occupant first timeframes, I usually call the list agent the day before the timeframe expires, ask about the current offer status and if I get info taht no owner occupant offers were in and that investor offers will be accepted as of tomorrow, and I can get a glimpse as to any investor competition already, at that time I write the offer and submit that night so they have mine first.
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y

    One other thing about your question, the other main reason I wait until the day before is so I do not give the list agent too much info (amount I want to offer) so that they have time to shop the deal to their investor list for a higher amount than my offer. By doing it the night before, they have less time for that.

  • Real Estate Investor · Malvern, PA · Member since 2011 · 72 posts · 8 votes
    14y

    What is considered a "high EMD"? Is there a particular percentage that you guys use?

    I'm about to make an offer of $200k on a Fannie Mae property. What would be a good amount for an EMD?

  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    14y
    Originally posted by Ken Sanders:
    What is considered a "high EMD"? Is there a particular percentage that you guys use?

    I'm about to make an offer of $200k on a Fannie Mae property. What would be a good amount for an EMD?

    Many times, REO sellers require cash offers to come with at least 10% in EM. On a $200K property, I think $20K EM is a good amount.

  • Chris ClothierBusiness Member
    Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
    14y

    Ken -

    I would agree with J Scott and add one more thing. If you know you want the property and have your financing lined up in advance, then there cannot be an amount for EMD that is too high (in theory!) I have offered 50% EMD non-refundable and closing in 7 days on a property that I knew someone else was looking at but they were going to offer a slightly higher price than me. I did not want to raise my price and erode the profit margin, so I simply improved my offer from the terms stand point and it definitely caught the attention of the sellers representation.

    Obviously it is not a game and you do not want to gamble, but if you know you want the property and are prepared to close quickly with cash, then go as BIG as you need to on the terms in your contract without offering a price that is so high you eat into your profit margin.

  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y

    Here in CA, a standard expected EMD would be 3%, a good high EMD amount would be as Jason suggested - 10% and as Chris pointed out, so long as you have already cloeared your due diligence, and it is not a short sale, but REO where the bank is ready to close quick and so are you, offer an extremely high amount like 25%, 50%, or even 100% in place of making a higher purchase amount. These little things make your lower offer price appear like the best offer!

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