Looking for advice on how to present lowball offer on REO in bad shape

Robert Taylor · 2013-07-28T04:02:22-07:00

I'll apologize right away for the LOOOONNNNGGGG post here, sorry but I was trying to get all relevant info included! Hopefully its a quick read for you! Its funny, I know some of the guys/gals posting here on BP have done all or nearly all of their flip deals starting with buying an REO and have done very well with them. For me, even though I've been buying/flipping homes for a while, I'm just now looking at buying my FIRST REO! I've bought most of my homes to flip through the local sheriff's sale, some directly from the owner (non-REO) and one REO that sat on the market too long so they had an auction. Actually, I have submitted a few offers in the past on REO's but never had one accepted and wasn't really trying that hard on those few, because I felt at that time I could certainly get better deals through the auction, where I felt quite comfortable as well from experience. Anyway, I read through some of the other posts on here, including the "Top 20 Tips on Buying From Freddie Mac". This REO is owned by Freddie Mac. I'll try to sum up all of the relevant facts regarding the property and my potential offer: -This place has been on the market for nearly 3 months in an area where things usually move pretty quickly. -I'm looking at coming in quite a bit below the asking price ($149k), I'm nearly done with my comps and still have to work on my projected rehab budget a bit more, but as of now I'd say that I'd like to get it for under $125k for it to make sense and I'm considering coming in even lower, maybe $110k or so. I'm actually looking to move in when the rehab is done or nearly done and then list it for sale at a high price. If someone really wants it and I can make some great money, I'll certainly sell and move somewhere else, but I'd also love to live there too, its in exactly the spot I want to be and will be a really cool place when I'm done. -Here's why I'm thinking I can get in for considerably lower than the asking-the place has had some major damage to it and is currently totally uninhabitable without a lot of work first. Apparently, at some point after the former owner left the place, some pipes must've frozen or otherwise burst and there was major water damage to the kitchen, which has been completely gutted down to the studs. The house (actually its a condo, a large older house split 10 years ago into 2 side by side condos) has hardwood floors throughout the first floor and they're warped and cupped as bad as I've seen, they can't be sanded (unless someone wants to sand them for about 6 months straight!) they need to be replaced in at least one room and since its continuous wood into the other room and hallway/entryway, all the wood on the first floor needs to go for appearance sake. Upstairs, I'm not yet sure if plumbing repairs are needed (if pipes did freeze, its likely) I'm coming back through with a plumber in the next few days to fully assess the plumbing damage. -The house (condo) needs more than the "average TLC" that nearly all REO's seem to need, lots of wall patching and other odds and ends need to be taken care of in every room. -As I mentioned, its actually a condo unit, someone took a 1920's 4,000 sq foot tudor and split it right down the middle into 2 condo units. In the area, this has been done a fair amount here and there but I know from experience that banks are sticklers about these kinds of "condo complexes" where its 2,3,4 units, they really want to see that there is a real, legal condo association set up just like you'd do for a 30 story highrise condo or a 100 unit condo complex. I talked to the neighbor to see if they had anything set up like that, with a president, VP, tres and secretary, rules, INSURANCE-etc, and he just had a blank look on his face! I'll take that as a NO! I know that last year when I rehabbed and sold a condo in a 4 unit complex, the bank we have our credit line through was all over us about getting them copies of the condo association bylaws, etc and most importantly-PROOF OF INSURANCE for the "common areas". Apparently, this 2 unit complex has no such association set up at all and the neighbor didn't seem the least bit concerned about it either! -The roof will need replacement soon, some of the shingles are already curling up pretty good and while it could probably at the very most hold out for a year, it should really be replaced asap, certainly before another wonderful WI winter hits! I'd estimate it as a $10k job for a tear-off and reroof, its a big house but a real simple roof and I have some guys that do a great job for low rates on roofs. The neighbor said he'd be all for replacing the roof and that the former owner of my unit just didn't want to kick in a cent for any maintenance and certainly not half the cost of getting a new roof! The whole outside of the place looks dingy and unkempt-not falling apart, just dirty. It needs a real cleaning, it has ugly unkempt vines crawling up the sides, etc. Even the tiny patch of lawn it has could greatly benefit from an application of crabgrass/weed killer! -The only real "plus" for this place is the location, its in an area that's always hot and sought after in our metro area, although its not in the best part of that hot area, if I ranked it 1 to 10, I'd give it an 8 for location. -My offer would be a cash offer, NO contingencies at all, could close in 14 days or sooner if title work is done, have proof of funds, etc. Also, from the top 20 tips article, I'd follow the other rules like making my offer good for 14+ days and I'm buying it as an investor, even though it could very well end up being owner-occ, I want to keep the option open to sell it as I mentioned. So, thanks for reading through all my typing, here's where I need some advice-how or what do you all suggest for me to do to try to get all of these shortcomings across to the seller (I'm assuming that offers are actually being accepted/rejected/countered by a 3rd party asset manager) to get the point across that NO ONE is likely to be buying this place anytime soon and they're best off taking a nice cut off the price and selling it to me? I see in the top 20 tips list, he mentions including a cover letter, although some other commenters disagree with that-any opinions on that? I'd think that the cover letter would be a great place to state my case as to why this place is a basket case as it sits now and why they should be darn happy anyone would even make ANY offer!! Also, if I would go with a cover letter, how about a few pictures as well, integrated into the cover letter, showing things like the gutted kitchen and whatever other awful scenes I can find in there? THANKS!!!

Andrew FidlerBusiness Member

Real Estate Broker · Toledo, OH · Member since 2011 · 384 posts · 434 votes

13y

Morning Rob-

You are referring to this deal as a two unit condo with no association or bilaws in place...this mean you are really buying a duplex/twinplex and want to sell each side to different owners in the future?

Someone else will have to comment on creating a "condo association" to be able to sell both halves of the building and having both halves pay for the overall upkeep and maintenance. I am a foreclosure buy-hold-rent guy and when I do sell its sfh directly to the new owner and I hold the note.

Thoughts- water damage and an intended retail sale as an exit plan makes me nervous you will have to disclose damage and have a mold inspection conducted. A bit of unknown risk there. Regarding the hardwood- I've repaired it warped into a series of road bumps several times...if you rip down the peak of the warp with a circular saw the floor can be re-nailed in place. Sometimes if its localized damage I can refinish the floor and have some discoloration where we repaired...sometimes we have to put vinyl or carpet over it.

I'd like to hear your scope of the upside on this house...it sounds like the place may just need a full demolish. My cheapest deal is a $500 free-and-clear 1200 soft 3/1...I sunk $18k making it sect 8 ready...I could have purchased two good foreclosures for that price and learned to limit my appetite for really wrecked properties.

Ok- regarding bidding on this place, no real magic in my experience...I would condense your list to a single page of asking price (minus comps if its above the area but I doubt that in this case) and then itemize the repairs in each area of the house...roof to foundation and price everything high retail and worst case. You will come up with a $80k net value after this perhaps. Hand that summary in with your bid of $80k and see what spin FMHA puts on it.

With your terms being quick and simple and cash they will give you a counter. If you have an asset manager who just wants to move on to the next property then you may have given them the information needed to counter you at $95k (plan on being countered, I don't see straight acceptances these days).

So it will roll one of two ways: 1) they counter you something reasonable and you narrow the gap and take the place. 2) they come back $5k under asking, you inform them they are on crack and you thank them and ask to be notified when they want to sell the house for its actual value. (Move onto the next deal...maybe they call back six months later and want to talk or maybe you check title transfers in the paper and are in awe that somebody paid asking price for it)

I recommend you carefully ensure there is some psyco upside on this place because you WILL find something you can't foresee smacking your budget in any foreclosure (In my area I get collapsed water lines from the street...$1500 fix and that's with me cutting my contracting costs to the bone). With a house with this much damage you may end up with five of those and wish some other young pup bought the money pit.

[email protected]419-410-3836

LaPlante Real Estate

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Robert Taylor

OP

Broker, Investor, Property Restorer · Fox Point, WI · Member since 2012 · 288 posts · 120 votes

13y

Thanks for the detailed response, I guess I should've been clearer on the property itself, maybe my fingers were just too tired from typing all of that! It already was split into two separate condos, about 10 years ago. The REO listing I'm looking at is to purchase one of the two units. That one unit was foreclosed on, the other unit is not for sale.

As far as the condo association goes, my point was that its just another negative that I'd like Freddie Mac to take into consideration when they look at my lowball offer. As I mentioned, its based on my experience in selling a similar condo unit I rehabbed last year, that "condo complex" had four units total and luckily for me they had a real honest to goodness condo association set up with a prez, VP, tres and secretary, bylaws written up by a lawyer AND (this was what the bank was especially interested in!) they had INSURANCE for the common areas, etc. Now when I look at this current REO, I see the total lack of a condo association as another big drawback for this property because if the buyer finances it or even uses it as partial security on a line of credit, their bank is going to want to see the condo association documents if they're anything like my bank and the lender for the buyer I sold it to.

I'm trying to get the point across to Freddie Mac that if they get an offer higher than my cash offer from someone that's financing the place, they're likely going to run into a brick wall when the buyer's lender asks for the condo documents!

I've been doing the rehab and flip biz long and often enough to be confident in my numbers on the rehab costs. I've done several rehabs where I took an entire old house down to the studs, rejiggered the floor plan, etc, so this project isn't anything I haven't taken on before. I'm a realtor as well, so I've run every possible comp on this (plus I've lived right in this area for most of the last 20 years, so I know it like the back of my hand!) and I'm confident of all of my numbers, I'm getting pretty good at calling the numbers!

My real question again is what's the best way to get my various points across to Freddie Mac that this place is a disaster inside that 99.99999% of buyers will run, not walk away from as soon as they get inside! (except of course, someone like me!) The lack of a condo association is another big downer in my mind for the reasons I just mentioned. What is my best way to get this across to them so my lowball offer doesn't look so bad after all?

I'm still leaning towards the cover letter with pictures of the interior mess integrated in to the letter. Any other ideas?

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Andrew FidlerBusiness Member

Real Estate Broker · Toledo, OH · Member since 2011 · 384 posts · 434 votes

13y

So what is the status of the other side- occupied by good people who are caring for both sides and are thrilled you are involved and can't wait to sign a reasonable agreement so they get a good cooperative owner on the other side?

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Andrew FidlerBusiness Member

Real Estate Broker · Toledo, OH · Member since 2011 · 384 posts · 434 votes

13y

I closed a similar deal this March, a geodesic dome house on 6 acres. My wife wanted us to move I to it so you can imagine there was pressure at the highest level to get the deal.

Listed in July 2012 for $160, I went through all the motions evaluating the deal and determined it was un-mortgageable since there were no comparable properties and arranged for a line of credit to take the place. I presented a similar hard-luck no-frills offer with disclosure of the difficulties facing the sale from their end.

My offer was countered about $10k under asking and we watched the place.

The property was reduced a couple times, around $129k asking I renewed my offer of $75k and was spurned again. Two buyers came in with $120k offers and we're accepted, property moved pending and I shelved the property as a lost opportunity. December 20th or so I got a call from the listing agent, both buyers fell through and the property was headed to auction...if we could pay a bit more then we could have it. I got the place for $92k.

Moral: no matter how much the wife (my real boss) pushed me, I couldn't make the bank (HSBC in this case) see to reason that mine was a good price until they'd hit the wall a few times. Even then it depends on how much you WANT the deal. In my case this dome house was 1/4mi from me and is fully wooded while my acreage is all farm land. We wanted the place badly so we prevented it from going to auction and paid $92. Who knows what it would have sold for at auction.

I suspect you will walk the same road.

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LaPlante Real Estate

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Robert Taylor

OP

Broker, Investor, Property Restorer · Fox Point, WI · Member since 2012 · 288 posts · 120 votes

13y

I talked to the people next door yesterday and yes, they seem pretty decent. This is in a fairly upscale area, so this place kind of sticks out like a sore thumb, being pretty dingy and unkempt looking. Before I even asked about the condo association I asked about the roof (which is in need of repair soon, maybe a year left at best and should really be done before this winter) and he said he was all for it and that they'd tried talking to the former owner of my side about it but of course he/she had no interest, they couldn't even pay the mortgage, let alone pay for half of a new roof. I have a couple of roofers that do a great job for less than calling anyone out of the phone book or whatever, which he liked to hear too, so I also asked if we each kicked in a little more for some exterior freshening if he'd be up for that and he was game for that, too. I think he was happy to hear that someone that would want to make the place nice again might be moving in.

I wouldn't be shocked if you're right on about getting countered at some amount close to asking, I'd say that's what I'd be 80% sure would happen, that's why I'm hoping for someone to come through with any other ideas here. The one thing I'm still hoping for is what I'd call the "REO Roulette". I'm always looking at comps for my other flips and for when I take on the occasional buyer or listing and I always make a point to look at sold REO's . What they sold for vs. asking and if there were any markdowns as well, plus how long they sat on the market, too. I'll say the same thing I've seen others say here on BP, its sure hard to find much rhyme or reason to what they'll sell any particular REO for. I'll see them in the same close area, nearly the same dates where one goes for well under asking after only being on the market for 30 days, then there's another one 2 blocks away that sat for 130 days or whatever and sold for right around asking, no markdowns. Or sometimes I've heard other RE people locally talk about a certain house that had a deal fall through and that now the bank will "give it away" because they lost a deal and just want it gone, yet I'll see others that if you look in the mls history, they may have had even more than one deal fall thorugh and the bank still holds out, where on others its vice versa. That's why I call it the REO Roulette, I can certainly find no rhyme of reason whatsoever on any particular house as to what it will sell for, other than those that are obviously priced to sell quick from the start and you know they'll go quick, probably with multiple offers and for over asking.

As far as how "bad" I want this one, not bad at all! I actually have another one only a few blocks away I'm also interested in for the same purpose, to rehab and most likely live in, although I'd probably list it high and see if anyone takes it. One thing that's kind of hard to explain here is that this is an area of Milwaukee that's always hot, its upscale, I wouldn't call it "trendy" because its always been the "cool" area of the metro area to live, so this is the type of area that if you rehabbed a place and made it a really slick place for someone to live in, there's a good chance someone will come by and overpay a little for it. This isn't just another suburb with acre after acre of cookie-cutter subdivisions with cookie-cutter houses or McMansions or whatever where you can honestly pull up 20 true comps for any given house.

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Uwe K.

Milwaukee, WI · Member since 2009 · 203 posts · 50 votes

13y

From my experience, the seller banks don't give a rat's behind about your reasons you spent 40 hours on why this should sell for less and is severely overpriced. Although I am not investing in hot places, more low income, I think the banks are all the same. The bottom line number counts, and they don't care about the buyer. At best, they listen to the listing agent, but usually only after they ran into that aforementioned wall a few times.

A couple of years ago we bought a SFR. It seemed they got three listing agent opinions at the time, with the highest list price recommendation being $94,000 or so. They had it listed at around $50k, I think, then dropped in $5k at some point. After a long time we got to purchase it for $27k, which was even a bit more than the limit we set.
But it took months to get to that point, and the bank didn't care about what we had to say or the listing agent (he knew the local market and that it was overpriced).

You're just dealing with some pencil pushers who follow a script or flowchart, and nothing changes their mind.

Curious also about what area in Milwaukee you're talking about.
Besides that, personally, I would not buy a property like that (for myself or investment). Too many potential problems if two parties having to agree on certain things like a roof replacement.

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Robert Taylor

OP

Broker, Investor, Property Restorer · Fox Point, WI · Member since 2012 · 288 posts · 120 votes

13y

Thanks Uwe, unfortunately I'd guess that you're likely correct on that. like I said in my last post my experience being a broker and looking over hundreds or even thousands or REO sales, what they sold for vs asking, how long on mkt, price reductions, prior deals that fell through and on and on, I sure can't find any pattern to them at all! Maybe there might be more to learn when you're talking about a smaller, local bank that holds it paper and gets stuck with some REO's, they might be a LITTLE easier to predict.

Yet in the case of the big banks and Freddie and Fannie, who knows what's all involved. Especially with the asset managers involved as well, it passes through so many hands, who knows! I'm still holding out hope for anyone's advice otherwise, but hope is fading a bit! I'm still planning on giving my "cover letter with integrated pictures of just how awful your property is!" idea, based partially upon the 20 tips for dealing with Freddie article.

Uwe, the condo is on the east side of Milwaukee, 1/2 of a block off of Lake Drive, 1 block from Lake Michigan, just south of the Shorewood border, a very nice part of the east side. For those who don't know city of Milwaukee real estate, Milwaukee is a pretty big city area-wise for its population and there are nice, upscale areas of the city in several different areas, but the priciest residential homes are on the east side of the city near Lake Michigan, the closer you get to the lake, the pricier it gets! This place is a block from the lake, if you get much closer you start talking about $1M and up houses on the lake, which may not buy that much in LA or NYC, but its pretty pricey for this metro area!

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Dawn AnastasiPro Member

Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes

13y

Originally posted by Robert Taylor:

Uwe, the condo is on the east side of Milwaukee, 1/2 of a block off of Lake Drive, 1 block from Lake Michigan, just south of the Shorewood border, a very nice part of the east side.

That is a really nice area! Everything by the lake is generally more expensive and especially "Lake Drive".

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Robert Taylor

OP

Broker, Investor, Property Restorer · Fox Point, WI · Member since 2012 · 288 posts · 120 votes

13y

Hey Dawn, did you look at your little profile box now? One more post and you're at 1000 posts-better make it a good one!

Yes, you're correct, its a great area, I've lived somewhere on the east side for most of the last 22 years, wouldn't want to live anywhere else, although I've yet to make it up to living ON Lake Drive, maybe with enough hard work and good decisions, I'll get there sooner or later, hopefully sooner! That's part of my attraction to this dump, I could rehab it just how I want to and make a nice place, sort of targeting a younger to middle-aged professional crowd that has some extra money to burn. Maybe someone would take it for my high price and if they don't, I'm more than happy to stay on and live there until I'm ready for Lake Drive (or at least the next step along the way to Lake Drive!!)

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Looking for advice on how to present lowball offer on REO in bad shape

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