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.