Whenever I am working with a buyer and we are looking at bank owned (or REO) properties, the question always comes up:
“How low of an offer can we make on this foreclosed house”?
Just like many other things in investment real estate, it depends. Typically, a “normal” offer will be 95% of list price. I have seen offers accepted as low as 75% of list price. Much below that and the bank thinks you are simply low balling them and most often they will not even respond to your offer. Here is a list (in order of priority) of how I determine how to answer the above question when buying foreclosures:
- Most often, time on market drives both the price and flexibility of the bank when looking at foreclosures. There are two components under this category that determine how aggressive you can be when making the offer on that bank owned property:
- Total Length of Time on Market-In other words, how long has the bank been trying to sell it. The longer it is on their books, the more opportunity you have to make an aggressive/lower offer.
- Time Since Last Price Decrease-This is related to the above Time on Market in that the longer it has been since the last price decrease, generally the more aggressive you can be with your offer. The converse is also true. For example: even if the property has been on the market for 9 months, if the price dropped 2 days ago, the bank is going to be inflexible when looking at offers much below the new list price.
- The current list price relative to the market. The banks have Realtors perform BPOs (broker price opinions) on the houses periodically. If they just recently received a BPO and you make an offer at 75% of that BPO value, they are typically going to be unwilling to negotiate the difference. The number of REOs in a particular neighborhood may also help you as the bank realizes there are other opportunities out there.
- How strong is your offer outside of the price? Leaving out contingencies, setting a closing less than 30 days out, putting down a larger earnest money check, paying cash, or declining the property inspection are all strategies that make your low-ball offer more attractive.
- Often, the listing agent will help or hurt your chances to make a low offer. If the property is listed by a seasoned REO agent and it has been on the market for a long time, the agent will sometimes encourage the bank to simply dump the property. Maybe they have not received another offer on it in months or maybe the agent thinks the bank is keeping the price too high.
- Your buyer’s agent can help or hurt you. An inexperienced investment property agent can hurt your chances of successfully buying a foreclosure at a larger discount. They do not understand the above 4 pricing variables.
- Although I have never tested this, there is a belief that banks will be more flexible at the end of the month when they are trying to hit their numbers. They may give you a great deal simply because they need a few more houses in the sold category to look good to their bosses.
Ultimately, using a seasoned investment real estate agent is really the key if you are going to be a serious investor in bank owned properties. There are so many moving parts and dead ends with foreclosed properties, it is important for the buyer to have someone in their corner that can mentor and advise them.