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How do I negotiate with banks to purchase REO properties?

Banks seem to want full market value for properties they have acquired via foreclosure. How can I negotiate to purchase the properties at a substantial discount?

Public Comments

1. They aren't going to negotiate with you. You need to have a broker do it.
2. They will negotiate with you...you just hafta have a lot of cash...most bank don't want to hold properties, they are in the banking bizniz not R.E. If you have a substantial percentage of the homes value in cash they will drop there price. Your always better off getting a home in the pre-foreclosure stage, i.e. N.O.D., then you can deal directly with the current owner by working out a deal to help them get out before they get foreclosed and your also in a better position to negotiate with the bank, because they know they wont receive anything from the current owner if it goes to foreclosure. Check out my yahoo 360 page for more info.
3. Typically, banks will not negotiate on REO properties. Their attitude seems to be “my way or no way”. Also, just because it is a REO property does not mean it is a good deal or even a reasonable deal. Occasionally, the highest priced home in a subdivision will be the REO property. And, it might be in terrible condition. My personal experience is that REO’s are rarely good buys due to the price and condition. Instead of focusing on REO (or short sale or foreclosed properties) I recommend that you look for the best deals and, if they turn out to be REO properties, ok. Such bargains, even in the buyer’s market we have in Las Vegas (I am a Realtor in Las Vegas), are not easy to locate. Here is the basic process I go through for finding properties below market value. How I find properties that also have highly motivated sellers is too complex to explain here so I will skip that part in the following. Note that while I will describe how I would find properties in Las Vegas the process should not be too different no matter where you are considering. Also, I will explain how you can do it through public information sources. I recommend that you ignore the financial state of the property (REO, foreclosure, short sale, forced sale, etc.) and start from the other end of the equation. Is the property priced at or below the market value based on location, price and condition? To determine the market value, here is the basic process. Note: the websites I have seen that claim to provide market value are EXTREMELY inaccurate. For example, here is just one of the suits against Zillow for gross inaccuracies: http://www.ncrc.org/bestpractices/NCRC_Zillow_Complaint1026.pdf . To calculate the market value of a home you need to know: 1)What comparable homes sold for in the recent past (less than 6 months) 2)What comparable homes are listed for now Use Zillow, or any other source, to look for similar (same number of bedrooms, same square feet ± 5%, similar age, pool, within about a 1/2 mile, etc.) homes sold. Calculate the average $/SqFt (sale price / square feet) for the properties. Multiply this by the home’s square feet and you have a reasonable estimate based on comparable sales. For example, if the home is 1,500 SqFt and the average you calculate is $180/SqFt, the calculation will be: 1,500 x $180 = $270,000. Note: this is all CMAs do and why I do not use CMAs; they are too inaccurate in a market with even mildly changing property values. The next step is to use a site like www.remax.net or www.realtor.com to look at what comparable homes are selling for. Perform a similar calculation to determine the home’s price based on for-sales. Remember that this is based on the asking price for these homes; they will actually sell for less. Next, calculate what homes are typically selling for vs. asking price. This number may be something like 95% or 92%; it is very specific to your local area. You can usually estimate this by averaging what several comparable homes sold for in your area vs. what they were listed for. Multiply this times the price based on the for-sale. For example, if you calculate that the price per square foot based on for-sales is $175 and homes are, on average, selling for 95% of the list price, here is the calculation: 1,500 x $175 x .95 = $249,000. If this price is lower that the comps estimate, then home prices have fallen. Do not rely on zip code averages or city averages; calculate for the specific area in which you are considering buying. Once you have performed the above calculation on several properties, you will begin to get a feel for what is a good price based on size. For the calculations to narrow the set of potential homes, you did not need to visit the home. Now you need to visit each potential home to see each home’s suitability for your needs and its condition. If it is in poor condition and you will have to put money in immediately after purchase before it can be habitable (as many foreclosures require), you need to take that into account. Note also that this will be cash out of your pocket, not financed. With the market value and condition considered, you will have a very small set of potential homes to consider. It now becomes relatively easy to choose the best deal of the set. Notice that I have not considered whether the property is in foreclosure, short sale or anything else because these factors do not define a good deal. A good deal is buying property that matches your personal needs at the best price. Let me give you a real example. I have an out of state client who is looking for a specific property. Searching the MLS, about 550 homes met his requirements. Using software I developed, I reduced the number of homes to less than 50 based on the asking price vs. comps and for-sales and seller motivation. Looking at aerial views and such I was able to further reduce the number to 18 due to the property backing up on busy roads, high power lines, freeway access, etc. Later this week my client will be in town and we will visit each of these homes to determine whether he likes the property and the condition vs. the price. I expect that we will narrow the number to less than 5. Based on more analytics, I will make a recommendation on the price we should offer on each property. I will then personally present the offer to the property owner and their agent for my client’s top pick. By personally presenting the offer I can take the owner through the process of how the offer price was calculated and explain the benefits of selling to my client. If I can’t negotiate a deal that meet’s my client’s goals, next home. If it’s an REO, foreclosure or a short sale, you have to just fax the offer and wait. The response can take 10 to 20 days on either foreclosures or short sales. Bottom line, look for the best deals, not just REO properties. Hope this helps. Eric Fernwood Eric@ISellLVHomes.com http://www.iselllvhomes.com/