Foreclosures 101: Offer pricing
When it comes to making an offer on a foreclosure property, many investors often get caught up in the “How low can you go?” mentality. Since banks can more easily absorb a loss on a property, you might be tempted to do nothing but lowball. At times this is the appropriate mentality, but don’t throw away your common sense.
Like all aspects of a foreclosure offer, if a property has been on the market for a long time, you can take a more casual pace in your negotiation. If you aren’t worried about someone else coming in and taking the building away from you, its easier to justify countering back and forth for a week or two. I have seen this tactic be very affective as a matter of fact. On the other hand, I have also had it blow up in my face.
The biggest negative about dragging out a negotiation is that it gives time for another buyer to come in and outbid you. Two times in the past year I have come to a verbal agreement with a seller on a deal after a lot of back and forth, only to have someone else swing in with a crazy-high offer and get the deal. That’s a bit underhanded for the bank to do, but banks are entities, not people. Their profit and loss margins are all that count. Until the deal is on paper and signed by all parties, the negotiation is never complete. If you come to a point on price where you are happy, and you really want the building, just agree to the deal already. Is it really worth losing a great deal to save $250 on the contract price? Whether you’re dealing with a small single-family house or a large multifamily, the answer is usually “no.”
When it comes to hot foreclosure deals that have just hit the market, your pricing can be even more important. In most multiple contract situations on reo properties, the bank’s agent will request a “best and final” offer from all prospective buyers. to be returned within 24 hours. The trouble is that you can never know whether you are the front-runner or last in line in these situations (of course there is more than the question of price hear as well). It is especially frustrating when you really want the building because you are also confronted with the fact that you don’t want to overpay for the property.
My recommendation in these pressure situations is to ignore the price that the bank listed the property for. Almost every foreclosure is listed under its real market value so these prices are often intended to start a bidding war anyway. The best deals almost always go above sticker-price. Don’t think like everyone else. Rather, you should figure out, in reverse order, how much the building is worth to you. If you are dead set on getting a 15% cap rate out of a building, figure out how much you can pay for the building, accounting for repairs and expenses of course, and still reach that number. That’s your price. If that means you will offer $55,000 on a property listed for $50,000 then so be it. You’re making the money you wanted. If you lose out, at least you know that you didn’t sacrifice your profit margin in the heat of negotiation.
As a side note, I should mention that while most multiple offer foreclosure deals end with a “best and final” request, I have been involved with a few in which the bank simply look the highest offer they got on the first day on market. Once I won out, the other time it was someone else. This isn’t common, but it does happen. If you really want a property, never throw out a lowball under the assumption that this can’t happen. Your pricing should be as serious as your interest level. The best investors are all chasing after these properties.
Pricing, like all points of a foreclosure negotiation, is a delicate matter. If you stay reasonable in pricing you offers and take note of the other aspects of the deal (see other foreclosure tips), you stand the best chance of rising above the pack. Pay attention to YOUR goals and YOUR business. Not the other guy’s. You’ll thank yourself for it.