How to Represent a Buyer in a Bank Owned Transaction
Selling real estate in Ohio over the past few years, I have found that more and more foreclosures have led buyers who were normally arms length transaction purchasers to jump into the bank owned purchasing arena. "i want a great deal!" Heard that lately? I hear it just about every day now. So I say, "you want a great deal? Let's go after a bank owned."
1. Prepare your buyer for the process
It takes time. Banks do not answer like a normal seller. They do not care about whether your client walks away or not. They have tens to hundreds or even thousands of properties that they never intended owning. You are a number. The agent that represents the bank doesn't care if your buyer walks either. They will sell the house to your buyer and if not, the next one. Those REO agents know one thing, the property is going to sell one way or another. They don't care if your buyer walks, so don't piss them off! The nicer you are to them the more they will help you. They generally have a lot of listings and field a lot of offers. Those agents are more like cattle ranchers and less like agents, moving paper through the process until the bank chooses which offer to take. You will generally get your answer between a few days to a few weeks, depending upon how long the bank has owned the property and how close the list price is to the eventual sale price.
2. How much should your client pay?
The is no set answer here, but I have a few guidelines that have worked for me. I like to work backwards and I explain the process to my clients ahead of time. The starting figure is how much the house would be worth if it were completely updated, taking into consideration its location. Then I calculate with the buyer how much money it would take to put it in a completely updated condition. I'm talking updated kitchens and baths with granite tops and wood cabinetry, tile or hardwood floors in the kitchen and foyers, new carpet or refinished hardwood in the bedrooms and living spaces, ceramic tile in the bathrooms, updated light fixtures, updated mechanicals, etc. etc. We subtract the rehab cost from the top market value and then take off 20%. Why? Because that's what the bank gets for being so stupid as to let a 480 credit score buy the house on a stated income variable rate loan! Well....not really...but if you check the standard margins the banks take, you'll see that is about the margin. In addition, your buyer is buying the property "as is" and will be taking on unknowns. They'll need that cushion for unforseen costs. Also, the buyer has to do the work to make the house habitable. That's worth something too. Here's an example:
Top of the Market Value of a 4 BR 2 1/2 BA Colonial with 2,000 sq. ft. and a finshed basement in Heavenly Acres is $275,000. The property needs $5,000 in flooring, $10,000 for a new kitchen, $4,000 in painting, $3,000 in bathroom updates, $2,000 in landscaping, $3,000 in windows, $1,000 in lighting fixtures and $7,000 for a new driveway. That's $35,000 in work. $275,000 - $35,000 = $240,000. 20% of $240,000 is $48,000. $240,000-48,000= $192,000. I tell my buyers that unless they are absolutely IN LOVE with the property, that is the most I would pay.
3. What terms do banks like?
Banks like cash. They like clean deals. They have too much to deal with than to have a deal fall apart because of financing issues. Often times, banks will take less money on a cash deal than more money on a financing deal. Don't get crazy though. I'm talking about a few hundred to a few thousand dollars depending on the value of the property. If your buyer can borrow the cash from a friend or relative and then finance after closing they will have a better shot at getting the property. That is not to say that a bank won't take a financed deal but you better have a very strong letter from your client's lender. Banks also like quick closes and no inspections. The less changes to the deal after they accept your offer, the better. If the utilities are getting turned on it is at your buyer's expense, not the banks. They generally could care less what your inspections find so don't try to give them that BS that you threaten a normal seller with ("If you don't negotiate my inspection findings I'll send you the whole report and you'll have to disclose it to everyone else who comes to buy the house! Ha ha!") Nope...you lose there...banks are not subject to that regulation. Also, don't fight over title company! In Ohio (at least in Cleveland) every agent wants to recommend a title company because most big agents are partners in a title company. So much frivolous fighting over which title company to use. Don't fight it, you won't win and it's not worth it if you do. Put down "seller's choice" for title.
4. How do I win a multiple offer situation?
Cash deal, as quick as possible closing, NO INSPECTIONS, seller's choice of title company, no givebacks, and over list price offer! Let your buyer decide the most they are willing to pay. Don't set the number for them! If they ask your opinion, give them only facts, namely reiterate market value if the house is all updated (make sure they have the funds or the credit to get the funds do get the work done, otherwise they'll hate you later!) and tell them to pick the highest price with which they will be comfortable, but LET THEM PICK THE NUMBER! If YOU pick the number and they don't get the house, it's ALL YOUR FAULT! Get it? I just lost a deal that was a cash offer, 7 day close, no inspections, and my buyer's offer was $10,101 over list. We didn't get it. All of you out in California are saying, "Ten thousand over list? Ha! That's nothing!" IT IS WHEN THE LIST PRICE IS ONLY $82,400! The point is, you never know what price will buy the property when you're in a bank owned multiple. There were 14 offers on that property and you normally don't know how many offers there are until it's too late.
Seriously though, as long as you educate your buyers on the process and do your research on rehab costs, bank owned properties are a great option for your buyer if they are financally in a position to buy one because they will not only get a great deal on a house but they will also have everything done in the house exactly how they like it. Always a good match!