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The Art of Making an Offer
By Chris Knoppe, Ohio Rehab Loans
Nearly every real estate transaction begins with an offer. On
the surface it seems like a very simple concept ‐
just make an offer; yet the entire success of a deal can
hinge on that initial offer and how it plays out. Many investors do not give
this the attention it deserves which results in paying too much for a property
or missing out on an opportunity because of a mistake in strategy.
A potential buyer’s strategy is going to vary depending on the
seller’s situation, so understanding who your seller is and what they want is
extremely important. Right now the most common seller in the real estate market
is a bank. This seller is different in that it is an institution that shows no
emotion and is hard to tangibly grasp. This can make it difficult &
frustrating to deal with bank owned properties, but if you learn the game,
playing along is much easier.
Let’s look at the basic situation of every bank owned
property: The previous owner stopped paying their mortgage, and once they fell
far enough behind, the bank was forced to foreclose. Finally (~9 months later),
the property goes to Sheriff Sale to be sold to the highest bidder. Because the
bank is owed their mortgage, it will generally bid up to the amount that is owed
on the property. If nobody is willing to pay that much, the bank takes
possession of the house so it can try to re ‐coup
the loss it incurred on its mortgage. Unfortunately for the bank, the house has
now been sitting empty for months & is most likely in need of repairs due to
the previous owners’ neglect, general vacant dilapidation, or theft/vandalism.
And worst off, banks are facing a record number of foreclosures in which they
must desperately sell in order to generate cash to keep their institution
afloat. This bad news for the bank translates into good news for investors. In
other words, this unemotional institution is really just another desperate
seller. And lucky for the banks, investors are willing to take these vacant
& dilapidated houses off their hands if the price is right.
Because banks specialize in lending and not in property
management or real estate sales, they contract with an asset manager and/or real
estate broker to oversee the sale of these properties. So as potential buyers,
you are dealing with a realtor who has the bank owned listing. The need to move
this growing inventory of bank owned houses has given birth to some interesting
techniques used by the listing realtors. One common situation that an investor
can now expect to encounter is the request for your "highest & best
offer." This was at one time a rare occurrence intended for when a seller
receives multiple offers "simultaneously." Instead of independently
countering with all the potential buyers, the seller requests each potential
buyer to submit their "highest & best" offer. Lately, it seems
that "simultaneous" offers seem to be happening on most bank owned
sales! What is really happening is that listing agents have begun to list the
property below market value in order to attract buyers’ attention. They will
then collect offers for a certain period of time, and then request "highest
& best offers" from each buyer. This has changed the game of making
offers dramatically because instead of each offer being submitted to the bank
when received and the usual counter offer process taking place, it is now
turning into a blind auction! The realtors, to their credit, have used this
strategy as a way to move properties faster and at higher prices (which is
ultimately what they are hired to do). Unfortunately, I have seen many investors
panic in this unfamiliar (and some would say unfair) situation, and consequently
offer a price that is too high and later regretted.
No matter what the situation, it is important to know what you
are willing to pay (based on a realistic valuation & repair estimate), and
not deviate from your formula. Don’t be afraid to make an offer too low or to
hold your price during a "highest & best" situation, because there
are plenty more bank owned properties getting ready to hit the market.
Comments or questions can be directed to Chris.Knoppe@OhioRehabLoans.com.
For more information about Ohio Rehab Loans, visit www.OhioRehabLoans.com
or call 614‐433‐0570
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