Why you can't low ball a bank.

When pitching an offer on a Bank Owned property you have to understand both the way the game is played, and the motivation of the entity you are dealing with.

The owner of the property is a bank and they have a problem.  They own hundreds, maybe thousands of homes across the USA and they HAVE to get rid of them ASAP.  They also have to recover as much money as they can.

Firstly it is irrelevant how much the previous owner owed.  That money is already a loss to the bank and is history.  They now have a “non performing asset” that must be liquidated.  Here’s how it works.

The bank requests a Broker Price Opinion from someone like myself as an initial estimate of how much the property will sell for in the current market.  They use that as the starting point and pitch the initial price a few percent above that level.  The details go in a computer and an Asset Manager assigns the property to a local real estate agent for sale.

Every day the computer sets the minimum price at which the property can be sold.  The minimum price reduces rapidly overtime.  The speed at which the prices reduce is dependant on how much of the banks inventory has been sold this month.  When the minimum price gets to about 90% of the listing price the selling agent is given permission to reduce the listing price.

Whenever someone makes an offer below the current minimum price the system can accept, it counters at today’s minimum acceptable price.  If the offer is too low it is automatically rejected.   Please note it is the computer system that does this.  The asset manager has very little input, unless you are close (within about 10%)  of the current minimum acceptable price.

Here are the magic numbers, and remember there are some exceptions to these rules, but this is what happens with 95% of all offers.

If your offer is above 85% of the current asking price, it is likely to draw a counter offer somewhere between 90 – 100% of the current asking price depending how long since the last reduction, and how fast they are reducing.  Below 85% and they will likely just reject the offer.

Now you need to be aware that most REOs are already well below current market value, whatever that means. Often the asking price is less than 70% of what I get when I run a current CMA.  Sometimes they are even lower.  I can always do that for you before I make an offer.  If you think the price is too high you can wait and see if it comes down, but of course you run the risk of someone else buying it first.

Look at this another way.  In Charlotte County today prices are around 60% of the peak at the end of 2005.  Bank Owned properties are selling around 45% of 2005 prices.  That translates to about 75% of current market value.  

Once the bank starts negotiating a sale the price freezes.  That doesn’t mean you are out of the game.  If they get a better offer, (higher price, fewer contingencies) they will put the current offer on the back burner and negotiate with the new buyer.  So it’s always worth making an offer even if yours is not the first. Lot’s of people are making very low offers.  Only a few of them stick.

So in conclusion, once again if you want to buy Bank Owned property you have to make offers.  The probability of success drops rapidly depending on the ratio of your offer to the asking price.   Remembering there are always exceptions to every rule, use the following as guidelines.

Below 90% of the asking price = Same as the proverbial snowball.

 

90 - 95% of asking = On a par with the Cubs winning the world series

 

95-95% of asking =  About the same as coming away from the Casino as a winner

 

95 -100% of asking = Yankees and the world series.

 

100 - 110% = Same as losing at the Casino

 

over 110% = Still no guarantee but about the same as a getting a ticket driving 100 mph on I95.