Financing REO ~ How to structure my offer.


I have a potential flip deal I am analyzing. I am watching an REO. Its a 3/1.5 and it is listed for 142K. The realtor told me he is sure the bank would let it go for 120K. I think it needs roughly 10K in repairs (walked through and priced out already) and with my current market, the comps tell me it will sell in 30-60 days for +/- 150K.

I think I want to be in it near 100K to 105K to give myself a decent profit/error margin.

What I am trying to figure out is how to structure my offer to the bank.

Should I go in there and really low ball them? Say 80K and attach a huge list of repairs and crazy costs upwards of 40K (which I could do, if I really wanted to overhual the place). Would they even take me seriously? Or would that just piss them off and make them more difficult to work with?

Or should I offer 100K ( I don’t want to be any higher than 110K) and see where they come back?

Also, as far as financing, I don’t have HML, I was going to use a conventional loan. Should I get a pre-approval letter? I think I know the answer to this one. But will a pre-approval letter show I am serious and not screwing around? Should I get my pre-approval letter to say I am only approved for 105K and no more?

I would take it anywhere 100K or lower, so should I offer 100K and attach a 5K earnest money check?

Basically I am trying to figure out what tactic is going to give me solid success in snagging this one really cheap.

Any input from the REO pros out there?

Every deal is different, but remember that they need you more than you need them. You have to come at this with a position of strength.

I am not a huge fan of negotiating, and I beleive in putting my best deal on the table at the onset, or at least very close to it. I know many don’t agree with that, but it has served me well, and when people know you’re not bluffing or playing games, they sometimes take you more seriously. You might decide to leave yourself a little wiggle room so that you can come up just a little to make it look like you’re being a little flexible.

First, I agree that you need to be in that deal at no more than the $100K that you’ve mentioned.

So, what I’d probably do is:

  1. Offer $95,000 and pile on the documentation as to why that’s a good offer

  2. Include a pre-approval letter from your mortgage broker. Some brokers do not like to put the dollar amount on there, and some are OK with it. My mortgage broker just gave me her pre-approval letter in a Word file, so I just write out whatever I need when I need it. You could put in that you’ve been approved for a $95,000 acquisition loan plus renovation costs.

  3. I’d offer no more than $1,000 in earnest money on a deal that small, especially if you’re going to give it to the seller’s agent or the seller. If you are represented by an agent, let him/her hold the money, regardless of whether it says that selling agent holds funds. Again, you are in the driver’s seat here.

When they counter with a higher number, you can raise your offer to $100,000, but let them know that this is the final number, and you are bending away from your formula only in the interest of getting this done. $100,000 is your maximum offer, and there won’t be another offer above it.

If they say “No,” just let them know that you’ll still be there when they come to their senses. And if you lose the deal, so be it.

Two more questions,

  1. I started working directly with the bank’s realtor and didn’t bring my realtor on board. Her and I did another walk through and she asked if I wanted her in on the deal. I told her that it didn’t matter to me, I just wanted the arrangement that would get it done faster. She said that since I had already been working directly with the guy, maybe she should stay out of it, though she wouldn’t mind the money. I was thinking about hinting at the bank’s realtor that if we have to go into several rounds of negotiations, I am going to bring my realtor on board to take a cut of his profit. Is this a good idea? Will him knowing that if he doesn’t prod the bank along at my offer he will lose half his commission check help him convince the bank to sell to me? Or will that make a difference.

  2. In the listing it says some crap about must allow 30 days for bank to do this and that, blah blah blah. Can I put that as a stipulation in my contract that I want to close with in 10 days? If I have my money lined up it should all fall into place that fast.

  3. The electric works, but I haven’t seen the plumbing. Can I make that a contract stipulation that I need to see the water running? I also want an inspection checking mainly for structural stuff (Its a small place and the load walls looked good to me, but I am not an inspector). Are these requirements going to make them less likely to bite?

Thanks again for the help!


A few items to consider

  1. Do you really think that you can get a conventional loan submitted, underwritten, approved, and funded in ten days? In addition, title reports take time.

  2. As far as using the bank’s Realtor is concerned you should understand that this Realtor has a duty to his seller (the bank) not to you. You, in effect, will have no real representation.

  3. Of course you should have inspections and a number of contingencies in your purchase agreement. This ties back to point #2 - If you don’t understand the inner workings of such an agreement - you should have representation.