Negotiating the Best Price on an REO Foreclosure

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Negotiating the Best Price on an REO Foreclosure:

Negotiating the Best Price on an REO Foreclosure

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Negotiations can be one of the most thrilling aspects for buyers of any piece of real estate. Since the average member of the buying public doesn't get that many chances to hone their haggling skills in everyday life, they often relish the opportunity to do so when it comes to their home purchase. With regards to bank-owned foreclosures, buyers who are in the know enjoy optimal negotiation positioning, resulting in fantastic deals.

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Real estate negotiations begin with the context of the potential transaction. That is to say, without a full understanding of the home, the market, and the circumstances surrounding both, buyers are flying blind. The word "buyers market" has been thrown around quite a bit over the last few years, which implies that all of the leverage is on the side of the buyers. While this is largely true in many transactions, it is by no means universal. Even today, in some cases buyers find themselves in a bidding war, at the mercy of the whims of their counterparts just like a few years back. The key is to understand what is being offered, and what one hopes to achieve as a buyer.

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This is a critical element of any successful negotiation/purchase strategy that is overlooked far too often. One must not confuse the feeling of "coming out on top" with getting a good deal in actual terms. Many buyers would feel better after paying $5,000 less for a home that is overvalued by $10,000 than they would by paying $5,000 more for a home that is undervalued by $10,000. By separating perceived savings from observed savings, buyers free themselves up to unearth fantastic savings in their real estate purchases, especially when it comes to REO properties.

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When negotiating for a bank-owned foreclosure property, understanding the home's list price and where it falls within the value range is a necessary first step, given how REO properties are valued in the first place. To say the very least, foreclosure property valuation is an inexact science. The Asset Manager (entity in charge of handling the foreclosure transaction on behalf of the bank) collects a series of agent-generated evaluations of a home, and makes a value determination based on these findings. Many of these evaluations are "exterior-only" meaning the agent merely drives by the home, snaps a few photos of the exterior, and are then tasked with determining the home's value. Even when performing interior evaluations, agents must generate market values for properties while taking into consideration amenities, useful life of upgrades, and repair costs for damages. The asset manager, which more-often-than-not is located in another state altogether, then dictates the list value for a property they've only seen in photos.

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The result is that from time-to-time bank-owned foreclosure properties are listed on the market at values that aren't in sync with the area value range. Often times, listings that come on the market way under value are met with a storm of offers, some of which may even be over asking price. So as a bargain-hunter, should a competitive offer situation be seen as an indicator that no savings are to be had? No way! The key is to understand that a bargain isn't defined as sale price vs. list price, it is sale price vs. market value.

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When developing a pricing strategy for an offer, agents are full of stupid ideas. Some advise offering some arbitrary percentage under the list price if their clients have the only offer on the table, while others suggest offering some arbitrary amount extra over list value for every competing offer that has been submitted. For starters, one must make their own determination of a home's market value, irrelevant of the list price. From there, buyers must determine how much of a savings they would feel satisfied with getting, vs. how much savings they would be willing to give up to get the home. If buyers fall in love with a home and will do anything to get it, then negotiating for maximum savings may not be the best strategy, especially in a competitive situation. Sometimes deal-seeking buyers get overzealous in a competitive situation, and offer enough as to eliminate all potential savings, or even go over market value altogether. A good negotiator knows that they must be able to make their own determination of value, and they must not let emotions govern their approach.

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Speaking of emotions, they have clouded countless real estate deals over time, especially when the sellers have a personal interest in the home. When buying a bank-owned foreclosure, however, buyers can be as sassy as they want with their negotiation tactics without fear of hurting anybody's feelings. The banks are financially invested, but not emotionally invested. Telling the banks that as a buyer you think a home is worth a lesser amount is fine, and is not taken as a personal affront. Yet if not done properly, it won't lead to any positive outcomes either. Lending institutions and asset managers rely on market data when determining a list price, and are open to relying on the same when deciding whether or not to accept an offer. If an offer is made that is under list price but is backed up with market data indicating that the price is justifiable in the market area given local value progression, buyer demand, economy, etc., then the banks are much more likely to play ball. The best way to steer things towards a positive result when negotiating with the banks is to speak their language.

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Price is the primary factor that drives negotiations, but is not the only variable in the equation. Buyers can sweeten offers in a variety of ways, some of which come at no additional cost. For example, a buyer who has been fully vetted by their lender and has their inspectors on standby can tighten all of their contingency time frames, offering a faster, more attractive closing. If a buyer isn't entirely happy with the present condition of the home, they may be able to negotiate for repair credits, something that is not generally known about buying bank-owned property. Credits are preferred by banks to performing repairs themselves, which often involves more red tape than they would like. By forming the other elements of an offer as per the specifications of the lending institution on the other end of the deal, one can add appeal to a deal that can sufficiently offset a lower offer price.

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My sources: http://www.asreos.com http://ezinearticles.com/?Negotiating-the-Best-Price-on-an-REO-Foreclosure&id=6504520

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