How Much Do You Offer the Bank?

It is important to realize that when submitting a short-sale package, you are building a case. The better the case, the deeper your discount. Think of yourself as an attorney preparing for a court hearing. If the attorney shows up unprepared, the case will be lost.

How many of you remember the O. J. Simpson trial? If you think he was guilty, why do you think he walked away from a double murder charge? His attorneys built a great case, and it was presented more effectively than the prosecution’s case was. Short-sales are the same concept: the better the case, the better the deal.

Your first offer will focus on the homeowners, their distress, the distress of the property, and the overall hardship of the situation. This will be your initial offer and your lowest. You’ll go up from there and the bank will come down until you reach a final settlement.

The best way to determine your offer is to first decide on your exit strategy. Let’s use a $100,000 property with a $100,000 mortgage balance as our example.

• If you plan to wholesale the property to a rehabber, you need to know that rehabbers want to buy at no more than 65 percent of the retail value. This means that on a $100,000 property, a rehabber will pay up to $65.000.
• If you plan to rehab it yourself, you could pay as much as $65,000 or 65 percent of the value.
• Landlords will pay up to 80 percent of the retail value, or $80,000. When you find a property in mint condition, sell it to a landlord for a higher profit.

There are few things worse than making what you think is a good offer and the bank immediately says yes. Your first thought is that you are paying too much. We hate when that happens! We usually begin our negotiations with an offer of 40 percent of the retail, fixed-up value of the property. However, there are times we offer less and other times more. Here are four examples:

• Example 1: Let’s say the property is worth $100,000 in retail condition and the homeowners owe $100,000. Their property needs basic work: new carpet, updated kitchen and baths, and so on. On a property like that, we would start at 40 percent of the retail value, making our offer $40,000.
• Example 2: Let’s say the same property needs $30,000 in re-habbing. Then we might offer somewhere between $25,000 and $30,000. Once the bank takes the property at the sheriffs sale, rehabs it, and pays the realty agent commission, it will make the same amount later as it will make selling it to you today.
• Example 3: This is the same deal as Example 1 with one adjustment. The property is worth $100,000 in retail condition as before, only this time the homeowners owe only $65,000. Again, the property needs basic work: carpet, paint, updated kitchens, and so on. Since the mortgage balance is $65,000, asking the bank to take $40,000 is not much of a short-sale. In this case, we might offer 50 percent of the mortgage balance, or $32,500.
• Example 4: The homeowners owe $100,000, but the property is in mint condition. We might offer as much as $65,000 or $70,000. We could sell it to a landlord for $80,000 and still have a great deal.

The bottom line is: There is no correct offer. The best way to determine your offer is to start with the current retail value and work backwards, depending on what your exit strategy is.

• If you plan to keep the property, you can offer more.
• If you plan to wholesale it (our main exit strategy still), you have to account for the rehabber as well as your sale proceeds.
• If you plan to sell it to a landlord, you can pay more.

For example:
Retail value         $100.000
Short-sale offer    $40,000

There is $60,000 left on the table. You plan to wholesale:
Rehab costs: $ 10,000
Cost of money: $5,000
Rehabber profit: $25,000
Your profit: $20,000

This leaves a window to negotiate of $20,000. If the bank does accept your offer of $40,000, you still have a $20,000 window. The more you pay, the less you make. The rehabber will still want to make $25,000. The cost of money will still be $5,000, and the rehab costs will still be $10,000. Your figure is the only number that is negotiable. If you raise your offer the entire $20,000, you will leave no money for yourself.

If you begin the negotiations at $40,000 and end at $50,000, you still make $10,000 for yourself—not a bad day’s work.

Work the numbers backwards to determine your highest offer and start as low as possible. Having a larger negotiating window will allow you to get more of your offers accepted.

Here is a short-sale we recently did. This house was beautiful, which proves you can do short-sales of pretty houses. We did actually send the bank a complete short-sale package, but we just want to share with you the highlights of this great deal.

The seller of this new-construction home, which was absolutely gorgeous, had bought the home with $90,000 in down payment and builder extras. Since he owed approximately $483,000, which was what it was worth, we had to do a short-sale in order to create enough equity to make it worth purchasing.

We had to wait until the new owner/lender assigned their loss mitigation representative to this short-sale: hence the delay between the payoff statement and our offers being submitted.

In the meantime, an interested buyer made an offer hut couldn’t produce proof of funds, so we dismissed him. He continued to call, expressing how much he wanted the house and asking for more time to find the money to close. We really didn’t give him much thought. Another interested buyer went to the property and told us that it looked occupied. To our surprise, the buyer who had been calling had actually broken in and moved in. He painted, decorated, and filled it with his furniture! Once we found out, we imposed rent and forced a closing deadline or else we would have to take some legal action.

He closed before our short-sale approval deadline, and everything worked out fine! We have to say that this was a first. We’d never before had an interested buyer move in ahead of the closing. The great news is that the deal worked out for everyone, creating yet another win-win situation.

The bank accepted over a $100,000 discount! Do not be afraid to make a low offer. The worst-case scenario is that the bank says no.