Follow The Offer

August 4, 2010 · 6 comments

Not much to write about today, but since I get a lot of questions asking about the negotiation process I go through with my REO offers, I thought I would share the details of the latest house we’re in the process of negotiating. I don’t know if we’ll end up getting the house or not, so this may be a single part post, but hopefully it will give some insight into how I approach making and negotiating offers.

This is a house we saw for the first time yesterday. It’s a 3/2, about 1500 square feet and built in 2004. Yup, practically brand new. The downside is that it borders neighborhoods that got hit very hard during last year’s flooding in my area. While the house didn’t get touched by the flood — and is not currently listed in a flood zone — we are concerned that the proximity to the flood damage could turn off potential buyers.

The house originally sold in 2004 for $130K and the tax assessment on the house is $123K, but given the sparse comps in the area, I wouldn’t want to have to resell for more than $85K after rehab. And I anticipate about $10K in rehab to get it ready to resell and I’d want to make at least $15K.

Using my Flip Formula, that puts my maximum purchase price at:

MPP = Sale Price – Fixed Costs – Desired Profit – Rehab Costs

MPP = $85K – $15K – $15K -$10K

MPP = $45K

So, I’m willing to pay $45K for this house.

It’s currently listed at $55K, and I had a feeling if I made my first offer below about $40K, it would get rejected. Given that I’d rather get into a negotiating situation instead of having a rejected offer, I decided to make my first offer $40K cash, with 3 days due diligence and $5K earnest money. I’d be happy to get rid of the due diligence period and would be happy to increase the earnest money, but setting those where I did leaves me room for negotiation if they come back with a counter-offer.

I put that offer in this morning, and this afternoon we received our first counter-offer. They countered with $52K purchase price, no due diligence and $5K earnest money.

A good rule of negotiating is that every time you give something up, you should take something away as well. This lets the other side know that they’ll never get anything for free.

So, we agreed to up the offer price to $42K. We rejected their “no due diligence” and countered with our original 3 days of due diligence. And what we took away was some of the earnest money. We dropped our earnest money offer from $5K to $2K.

We’ll see what they come back with…

6 responses to “Follow The Offer”

  1. Uncle Jeff says:

    “We’ll see what they come back with…”

    Might depend on whether they read this blog. 🙂

  2. […] Flipping REOs: How To Make Offers That Banks Can’t Refuse Posted by: rein | Category: Flipping Houses, Real Estate Investing, Reos […]

  3. I’ll remember that tip from now on. It’s a great way to stay in power and in control of the negotiations.

    Would a partial owner finance work for you in a situation like this? Just trying to think outside the box a little. Say up the earnest money to 10k but say you’ll give them the rest in 3 months.

  4. J Scott says:

    Scott –

    This is a bank-owned REO, so there isn’t much room for creative financing on this one. Basically, the only variables I have to negotiate with are price, earnest money, due diligence period and closing date.

    Unfortunately, there’s not much to work with when negotiating REOs… 🙂

  5. Karen says:

    I love this tactic of adding something but then taking something away! Otherwise, there is little incentive for them to not counter you back, if they think you will just keep adding. Love it!!!

  6. Marla says:

    Love this blog J Scott. Such great posts!

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