Negotiation is Basic to Short Sales

Negotiations Strategies for Short Sales

By Deb McMillan © 2008

Short sales are purchasing a property from a homeowner who is currently in foreclosure and needs to sell their house prior to the sheriff’s auction. This will keep the foreclosure off the homeowner’s credit and actually let their credit recover from the late payments or no payments made prior to the foreclosure being filed.

This is actually a positive thing for the homeowner. They can get out from under a mortgage that they could no longer afford. They can often get a new start on their life without banks and creditors calling to harass them, only to find out that no future payment will be able to be made.

Once you find these distressed homeowners, you’ll need to write a purchase contract, demonstrating you are serious about buying their house.

In a short sale offer, you are actually buying the house from the seller who is on the deed, but you are doing the main portion of your negotiations with the bank who is holding the mortgage.

When you make your offer to the seller for the property, you should always make it lower than the total amount you want to pay for the property. In a short sale, you are also negotiating that the bank will not expect the seller to still owe the unpaid balance. This makes it so the seller shouldn’t really care about the purchase price on your offer. You can always increase your purchase price with the bank, but you can never decrease your offer, so start low.

You still have to offer what you want to pay for the property, not what you think the bank will sell it for. If this is your negotiation strategy, you will be buying property that you’ve paid too much for and won’t be able to sell. You could easily get into the same position as your homeowner in foreclosure. Do not put yourself in the same position!

You don’t want the first offer to the bank to be so low that the bank laughs and doesn’t take you seriously. unless you really can support the number. Your offer should be calculated by the ARV (After Repaired Value) multiplied by 70%, minus the cost of the repairs needed to get it into market value.

Calculation for Properties under ARV of Approximately $135,000.00

Even at a purchase price of 50% of the ARV of the house, the seller shouldn’t object. He might speak up and not be happy with the offer, but your negotiations start here. Do you really care how much I pay if you don’t have to pay the unpaid balance? The homeowner will almost always say no.

Negotiations are important in every single real estate deal. When making your first offer, you never give your best offer first. You must assume that the seller, whether it is the home owner or the bank, will not accept your offer on the first go around. They will want to play with you to see how serious you are at your first offer and how much you will go up on the second counter.

Remember, negotiations is a game. Play it well and don’t be in a hurry, and you could do very well.

Two rules you must follow:
Never fall in love with the house
Don’t increase your offer too fast

If you fall in love with the house, you will be more inclined to increase your offer quickly, thus giving away the fact that you love the house and want it at any price. There goes your good deal. Walk away right now before you pay way too much.

Increase your offer in small increments. This says you don’t have much leeway to increase your offer and now the bank is playing with you. The bank doesn’t want the house back and once they have worked with someone on a short sale and built rapport, they don’t want the deal to fall through.

One of my students offered $24,500 on a property that needed a lot of work. The bank countered at $50,000. Ken the student stayed firm and stayed at $24,000. He told the bank why it was not worth $50K in its current condition. There were 20 windows that must be replaced; the siding had to be replaced since most of it was missing in the back of the house. He recited the extensive work that needed to be done and the cost it would take to do the work. The bank came done $10K without Ken moving a penny. Of course, $40K was still too high.
Ken got a 2nd contractor’s estimate to confirm the extensive repairs. He had originally faxed in pictures that showed no detail. He faxed in better pictures with a better hand written explanation of what the bank was looking at. He drew the conclusions for the bank on the picture. “Many windows are broken because of the vandalism in the vacant building.” Not just that the windows are broken. “Water is leaking from the roof and gutters damaging the drywall and paint in 3 rooms. The drywall, insulation must all be replaced after the roof is replaced to ensure that all the mold has been removed. This could be a liability after the sale of the house.”

It took a couple more rounds of negotiation but Ken eventually got a purchase price accepted of $27,500. The bank accepted Ken’s offer after countering at $50,000. Ken increased his offer slowly and knew he couldn’t pay over a certain amount with all the repairs needed to be completed. He stuck with that number and the bank accepted.

If Ken had increased $5,000 at a time, he would have easily paid too much.

All of these negotiations were legitimate. Nothing was untrue. There was no reason to make up anything. It was all believable and backed up with data. And the bank didn’t want the house back.

Another house I negotiated on was actually a wholesale deal a student was buying from a bank for $50,000. The roof was leaking and the drywall in the kitchen ceiling was slightly coming apart from the water. The bank did nothing to cover the roof and stop any additional water from coming in the house. Normally, in July in Cincinnati, that wouldn’t be a problem. Except this July. On a Sunday, rain poured all day long. It was an extremely hard pelting rain and it rained off and on all day.

The student had gone on a trip out of the country so I went to the house to see if there was any additional damage. There was no tarp on the roof and the four panels of drywall were now coming down. Insulation and water was on the floor. There was enough rain that the water had wicked to the kitchen walls and it was possible they may have to be replaced due to mold.

We asked the bank for an additional $5,000 off the purchase price since they were not giving me the house in the same shape. I didn’t expect $5,000 reduction. There was $5,000 worth of additional damage. But it was a starting place.

Normally, I would not ask the bank for a discount basically at the closing table. Getting the bank between a rock and a hard place then asking for a discount just because in 5 minutes it will be too late is not an ethical thing to do. This situation was different. There was additional damage. It was going to cost more to repair the damage. The inspection period in the contract was over when we actually made the request for the reduction. It was not over when the damage occurred. It just so happened that the student was out of town and couldn’t put the request in to the realtor.

The bank did do an inspection and reduced the purchase price by $2,500. The deal closed 3 days later. The bank sold one of their properties. You just have to ask.

Deb McMillan, OPHP, CMI, is a real estate investor and writer living in Hamilton, Ohio.  In Deb's home study course and seminars, you'll learn how to talk to sellers to get them to do what is necessary to save their credit. In addition, you will become familiar with bank negotiation strategies that will lead you to incredible savings when buying real estate. You will also learn about bankruptcy and what you can and can't do once a homeowner files. That, and so much more knowledge that will help close your deals awaits you!

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