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Foreclosures: Getting Your Offer Accepted

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Foreclosed homes are some of the best real estate values on the market.  The really good ones are often picked up quickly, however, which makes it imperative that you submit an offer that will be acceptable to the Lender.

The first step, of course, is to determine the actual Market Value of the home. Market values are determined by Buyers, and the most recent sales are the best source to determine the value of homes in the neighborhood. 

• Prior Sales are the only true indicator of market values.
• Sales of homes in the immediate neighborhood are best, especially if the same builder was used.

• What a Seller “needs” to get for the property (the Buyer does not care).
• A “padded” number that allows for some negotiation.

• Slightly below Market Value, in order to be more competitive with other properties; or
• Far below Market Value, in order to attract immediate, multiple offers on the property.

That is why it is so important to calculate the true market value of the property first, so you have some idea of what pricing “scheme” is being used.  Once you know the market value, you can position your offer accordingly.

It is not an exact science, however, and a good Realtor will not just look at past sales but will also call the Listing Agent to get a sense of their strategy. They can also often find out the level of interest in the property and whether or not you can expect competing offers.

Armed with this information, you can then decide on your offer price.  But that is just the first step. Here are some other pointers:

Earnest Money: Offers are evaluated two ways; (1) the net return to the Seller and (2) the ability of the Buyer to obtain financing and close on the sale. While many homes can be held with $1,000 Earnest Money, a larger deposit makes the statement, “I am a serious Buyer and I have the funds to close on this property”. 

Sellers will be more likely to consider aggressive offers if accompanied by a large deposit – I recommend $5,000.  If you later decide to withdraw the offer, your Earnest Money is refundable so long as you cancel, in writing, prior to the expiration of the Inspection Period.

Cash vs. Financing: Cash Buyers will get the attention of the Seller as they do not have to be concerned about the Buyer’s ability to close on the property. They also do have to be concerned about Appraisals.

Whenever a home is financed, an appraisal will be ordered by the Lender.  If the Appraisal comes in lower than the offer price, the Buyer can cancel the sale and obtain a refund of their Earnest money.  In a cash offer, an Appraisal is usually not performed; however, we often recommend that an Appraisal contingency be written into a cash offer, which gives the Buyer the same option to cancel if the Appraisal comes in low.  

Offers where the Buyer is not putting much of their own money into the purchase may raise a red flag.  VA and USDA Rural Development loans allow the Buyer to obtain 100% financing.  If the Buyer does not have much “skin” in the game, they are more likely to default on their mortgage than if they have some of their own funds in the purchase.

Do not place too much importance on a cash offer, however. A Lender may accept a lower offer if it is a cash deal, but they will not give it away. Do not expect that a cash offer will be accepted if it is far below the market value.

Proof of Funds/Loan Status Report: You must include documentation with the purchase offer that shows that you have the funds (cash offer), or that you have been pre-approved for the loan (Loan Status Report).  Proof of Funds can be a Bank Statement or an Investment Account Statement that shows funds in excess of the Purchase Offer.

Close Of Escrow: A Closing date that is 30 to 45 days from the offer date will not raise any eyebrows, but if you ask for many more days it becomes suspect.  If you are offering cash, then a closing date that is less than 30 days from the offer date is welcomed.     

Closing Costs: Home Buyers are sometimes “cash poor”, as the out of pocket costs in buying a home and moving can be substantial.  Buyers often request that the Seller pay for some or all of their closing costs, either a dollar amount ($5,000 or so) or a percentage of the list price (3% is common). 

Sellers are used to that and will usually allow that in a contract; however, bear in mind that they are focused on the “bottom line” – the net return to them.  When requesting the Seller pay for the Buyer’s Closing Costs, they will take this into account when evaluating your offer.

For example, let’s say you determine the Market Value is $200,000 and you position your offer 10% below that or $180,000. If you also request the Seller pay for $5,000 of your closing costs, then you must increase the offer by that amount so that the net return to the Seller is the same. In this example, your offer price would be $185,000.

If you do not have to request funds for closing costs, don’t.  Lenders prefer “clean”, simple offers, and contracts that require the Seller to pay closing costs can result in an appraisal problem.  

The Buyer’s Lender will only approve the loan based on the appraised value. If the Appraisal comes in below the purchase price, the Buyer has the option to cancel the contract.

This puts pressure on the Seller to lower the price to the appraised value in order to get past this issue and keep the sale active. That is why it is preferable for a Lender to agree to an offer that does not include a request for the Seller to pay the Buyer’s closing costs.  The Seller runs the risk that the higher sales price might result in an Appraisal problem.

Home Warranties: Don’t bother.  A Seller will not pay for these costs. If you ask for that in the offer, the Seller will take it out in a counter offer. 

Your goal should be to submit an offer that the Lender will approve on the initial submission. Counter Offers delay acceptance and could open the door to a competing offer.

The above suggestions will help you obtain quick approval of your offer, but the most critical factors will be the terms and offer price. This makes it imperative that your Realtor knows the guidelines used by Lenders and can position the offer so that it will be acceptable to the Lender the first time it is submitted.

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Do you qualify for the Existing Homeowner Tax Credit? Or are you a First-Time Home Buyer that may qualify for the First-Time Home Buyer Tax Credit? What about Short Sales & Foreclosures? Are these a bargain and what are the pitfalls? How should I start my home search? Answers to these questions and more may be found above.