Last week, we received this query from a home buyer:

Thank you for the Sacramento Real Estate Blog and the time you
take in putting out this information. It’s been really informative and
helpful to read through the blog, especially in the current Sacramento
market. Anyhow, I’m a first time buyer with a question about offers on REO
homes. In the current market, I’ve noticed REO listings typically elicit a
multiple offer scenario. Aside from offering over list price, what can a
buyer do to make their offer stronger in the eyes of a bank? Are there
certain things that a bank will view more favorably (e.g. larger down
payment)?

I think this is a very good question and one repeated by many first time homebuyers. Buying a home is stressful enough. Add to that the fact that you are a first time home buyer and also are dealing with a lender / bank directly to buy a house and the discounted price almost doesn’t seem worth it.

However, notice I said “almost.” There are a few things you can do to make your offer stand out when a bank is looking at it. I will give you the inside details on that in this series. This is a three part series and I will discuss what you can do to have your offer stand out from the multiple offers a bank (usually) receives if the house is priced right.

To understand what your offer needs to be like, you have to understand the bank’s point of view. Imagine this: you have an object which needs maintenance, which you have never seen and have no idea how to take care of. Now place the object far away from you – miles away in fact. The person you loaned money to who promised to care for it refuses to pay you back, so you have to take the object back. But it is heavy, so instead you have to keep the defaulting person away from the object. Mind you, the object is still miles away from you. All you’re thinking is, I need to get rid of this object. I need to salvage some money here. But I have to get rid of it!

Get the idea? Then these tips will help!

Give all impressions of being a “normal” buyer

Banks typically don’t like offers that are not straightforward. (Now, you can argue that the banks themselves play all sorts of games with loans and so forth and are not straightforward themselves, but remember your goal at all times. If your goal is to buy the home, you must be direct.) What do I mean by “direct?” This would mean that you are an individual buyer or write your offer as an individual buyer (not a business entity like a corporation, typically). Do not even try to use the games most so-called real estate investing books recommend. For example, do not write something like “and/or assignee/s” after your name on the offer. Most loans are not assignable and since it is the first line on the California purchase contract, chances your offer won’t get very far at all. Of course, this is just an example. If you haven’t read any game-y real estate investing books, keep it that way. Listen to the advice of your Realtor® and come across as a normal buyer. Don’t do anything that would be grounds for immediate rejection.

Get Preapproved

Today, most listing agents require a preapproval (not a prequalification) letter from a lender (not a broker.) This means that you have met with either your own bank or credit union and have an approved loan or you have been to a mortgage broker and he has submitted your information and has received a loan approval for you. This is the most basic requirement for writing an offer and most REO banks will not take your offer seriously unless you attach a preapproval letter with it. Also, it would be a good idea to have a copy of your credit report because some banks still require that even if you have a preapproval letter, you get approval from their lender. It’s an extra step, but necessary. Sometimes, you can send the bank’s lender your credit report to expedite the process.

Increase your Good Faith Deposit

This is the oldest trick in the book, except it’s not a trick. Again, think of this from the point of view of the seller. If he has two offers to consider and one is offering $100 that he would lose if he walks away from the transaction and the other offers $2000 that he would lose, which one would you consider to be more serious about buying the property? Remember the bank wants to ensure that once the house is in escrow that is stays that way and ends in the buyer buying it. Ensure that you have between 1% – 3% of the offer price to put as a good faith deposit. This money will be deposited in an escrow account after the offer is accepted. You can get this amount back if you find a problem during the contingency period and cancel escrow. You only lose it if you cancel escrow after the end of the contingency period. So make sure you schedule inspections immediately after the bank accepts your offer. More on this later.

Offer an amount over asking price

Banks will typically underprice a property, especially if it shows well or has been built in the last five to ten years. Why? It’s a sales technique to get home buyers into the home and create a sense of urgency. Also, the price attracts more buyers which ultimately leads to multiple offers and sends the price up. If you don’t have a substantial down payment or a decent good faith deposit, offering over asking price might be the best way to get your offer accepted. But be careful – don’t offer more than you think the house is worth. At this point, it would be a good idea to ask your Realtor® to get you a market analysis and make an offer on the high side of the market, but not over the top. Besides having buyer’s remorse if you pay too much, you might have trouble during escrow if the house does not appraise for the offered amount.

That’s it for today! Come back tomorrow for more tips on getting your offer accepted! There are many REOs out there. If you’re interested in buying one of them, search here or call us. We’ll be happy to help!

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