Whenever I am working with a buyer and we are looking at bank owned (or REO) properties, the question always comes up:

“How low of an offer can we make on this foreclosed house”?

Just like many other things in investment real estate, it depends. Typically, a “normal” offer will be 95% of list price. I have seen offers accepted as low as 75% of list price. Much below that and the bank thinks you are simply low balling them and most often they will not even respond to your offer. Here is a list (in order of priority) of how I determine how to answer the above question when buying foreclosures:

1. Most often, time on market drives both the price and flexibility of the bank when looking at foreclosures. There are two components under this category that determine how aggressive you can be when making the offer on that bank owned property:
   1. Total Length of Time on Market-In other words, how long has the bank been trying to sell it. The longer it is on their books, the more opportunity you have to make an aggressive/lower offer.
   2. Time Since Last Price Decrease-This is related to the above Time on Market in that the longer it has been since the last price decrease, generally the more aggressive you can be with your offer. The converse is also true. For example: even if the property has been on the market for 9 months, if the price dropped 2 days ago, the bank is going to be inflexible when looking at offers much below the new list price.
2. The current list price relative to the market. The banks have Realtors perform BPOs (broker price opinions) on the houses periodically. If they just recently received a BPO and you make an offer at 75% of that BPO value, they are typically going to be unwilling to negotiate the difference. The number of REOs in a particular neighborhood may also help you as the bank realizes there are other opportunities out there.
3. How strong is your offer outside of the price? Leaving out contingencies, setting a closing less than 30 days out, putting down a larger earnest money check, paying cash, or declining the property inspection are all strategies that make your low-ball offer more attractive.
4. Often, the listing agent will help or hurt your chances to make a low offer. If the property is listed by a seasoned REO agent and it has been on the market for a long time, the agent will sometimes encourage the bank to simply dump the property. Maybe they have not received another offer on it in months or maybe the agent thinks the bank is keeping the price too high.
5. Your buyer’s agent can help or hurt you. An inexperienced investment property agent can hurt your chances of successfully buying a foreclosure at a larger discount. They do not understand the above 4 pricing variables.
6. Although I have never tested this, there is a belief that banks will be more flexible at the end of the month when they are trying to hit their numbers. They may give you a great deal simply because they need a few more houses in the sold category to look good to their bosses.

Ultimately, using a seasoned investment real estate agent is really the key if you are going to be a serious investor in bank owned properties. There are so many moving parts and dead ends with foreclosed properties, it is important for the buyer to have someone in their corner that can mentor and advise them.

(If you have an unlicensed rental property in Minneapolis)

Maybe I am last to know, but I just heard that Minneapolis has hired two “unlicensed property finders”. These inspectors will drive up and down the streets, search Craig’s list, and Rentals.com looking for properties for rent. They will then check their lists and see if that property has a rental license.

If the property does not have a current Minneapolis rental license, the City will:

1. Send the owner a letter stating they are in violation of city codes as you can not even “offer” the property for rent before you obtain a Minneapolis rental license.
2. Fine the owner $250 for not obtaining a license prior to putting the property up for rent.
3. Mostly likely you will be subject to the $1000 Minneapolis Rental Conversion Fee.
4. Confirm the owner does not have any outstanding code violations, no delinquent property taxes or assessments on the rental dwelling, nor shall any licensee be delinquent on any financial
   obligations owing to the city under any action instituted pursuant to Chapter 2, Administrative Enforcement and Hearing Process.
5. Require a full property rental inspection where the city may require changes and upgrades to “encourage” property owners to maintain the City’s housing stock.
6. Possibly charge a flagrant or multiple violator with a misdemeanor.

Keep those licenses up to date and obtain them as soon as you buy those Minneapolis properties!

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Nathan asked a question on my post “Give Me Your Investment Property Questions“:

“What is the fastest way to acquire 10 investment properties?”

I think there are several questions and a couple answers to this question:

Questions:

1. Why do you want to own 10 properties?
2. Are you looking to leave your day job and work on your investment real estate exclusively?
3. Is your goal to use investment property as a supplement to your retirement or is it to add cash to your monthly income?
4. How much time and financial resources can you devote to building your investment property portfolio?

Answers

1. Regardless of how quickly you want to acquire 10 investment properties, the most important decisions you can make is to partner with a great Mortgage Banker and a great Real Estate Agent. These individuals must own investment property and specialize in investment real estate. A good team can absolutely help you be successful at growing your investment portfolio (I have see a bad team or no team send investors into financial ruin).
2. Once you have chosen your Mortgage Banker, I recommend that you follow every single piece of advise s/he gives you in regards to your financial future. Do not make a major purchase or change without his approval. He understands much better than you what that new car will do to your chances of getting a mortgage for that next investment property.
3. Assuming for a second that you don’t have an extra $400k sitting around to invest in real estate (for 20% down payments), in this market, I would be capitalizing on rehabs as a way to stretch your limited down payment pool as far as possible. We are working with many investors right now that are going to acquire 5-10 new Minnesota investment properties and spend very little of their initial down payment seed money. Read about those Minneapolis investment property opportunities here.
4. I also recommend that you buy your properties in clusters. You do not want to be driving across town (especially when gas is $4 per gallon) every time you need to unclog a drain or show an apartment.
5. Get yourself organized early with an accounting system for your investment properties. Without setting this up early you will be letting money slip through your fingers by not keeping on top of what your tenants owe you.
6. Lastly, read how I manage 28 rental units and get prepared! There are many tricks and time saving tips to managing a larger portfolio.

Setting a goal to acquire 10 investment properties is a good goal to look forward to. If you achieve it, you can set yourself up for a lucrative financial future.

Have you always wanted to buy investment property, but never knew where to start? Don’t Wait! Get Started now. 

I am not sure where Joshua Dorkin at Bigger Pockets came up with this list, but it has to be the funniest one I have ever seen!.  It was even more sad that I could identify with probably 75 of the 101 ways personally.  Go check it out at the Bigger Pockets Forum.

John asked a great question to my post, “Give me your investment property questions“:

“I recently had my tenant go to the county for a one time crisis assistant payment to keep from getting evicted. If you wanted to give whatever you know about that or the process it might be interesting. Seemed like a one time thing Anoka County does and there was another group that was a non profit that would do the same for adults.”

Owning investment property in certain areas, I do run across this from time to time. Essentially, there are multiple sources that a tenant can go to and get assistance to pay damage deposits, past due rent, and such. These sources are both governmental and from non-profits.

For past due rent, the tenant will simply need a statement from you showing the past due amount. They will take that into the agency and within a couple days, they will mail you (the landlord) a check.

When I have a prospective tenant say they are getting assistance for the damage deposit or first month’s rent, I require a confirmation call or letter from the assisting agency. This is similar to confirming rental or employment history that you should be doing during your tenant screening process.

Sadly, many tenants have figured out how to work the system and they literally have the yearly anniversary marked on their calendar. I have a few tenants that will short pay their rent and their utilities bills starting about 3 months prior to their anniversary of receive help last year. Then just before I file a MN eviction on them and their lights are turned off by the utility company, they run in to the agency begging for money. Since it has been at least 12 months since their last assistance, the agency pays the bills. I have seen the assistance be a entire month’s rent and $300-400 in utility bills.

Have you always wanted to buy investment property, but never knew where to start? Don’t Wait! Get Started now.

(From the Wall Street Journal)

By MICHAEL R. CRITTENDEN
June 17, 2008; Page A3

WASHINGTON — Top mortgage lenders and servicers have agreed to speed up their efforts to help struggling homeowners, after coming under pressure from U.S. lawmakers and regulators.

The agreement among companies in the Hope Now coalition says for the first time that lenders should accommodate borrowers seeking to sell their home for less than their mortgage balance as a way of avoiding foreclosure.

The coalition, which is backed by the Bush administration, says its efforts since July have resulted in nearly 1.6 million loan workouts. Those numbers have been met with skepticism from legislators who say the mortgage industry should be trying harder to help people at risk of losing their homes.

Under the agreement, to be announced Tuesday, borrowers seeking help should receive an acknowledgment within five business days. In most cases, they should receive a final decision on whether they will receive help with their loan within 45 days. Lenders also will pledge to stay in touch with borrowers while reviewing their loans.

The agreement isn’t legally binding.

Claims from other lenders, known as secondary liens, often have delayed refinancing or loan modifications because the secondary lenders are often the first to take a hit when a borrower gets easier repayment terms. The new Hope Now agreement automatically keeps the second-lien holders at the back of the line, in some circumstances.

In earlier discussions, the Hope Now parties agreed that lenders should consider a new repayment plan and changes to the terms of a loan — including writing down the loan’s principal — before foreclosing on a home.

The latest agreement says lenders should also accommodate “short sales,” in which the borrower sells the home at a fair market value that is below the outstanding balance on the mortgage. The lender essentially forgives the difference between the sale proceeds and the balance.

While both short sales and foreclosures result in borrowers leaving their homes, a short sale allows homeowners to move out in a more orderly fashion, and their credit scores generally suffer less.

The agreement calls on servicers to delay foreclosure proceedings that are about to begin when there are still other steps that could allow borrowers to keep their homes.

Hope Now participants — including major banks and companies that service loans by collecting monthly payments — are expected to implement the new standards within 60 days.