Outbidding on REO hoping FHA appraisal will come in lower so bank will negotiate.

Asked by Marc Wilson, Oakland, CA Thu Jun 25, 2009

We put a high bid ($50K over asking) on a REO property in east Oakland because there were 12 other buyers. The bank took our offer and passed on two cash offers under asking. It's been appraised at $250K (our comps suggested a $265 value), and since we qualified for an FHA loan, we're now waiting on the FHA appraiser. Are we correct in assuming that if the appraisal comes in at $250K (or lower), that the bank can either bring the price down to this lower appraisal price, OR, the bank can hold us to our asking and we have to come up with the 3.5% down on the full $300K we originally offered? I'm assuming our other option is that they only come down a bit and we renegotiate or we walk away from the deal. My question is whether, in your experiences with recent REO trends, banks drop all the way to the lowest appraisal price, hold out for our accepted price or meet halfway between the low appraisal and our offer? Yes, we're first-time homebuyers and we're learning fast! Thanks!

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Joy Elliott, Agent, Castro Valley, CA
Thu Jun 25, 2009
BEST ANSWER
As long as your contract has a appraisal contingency, you are not obligated to proceed with the purchase if the values don't meet the sales price. Ininitially the bank performed a BPO (Broker Price Opinion) which should give them an indication of the true value of the home. If the actual appraisal comes in low, you can submit it to the bank asking for the price to be reduced to that value. It doesn't serve to kick you out of the deal or make you come out of pocket for more money. The value is the value and the banks seem to be addressing that. Of course, they can put it back on the market asking for All Cash buyers, but we don't see that happening too often.
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Marc Wilson, Home Buyer, Oakland, CA
Sat Aug 1, 2009
Well, it's been 5 weeks and the FHA appraisal finally came in.
Surprisingly, it came in $60 over asking and $10K over our purchase price. We were shocked because as we understood it, FHA appraisals notoriously come in low. We think the appraiser took the higher comps but they were accurate. The numbers didn't line up in our favor and didn't give us any wiggle room to negotiate -- the bank didn't budge at all because of the multiple bid situation and other buyers backing up behind our offer in case we walked. I guess we can feel comfort in the fact that it is valued higher than we thought even though it's not as comfortable on our wallets. We are going forward with the purchase price of $300K and plan to close in a few weeks. Thanks to all for the feedback!
0 votes
Will Bateson, Agent, Livermore, CA
Wed Jul 22, 2009
I had a similar situation, and in that case the bank dropped the contract price to the appraised price, which worked out great for my clients. But each bank/situation is unique. I strongly agree with Jessica, you need to read the bank addendums VERY WELL. They are written by out of state attorneys and solely protect the bank. Make sure you know what you are agreeing to before you sign anything, particularly on a foreclosure.

Good luck!

Will Bateson, Broker
Sidewalk Homes
925-455-0845
Web Reference:  http://www.sidewalkhomes.com
0 votes
Oakland First…, Home Buyer, Oakland, CA
Sun Jul 12, 2009
I'm curious about this. How did this strategy work for you?
0 votes
Jessica DeL…, Agent, Berkeley, CA
Tue Jul 7, 2009
Be careful...a lot of REO banks are getting wise to this offer strategy and are beginning to counter offer with addenda that state you as the buyer will have to come up with the difference between the appraised value and the offer price. I cannot stress to you enough the need to READ ANY BANK ADDENDUMS VERY CAREFULLY. They can also include passive contingency removal clauses as well, ask your Realtor about this, it is something to watch out for!

Best of luck,
Jessica
0 votes
Kamal Randha…, Agent, El Sobrante, CA
Thu Jun 25, 2009
Hello Marc. How exciting for you to be getting into the real estate market and an excellent time too! If you really like the home and have extra cash, you can pay the difference between the appraisal and what you offered. However, if not, your other option is to negotiate a lower price. I would try this option first. Good luck with everything!! Feel free to call or email me anytime if you have any further questions.

Kamal Randhawa
Broker
510-932-1066
0 votes
Pacita Dimac…, Agent, Oakland, CA
Thu Jun 25, 2009
I've only had this happen once, and the bank was Wells Fargo.

When our appraisal came back, it did come in at slightly lower than our offer ---- so we presented this to the REO bank to make our case that we couldn't get a loan for the offer price.

Probably because we were already in contract, and because at this point, it's one bank's position presented to another bank, they agreed. Because new appraiser practices are in place: i.e., with FHA loans, there are two appraisals, they would have to know that you and your lender are doing your due diligence in valuing the property.

Overbidding to get a property and hoping an appraisal would be lower should not be the basis for how much one should offer. The REO bank could just as easily have canceled the agreement. You can hope that they will agree to a lesser amount.

When writing an offer, do factor in market value, how much the bank foreclosed on the property. Remember that before the bank lists an REO for sale, they have already done at least two BPO (brokers' price opinion) using experienced agents/brokers to determine a market price. So they already know what the property is worth. Overbidding on REOs is quite common, but be smart about it. Many times, it's not the highest price that gets it, but one with the best terms, too.

Good luck!
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