This past year I worked with two really great clients who were interested in buying condos in Steamboat Springs which were listed as Short Sales. (Short Sales can be thought of as pre-foreclosure sales in that the seller’s lender also has to sign the contract, because receiving the Asking Price will not be enough to repay the mortgage; it will be “short” the amount owed). Both times, coincidentally, the Sellers received and accepted a higher offer from another buyer on the same day we made our offers. You wouldn’t normally expect to get competing offers on a property with so many homes on the market today, but they were well-priced, so we did. It hurts to lose a deal (although in these cases we saved ourselves the further Short Sale hassles), but every one of them is enlightening. Here’s tips I can share from these:
1. Be careful lowballing an already low asking price.
In a buyer’s market such as the one we currently have, there has been a lot of discounting of price. We encourage our clients not to leave any money on the table, so offers are typically made for below Asking Price. But how much below Asking Price should you go? It depends on how badly you want it, what you can afford, and what kind of competition you are going to have. But a good place to start is always with market value.
Have your agent run a CMA (Comparative Market Analysis), looking at all the similar properties which have sold recently, to come up with X as the market value for the property. Then consider making an offer at 10-15% below X (market value) and hope the seller will either accept your offer at that price, or present you with a counteroffer. Particularly in a Short Sale, when the Asking Price is already 10-15% below market value, I think that going below that is treading dangerously.
Why?
Because if the Asking Price is below market value, and the property is in excellent shape and desirable, you are not the only person that is going to have noticed. It’s one thing to be low-balling when you are the only one at the table, it’s another thing to be doing it when a crowd is being attracted. This can often happen right after a price drop. What before was a borderline attractive price, can suddenly, with a price drop, become a very attractive and affordable price to more people than just you. And right now, everyone has a keen eye out for deals.
Also, in a Short Sale, it isn’t just the Seller that has to approve your offer, it’s also the lender. In these two cases, it was the Sellers that rejected our offers because they got a higher bid the same day. We didn’t even get a chance to be accepted or rejected by the lender because that happens after Seller acceptance.
2. Turn fear into clarity.
Buying real estate can often evoke fear, especially in our current market where it’s natural to wonder if you are about to buy something just before the price plummets even more. The whole process of negotiations can also raise the fear level, especially when you’re told their is another offer on the table. When the listing agents each told me that they were expecting, or had received another offer that same day, my buyers and I wondered “Are they lying, to get a higher price?” I mean, what are the chances of another offer coming on the exact same day?
As an Exclusive Buyer Agent I have a legal duty to my client. I help them get the property of their choice for the best possible price. I don’t want them to lose a chance at getting the home because of fear setting in; specifically a fear of being taken advantage of. Yes the listing agent could have been lying, although typically unlikely. But why call their bluff and risk that they are not lying?
Instead, use the opportunity to gain greater clarity about what you want. Is it really the house you want? Had you expected to end up paying more than your initial offer price, after negotiations, anyway? If so, rather than just calling their bluff, decide exactly how much the property is worth to you, what you can afford, how badly you want it, and then increase your offer to that price. Is paying $5000.00 more going to make much difference in your mortgage payments (especially at today’s rates)? $10,000.00? $20,000.00?
Again, if you can afford it, if you were expecting to go up that high anyway during negotiations, if it still gets you the perfect home, and if it still does so for under market value, why not take the risk that they are not bluffing? Sometimes you just have to 
be totally clear about your hand, and then show it, if you even want a chance to move forward with negotiations. Because there is still the lender that has to accept the offer, like I mentioned above!
My two buyers chose not to raise their initial price offers when they heard about the second offer on the table. Each case played out a bit differently, and they each had their reasons including, with good reason, reluctance to get involved with the ambiguities of Short Sales.
3. Be careful asking for too many contingencies.
In a normal transaction (not a Short Sale), when a Seller lists a price (and even when a bank lists a price in the case of an already foreclosed upon home), typically if you offer to pay the full Asking Price, they will sell the home to you at that price. And you can generally get an answer back in a couple of days whether they will accept whatever price you offered. But with a Short Sale, all you know for sure is that the Seller receiving the Asking Price will not pay off the mortgage in full. You do know that the Seller should be willing to accept the Asking Price, because they are who set the price.
But unfortunately in a Short Sale, the seller typically hasn’t a clue yet whether the lender will accept the full Asking Price, little alone anything less, because the lender hasn’t been involved yet And it could take months to find out. Sometimes in fact the Seller uses the Asking Price as a lure to get an initial offer. This is because the seller typically has to submit a real offer with their Short Sale request package. It’s only then that they can can find out whether the lender will agree to a Short Sale, or not, and if so, what the lender will and will not accept for a sales price. And then there is also the fact that the lender will look at the contingencies on the contract.
It’s understood that in a regular transaction many Sellers are willing to negotiate various things (fixing the broken faucet, for example), because the buyer has it in the contract that they can get out of the deal if they find problems with the house during Inspection. (Typically foreclosed, bank-owned properties are sold “as is” with only ten days to conduct and approve your Inspection findings.) Because there is a normal seller involved in a Short Sale, it’s easy to think that you will be able to ask for the normal contingencies. But you have to remember that it’s not a normal deal. The seller has to be thinking about what the lender will approve, because the lender is required to sign the contract.
And what does the lender want? What will get them to sign the contract? Besides the highest price they can get (remember, they are losing money on a short sale as it is), they want as few opportunities for the buyer to change his or her mind, meaning as few contingencies, to the contract as possible. Ideally, they’d like it to be a cash deal, or at least with as much cash down as possible to enhance the chances of the buyers getting financing. And they’d like it to be sold “as is”, to minimize their involvement and so there won’t be negotiations over repairs which could derail the deal.