Surviving the Feeding Frenzy

I don't know of a better term to use than "feeding frenzy" for what's happening with a lot of properties out there right now. Multiple offers on well priced properties, especially REO's, have been common for over a year now, but in recent months, it seems like it's been a rare REO listing that hasn't had several offers on it within a few days of listing. In some cases, we've seen 8 or 9 offers on especially attractive deals.

If you've been reading this blog for any amount of time, you know that our inventory has gotten tight over the pat few months. I'm going to do a 2009 first quarter review next week, but here's a little preview of one key stat: New residential listings on our market for the quarter dropped by about a third compared to the same quarter last year (103 this year, 155 in 2008). REO listings dropped by the same percentage (44 vs. 66) - accounting for about 43% of the total listings in both periods. It looks like we're on pace to be almost exactly where we were last year in terms of sold units year-to-date. Thus the big decline in inventory.

So here's the deal - if you're looking to pick up a good deal on an REO listing in this market, here are a few tips:

1 - Get a good agent (I just happen to know a couple - hint, hint).

2 - Get with a local lender and get pre-approved. Not just pre-qualified; you want to go through the process and get pre-approved. That's going to carry more weight with the sellers when they look at your offer. In some cases, especially on Wells Fargo or Countrywide properties, the seller is going to require that you pre-qualify through one of their loan officers. That's OK - they don't bite, really they don't. It's good to get a second opinion on your loan, and they might be able to cut you a better deal. If they don't, you aren't obligated to use them.

3 - Don't look at the list price in determining value. Look at the comps. For a long time, buyers have been conditioned to automatically go in low on offers to see if they can get a deal. That made sense in a different market, and on some listings, it still can. But we're seeing a lot of new REO listings coming on at prices that are clearly well below value, and in some cases, even going 10% over list will still get you a price that's well below recent sales. Just because you have to compete doesn't mean that you have to overpay.

4 - Make your best offer up front. This is especially true on underpriced properties. Here's the thing that drives us all crazy: There isn't any established "rule of thumb" on what to expect with a seller response on an REO. Some of them will come back and counter all offers with something like "make your highest and best offer". Some will only counter a few offers. Some will just take the best offer and run with it. This isn't a time to stake out a negotiating position. You might not get a chance to negotiate at all. Go in strong, give it your best shot up front. You don't want to lay awake at night regretting the one that got away when you would have been willing to pay more than it eventually sold for.

5 - Be patient. For a while last year, it seemed like we were getting responses back from the sellers on these properties pretty promptly. In the last couple of months - not so much. In some cases, we've seen it take a few weeks to get a final response. And then once we get into escrow, we wind up waiting to get an escrow officer assigned. The overwhelming majority of these escrows wind up out of town in large escrow offices down in the L.A./Orange County area, and this all too often results in further delays. It's one of my personal pet peeves - don't even get me started. But the important thing here is this: Keep your eyes on the prize. Yes, it's going to be slow and frustrating. But after it's all over, you're going to be getting a good deal on a home.

6 - If you're having trouble winning out on multiple offer situations, especially if you've been bumping up against your limits on price, look for something that's a little bit off the radar. Even though most of these seem to be coming on at "buy me now" prices, there are still some properties out there that aren't getting a lot of attention because they aren't priced right. There might be some opportunities to negotiate some of those down to a good price, especially if they've been on the market for a little while. Or my personal favorite - find one that just fell out of escrow. Those can be ripe for an aggressive offer sometimes, especially if it fell out over buyer qualification issues and you can bring in a strong pre-approval.

7 - Cash is king. If you have to compete against cash with an FHA or VA loan, it can be an uphill battle. If you can bring enough cash to even get a conventional loan, that can help a lot. But if you are in a position that requires FHA/VA, don't despair. It might take a few tries, but like I said above - patience, patience, patience.

8 - Don't limit yourself to REO properties. While these are often the best deals out there, there are occasionally some very good deals to be had on homes offered by traditional sellers as well. If you have someone who has to move and they have some flexibility, there could be a good opportunity to strike a good deal. And chance are pretty good you'll get a home in better condition to boot. You might also find some opportunities with some short sales, but you need to be somewhat selective about those, and that part above about patience? Double that.

It's a crazy and exciting time to be buying a home right now. Fasten your seat belt, keep your arms inside the car at all times. And enjoy the ride.