This question was recently posed by a potential buyer:

If a Spring Hill Home for Sale is in Pre-Foreclosure (Short-Sale), Can I Still Negotiate on the Price?

This is a question that has both a short and long answer.  The short answer is as follows:

Absolutely - one of the wonderful things about real estate is “Absolutely Everything is Negotiable”.

And now for the long (but definitely more informative) answer…

You must first define “pre-foreclosure” and/or “short-sale” to make sure that we’re all on the same page.  I wrote an article about short sales on the Hernando Luxury Homes website - make sure to take a look if you have any questions…otherwise I’ll assume we’re on the same page and move forward from there.

Next we must understand the process by which a short-sale or pre-foreclosure is sold.  There are several stages or dominoes that must all fall in order for the deal to go through (this is why short sales can take up to 6 months or longer to close).

Here’s an overview of the dominoes that need to fall in order for a short-sale or preforeclosure property to close (we’re going to start from the buyer’s perspective…i.e. from the time an offer is received.  The process before that is a whole other article in itself and fairly irrelevant to a buyer).

1. Buyer sees a great deal and has their agent write up an offer on the property (usually including a short-sale addendum which includes a minimum 45 day period for the sellers lender to review (and hopefully approve) the offer).
    
2. Buyers Realtor submits the offer to the Listing Agent for the seller to review and sign off (in a short-sale scenario, the seller should ALWAYS sign off on the offer - they’re already not going to make any profit on the sale, so they’ve got nothing left to lose as far as the home is concerned).
    
3. Seller signs off on the offer and gives it back to the Listing Agent.
    
4. Listing Agent sends the fully executed offer over to the bank’s Asset Manager for review.  The Asset Manager is the person at the lender who handles properties on their way to foreclosure - their job is to mitigate the banks loss on the property (make sure that the bank loses as little money as possible) and thereby keep the investors who ultimately own the loan as happy as possible.
    
5. Your offer goes to the bottom of the pile on the Asset Manager’s Desk (the AM’s usually have 50-100+ files that they’re working on at any given time in their portfolio…yes they’re a bit overworked in  most cases).
    
6. When the asset manager gets to your offer, they recognize that it is a new offer in on one of the properties they are managing.  It is not the AM’s job to say yea or nea to the offer…it is simply their job to qualify the offer before presenting it to the investors who have the ultimate say.  The AM, upon receipt of the offer, orders a BPO (Broker Price Opinion) or two and sometimes a formal appraisal as  well.  This is because the AM has never seen the property in person and public record just doesn’t give enough information to justify any type of value assumption.
    
7. BPO(s) and Appraisal are ordered usually through an separate company who farms them out to REALTORS / Appraisers.  The REALTORS / Appraisers then have between 24 hours and 2 weeks to complete the order, depending on how much the AM is willing to pay for the reports (usually as little as possible…see the trend? their job is to keep money in the bank’s pocket!).
    
8. 1-2 weeks later once the BPO’s have come back to the AM’s desk, they go to the bottom of the pile (remember…50-100+ properties all getting worked on at once by each AM).  Once they get to the top of that pile, the AM then has an idea of how your offer stacks up to what the homes actual value is.  Keep in mind, throughout this whole process, the property is still being actively marketed  by the Listing Agent and other offers are usually coming in as well for YOUR property!
    
9. If your offer is within a range that has already been deemed acceptable by the investors who own the loan, then the AM passes it off to them for their signatures.  If not, he passes the offer along with the BPO(s) and Appraisal to the investors for them to make their decision as to whether or not they’d like to accept, or counter the offer.  Keep in mind, if other offers have come in on the property, those will get passed to the investors as well (they’re looking for whichever offer will NET them the highest amount after all is said and done).
    
10. At this point the investors take some time reviewing the offer and their options.  If they deem it a good deal, they’ll sign off on it.  If not, they’ll usually send along a counter-offer based on the value determined by the BPO(s) and Appraisal.  This is where things can get sticky for the buyer…
     
         For example:
     
    The list price on the property is $100,000.  You recognize it as being a great deal and because you’re concerned about other offers coming in, you offer $110,000 ($10,000 above asking price!).
     
    The AM orders the BPO & Appraisal and those come back showing a value of $180,000.  The AM then sends this information over to the investors who then counter your offer of $110,000 with their counter-offer of $160,000…but wait…you offered above asking!  How is that fair?!?
     
    Well…the investors who own the loan are the ones taking the loss (not the seller, who determined the asking price), and they never approved that asking price of $100,000…so you can now either:
     
    a) Write up another counter offer and hope the investor comes down lower.
    b) Pony up the extra $50,000 to close the deal.
    c) Walk away realizing that you can’t afford to spend $160,000 and extremely frustrated that you just spent 3-4 months negotiating a deal that was never meant to happen the way that you hoped.
     
    It’s your call…but most buyers who are looking for a place to live for their family can’t afford an extra $50,000 on top of what they thought was their top dollar ”above-asking-price” offer.
     
11. Now - depending on whether you chose a, b, or c things can usually move forward fairly quickly from here (whether with you or with another buyer).  Either you bought the home in our example for $160,000, you countered that deal and continued the negotiation, or you walked away.  Let’s assume that you walked away.
     
12. The AM now knows what the investors bottom dollar is (and so does the Listing Agent) and those BPO’s & Appraisals are considered good for up to 4 months (which means the investors’ stance isn’t likely to be changing any time soon).  The Listing Agent now changes the list price of the property to the lowest acceptable offer that the investors might accept, and writes into the remarks “Approved Short Sale!  Price Firm!” or something along those lines.
     
13. A new buyer comes along, offers list price, and the process moves along very quickly because all of the background work has already been done at the expense of the buyer who was looking for the “too-good-to-be-true” deal.
     
14. The original buyer is now out at least 1-3 months worth of time, has potentially missed out on several other great buys while waiting for their “great deal” to  come to fruition, and has learned a very hard lesson (perhaps one that their agent should have told them about from the beginning).

And that’s just what happens AFTER the first offer is received…nevermind all the steps that go into it beforehand!

So - to answer the original question again…Yes, you absolutely can negotiate.  But make sure that you have your REALTOR put together a Comparable Market Analysis for the property you’re thinking of buying and base your negotiations on THAT value - because ultimately…the list price of a pre-foreclosure or short sale property doesn’t really mean very much.

Best of luck - and if you have any further questions, please don’t hesitate to contact us over at www.HernandoLuxuryHomes.com - we’re always here and always happy to help!

Thanks,

-Josh

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