First time buyers (or seasoned buyers) – Beware the bank counter-offer

Question - I made a bid on a foreclosed house and now the bank has countered with a huge document of their own. What’s that all about?

Answer – The bank has essentially made a counteroffer. Your original offer is now invalid and

they have asked you to respond to their counteroffer by accepting or rejecting their offer. Banks are arrogant corporate entities, faceless and soulless. They play by their own rules and nothing that you’ve already learned about the process will necessarily apply to a bank foreclosure deal (or a bank short-sale deal for that matter).

What the bank has sent back to you is their Purchase agreement with their terms and conditions. Go over it very carefully with your agent. Don’t make any assumptions that anything that you had in your original offer still applies. The bank counteroffer will give you the price that they will accept; they will tell you how much, if any concession they will make to help out with your closing costs and they will tell you exactly when you have to be ready to close or they will impose a monetary penalty upon you.

The banks also use this counter offer to construct an elaborate tort shield for themselves by denying any responsibility for anything to do with the property. Like Sgt. Schultz on the old TV series Hogan’s Heroes, “They know nothing.” It is not unusual for the various denials for various aspects such as condition or mold or anything else to take up 15-20 pages of legal mumbo-jumbo. Lawyers love the banks and make tons drafting these documents.

The bank may also specify that you must have yourself pre-approved by one of their loan officers, even if you don’t have any intention of using them for your mortgage. They use this ruse to gather more information about you to see if you are really a serious buyer. The banks may specify what type of mortgage you may get for this purchase and may disqualify some of the loan types or programs that you were hoping to use. Pay close attention to the clauses that define when you must be ready to close, the close target date and what the penalty is if you miss that date.

Lately the banks gave been using their unregulated power on these types of sales to ignore or throw out the local standards and practices for things like the tax proration and who pays various closing costs that have always been the responsibility of the seller. They just say, “Nope I’m not going to pay for your Owners title Policy, if you want one you pay for it”; or they may claim that they don’t have to pay normal state taxes or fees. Several states Attorney’s General or County Treasures have taken them to court and won over some of those shenanigans. They may also refuse to pay outstanding liens from the Homeowners Association for keeping the lawn cut on their run-down property and leave you holding that bag, too.  “Do the right thing” is not in their vernacular so don’t expect it from them.

The difference between dealing with a bank and dealing directly with a seller on these issues is that the seller usually really wants to sell and is willing to be reasonable and to make compromises. Banks just don’t care. They have no skin in the game. In fact they aren’t usually even the real decision makers; they are just acting as servicers for the real owners of the debt and just facilitate the process. The real decision makers are like the Wizard of Oz, hiding behind the curtain. They are never seen and you never get to talk to them directly.

The real decision maker in a foreclosure is an obscure entity call “The Investor.” Most of the time these days the investor is a corporate entity that bought you loan as part of a pool of loans that was collateralized. To this mysterious entity behind the curtain, you and this property are just numbers on a spread sheet; something for him (them) to “run the numbers on” and to be voted on in the committee meeting. There is absolutely no transparency in the decision making process of the investor. There isn’t any concern over you or the property, in fact they don’t even see it as a property, to them it is an asset to be bought and sold just like a commodity. This is as close as you’ll ever come to understanding how Wall Street works, because the investor is Wall Street.

So what can you do? You can walk. You can just say no. They don’t care. It won’t hurt their feelings because they have none. But, if you really want the house, then make sure with your Realtor that you understand what you are signing up for. Go over every line of their counter offer and understand any and all requirements that you must meet and the deadlines that they are imposing. Just understand that by signing up for this deal you are no longer protected by the rules and code of ethics of the real estate industry and you have probably given up a number of your normal consumer rights, too. Once you sign that contract you must dance to the devil’s song.

If this post has served to scare you off a bit, good; then it has served its purpose. You will seldom be in a more powerless situation over something that is important to you. This is not a game for virgins and even seasoned Realtors hate dealing with the banks on these foreclosure and short sale deals. You can get some great prices in these deals, but you can also get yourself into something that you can’t extract yourself from without it costing you -  caveat emptor!

Here are some other readings that may have different takes on this process –

http://www.realtor.com/home-finance/homebuyer-information/counter-offers-on-bank-owned-homes.aspx

http://homebuying.about.com/od/shortsale/qt/How-To-Handle-A-Short-Sale-Counter-Offer.htm

http://www.realestateabc.com/homeguide/reo.htm

There are things that are unacceptable in the offer. How do I handle that?

The 10^th in a series of 12 posts for sellers of answers to their frequently asked questions about the real estate process.

Answer – If there are issues that you cannot accept as written in the current offer, you will need to reject it or make a counteroffer. Counteroffers are usually made using the Purchase Agreement document and making changes right on the face of the document. Those changes reflect what you are telling the Buyers that you will accept. In most cases you may wish to let your Realtor® contact the other side and discuss the issues before marking up the Purchase Agreement. This is called verbal negotiation and is used to feel out the parties involved and resolve the language to be used to make any changes to the PA.

Sometimes the negotiations are carried out via email or text messages. It has not yet been conclusively determined yet by case law how binding any of these verbal or electronic negotiations are until they are reduced to paper and signed by all parties. Your agent should have you initial, sign and date any changes that you make to the Purchase Agreement document and send the document back to the Buyers as a counter offer.

At that point you have made a counter offer and will have locked yourself into a negotiation

process with the Buyers. You should not entertain other offers during this negotiation process, if you have made a counter offer. Counter offers, like the original offer, should have some time limit specified, at the end of which the counter offer is either accepted or become null and void. You don’t want to throw an open-ended counter offer out there, since you are effective off the market until that offer is resolved one way or another.

Another thing to remember is that by counter offering you have rendered the original offer null. If the Buyer rejects your counter offer, you can’t just go back and say, “Oh, well; then I accept your original offer.” Recent case law has confirmed that the Buyer is under no obligation to honor his original offer once you have counter offered. Perhaps the buyer is offended by your handling of the counter offer; or, maybe they found another house that they like equally well and want to make an offer on it. All they need do to end this process is reject your counter offer or let it expire; since there was never a contract reached based upon those offers.

If the offer was really terrible, don’t take it personally. Everybody wants to try to get a deal. Some just act more aggressively on that impulse than others. Some, however, are just on fishing trips to see if they can steal a house from a desperate seller. If the main issue is price, you should have a good heart-to-heart talk with your Realtor before you just reject the bid. He/she can provide you with some insight into what may be a good counter-offer price to use. Remember that arriving at a final sale price is often a negotiated process – so negotiate.

Your Realtor may also be able to discuss with the buyer’s agent whether or not this buyer is really serious about your property or just fishing around on several properties. Anything that your agent can find out about the buyer(s) and what is motivating them to make the offer that they made might help. He can also evaluate the “strength” of their offer by looking at things like the amount of the earnest money deposit and the level of commitment indicated in whatever “pre-approval” was submitted. Many times the so-called pre-approval is really nothing more than a fairly meaningless pre-authorization form letter.

 

If your Realtor and you agree that this was just a low-ball fishing trip by a buyer trying to see if he can steal your house, reject it and move on. I often have the seller use a wide point magic marker to write “REJECTED” across the face of page 1 of the contract and fax or email that back to other side. They get the point. Some agents have the Seller counter offer with a price that is $1 less than the original price – that also gets the point across, but is still a counter offer and locks you in for some period.

If what you don’t like is a possession issue, be as flexible as you can. A buyer usually wants to take possession at closing and making him/her wait an inordinate amount of time after closing to move in is a hardship and a hassle for the buyer. Remember also that you become a renter in your own home as soon as the sale closes, so it is not only inconvenient for the buyer, it’s costing you money too. Possession after closing of a week or two is reasonable; however, asking for a month or two is not.

Other issues that you may object to should carry less weight, especially if they are niggardly little items like objecting to supplying a Home Warranty to the buyer or refusing to throw in the refrigerator on the sale. Are you really ready to lose a $300,000 sale over a $3000 Home Warranty or a used $1000 refrigerator? Spend some more time thinking before you answer that. In real estate we tell sellers that they just bought their house back for that $1,000.

There is another way that we use to reply to an offer in Michigan without making a formal counteroffer. It  is called the “Sellers Response to Offer”. In that case you and your agent create a reply document that basically says, “I don’t accept your offer; but, if you were to submit a new offer with these changes, I would look upon it more favorably (note that you still aren’t saying you would accept it).” The Seller’s Response to Offer will also clearly state that this is not a counter offer and that you will continue to entertain other offers.

The Seller’s Response method of non-acceptance of the original offer keeps the negotiation process alive with that buyer without tying you down to the offer in any way, like a counter-offer would. You are not counter-offering; you are providing the buyer with information that he did not have before about what would be a more acceptable offer. Using this technique, you can still look at other offers while you wait to see if the original buyer will make a new offer, based upon your advice. It is certainly a much better way to deal with things than an outright rejection and much less restricting on you than a counter offer.

If this is not your first offer and all have been what you consider to be too low; it’s probably time to have a good heart-to-heart talk with your Realtor. Sit with your Realtor and go over the feedback that you’ve had from showings and review the offers that you’ve rejected in the past. The market tis trying to tell you something and it’s probably time for you to listen. It may be time to start compromising on those things in those offers that you couldn’t live with; otherwise you may be living in your current house for a long time. Don’t blame your Realtor for the failure of your house to sell. He/she has been doing their job by getting showings and offers and I’ll bet they’ve been trying to tell you all along what you need to do to sell. Make a list of those “I won’t sell unless…” items and have that discussion with your Realtor again.