There is a reason real estate investors can make money by picking up cheap defaulted property from the banks.  Banks need to get rid of those foreclosure properties.

You may think that negotiating with banks in order to get them to give you a discount on their property is practically impossible!  It is possible and real estate investment deals go through with the bank every day.  Here’s why.

Why You can Get Discounts on Default Properties
Banks are rated in their ability to work out deals with homeowner in default.  That means they are rated for how much cash they hold in reserve to cover each mortgage should it default and how well they work with the homeowner in order to keep a property from foreclosing.  Some banks may hold as much as 8 times the default mortgage in cash reserve, which for a standard $100,000 mortgage is as much as $800,000.  They are required by law to cover that mortgage in case it goes sour. The banks can’t use this money, invest this money and they certainly can’t use the property.  It just sits there tied up for as long as that mortgage is in their books.

So a bank will accept a short sale on a property or a mortgage note purchase primarily because of the reserves they are required to set aside.  They want that money freed up so they can invest that reserve money and make profits. 

Your best deals come from the bank right before the end of their fiscal year or right before their auditing. 

How eager the Banks are to get rid of Default Properties!
A particular real estate investor was interested in a small home in default.  The investor began discussions with the bank that held the homeowner’s mortgage to see if they could negotiate a deal.  He was holding out for a sale price of $37,500 on this property and he wanted to make the sale as a note purchase.  The bank was being difficult.  They didn’t want to sell the property that low and they wanted a short sale deal on this property.  The deal didn’t work out all three parties went their separate ways.

About 6 months later the bank calls the real estate investor back up to see if he is still interested in buying the property.  They were willing to let him have his previous price of $37,500 and let him have the property mortgage through a note purchase.  In fact the bank needed to do a note purchase. 

They had foreclosed on the homeowner during those 6 months, but neglected to show up at the sheriff’s sale.  This naturally messed up their foreclosure. 

The only way they could sell the property was by a note purchase.  There may have been a lot of investors interested in this property, but because the investor had been holding out for a note purchase six months prior the bank remembered him and called him up to see if he was still interested in investing that property.  Even better the investor saw what a pinch the bank was in and managed to negotiate an even lower sale price on the note purchase of $30,000.

Banks are not in the real estate business, they are in the money lending business.  The only use foreclosure as a last resort to recover some of their money.  This process takes a long time though and it’s messy.  Banks are much more willing to sell the property, work with the homeowner or take discounted short sales and note purchase deals to recover their loan.

You can’t just approach the bank with your best offer and expect to close the deal.  You need to persuade them to accept the short sale first with a little negotiation.

You’ve found a great real estate investment to purchase, signed on with the homeowners and gotten all of your information in order.  All that’s needed is to approach the bank with a short sale offer and close the deal right?  Maybe not.

There is an art to negotiation in the real estate investment industry.  Negotiating a short sale isn’t simply approaching the bank with your packet of paperwork and your best offer to close the deal. 

You’ll need to endure at least two rounds of negotiation with the banks most of the time.  So, don’t approach them with your final offer right off.  It’s probably best if your first offer to the bank is a price that’s lower than what you are willing to pay.

Send a Cover Letter
Submit to the bank an offer cover letter filled will all of your points to justify the discounted offer you are making on the bank.  The banks you usually end up negotiating with get tons of offers for their properties.   This submitted cover letter helps you stand out and makes you look a little more professional as a real estate investor. 

The cover letter can outline your interest in the property, certain negative aspects you’ve noticed to the default property and your first offer on the property.  Don’t be afraid to make a low offer on the property when negotiating short sales.  You can always up your offers, but you can never lower them.  So, if you start out by giving them the most you are willing to pay for the foreclosure property you are interested in the bidding could quickly enter a price range you aren’t able to afford.

Make it Personal
Making more personal offers, such as using the cover letter submission, will get you into more negotiations with banks and help you close more deals.  You’ll waste a lot of time if you go out make a 100 low ball offers in a very impersonal manner.  It just won’t make real estate investment worth the time. 

Instead, go out and find ten default properties that you are interested in and make more personalized offers on them.  Put together a nice cover letter for each that outlines the points above and you’ll find that you enter more deal in less time.  Less time spent means you are making more money for your effort and you are more likely to make that real estate deal.