OK, you have been looking at homes that are in pre-foreclosure for sale (short sale) and you found one you like. It is in good condition and not a major fix up. Your next step is to write an offer and for arguments sake lets say it is listed for $150,000. Before you write that offer you check out what has sold in the immediate area over the last 3 months and determine the list price is at current market. Now you have to decide what price do you want to offer. Thinking back over what you heard or read in news reports or heard on TV or Radio commercial about making offers on distressed properties you decide lets really discount the price and write your offer for $100,000. The lender (who has final approval) will negotiate right?
In essence, you have put yourself in the worst position you could have. In the current market, lenders know that there are a lot of buyers trying to find homes and they are willing to pay market or close to market because prices are at the bottom. Wait you just heard that the market was still decreasing. Check the market facts not the hype. In Surprise in all zip codes, the market bottomed out in April, May , or June of this year. It came up a few dollars per square foot since then but has remained steady, The number of buyers are keeping homes from further decreasing in price, its a competitive buyers market. As luck would have it, there are enough foreclosures and pre-foreclosures keeping the market prices from raising appreciably. So in effect the market for homes is between two forces holding prices steady. So why should a lender approve a short sale with a deeply discounted offer? They won't, they know they will get a better offer.
What will they do? From my experience there are a couple of reactions. First they come back with a price that is about 10% less than market. That seems to be bottom spot for them. Then they will often ask for a substantial seller contribution in the range of $5,000 to $10,000 cash from the seller at closing. Note that they also will often provide a promissory note option payable over 10 years at 0% interest for twice the amount (looks like a hidden interest to me but that is another topic). So now you have set the tone that says you must meet their new price (this is extent of their negotiation) and the seller has to come up with substantial cash at closing. What are the odds this will happen?
When you go to a seller and ask for a cash contribution, the most common comment I get back is "If I had that kind of money I would not be short selling my home". So where are you now. As the buyer, you can walk away from the deal or your can make the cash contribution. This is where you have to make the decision, could you have made the offer at a price where the lender would have been willing to take it without a cash contribution from the seller? If you did then the money you would have spent would be in the mortgage and not cash out of your pocket. This is a value of money decision. Buying home at super low prices have passed this market unless their is something very wrong the home.
The second response is that tell you it is not enough. Sometimes that continue with additional price guidance and sometimes you have to guess. Believe me that's when your offer drops to the bottom of their pile.
The second issue is that you are competing against other buyers. The listing agent has the responsibility to provide their client with the best opportunity to short sale their home. if a better contract comes in, a listing agent has the right to swap yours out. The listing agent wants the home to sell as quickly as possible. Unless you modify the short sale addendum, an offer can be replaced at the lender anytime prior to receiving a letter of acceptance from the lender. If you are serious buyer, you contract maybe replaced and you may or may not know about it until it to late. The listing agent should let you know when you are no longer in the primary position, but it doesn't always happen.
Your best bet as a serious buyer is to write your offer such that the sellers lender, who must approve the offer price and provide their additional conditions, will see the offer as just meeting its requirements for not asking for seller contributions. Lender negotiators are more likely to review the offer quicker and not find reasons to put it aside for future review and allow you as the buyer to decide the amount of leverage you want in your transaction at the beginning and not under the pressure of losing the home purchase from having to make larger cash contributions then you are comfortable with at closing.
Remember the critical issues. Know your market, know your comps, find out who the lenders are and what are their requirements for an OK, know what additional costs you may have to pick up for the seller, and know what mortgage and cash levels you are comfortable considering. Short sales are very little resemblance to a non-distressed home sale. You are going to need someone who has the experience to provide knowledgeable advice on what is a complicated process.