What if the Seller Owes More Than You Can Offer?

What if the Seller Owes More Than You Can Offer?

In 2008-2010, lending stopped. Interest rates were variable and, as they rose, borrowers who had been told to simply refinance when payments got too high, couldn’t. Foreclosures began to mount. People simply couldn’t afford their house payments any longer and house price values were dropping. Owners were forced over and over to walk away from what had been their family homes.

As investors, it was common to view properties where we found the seller owed more than the property was worth.

This still happens today, of course, but not nearly as often. When the economy turns down again (which it will because the real estate market always cycles), homeowners being “upside down” on their mortgages will become even more common again.

So, what do you do when you go out to a property and find that the seller owes more than their mortgage balance? Can you still make an offer?

To begin with, change nothing that you normally do.

These offers should be made just like any other offers that you present. The most important thing for you to pay attention to as an investor is never the seller’s situation, but keep your focus on your own true number – the most that you can offer to pay and still make a profit. To get to that number, naturally you need to understand:

  • how to comp the property
  • how to recognize and estimate needed renovation costs
  • how to calculate what the property will ultimately be worth after repair

I’ve covered those topics in other blog posts. You can find some by using the search bar at the top of the page or clicking on the links I provided above.

But the first thing to always keep in mind is that the seller’s position cannot influence your bottom line number. You must know the maximum you can offer on any property and never go up on that number just because it doesn’t meet what the seller wants or needs. If you pay too much for purchases, you won’t be in business very long.

Secondly, “never think for the seller”. We have purchased plenty of houses where the seller owed more on their mortgage than what we offer. What does the seller do? They come to closing with money. And don’t assume they can’t. Ask any closing attorney how often sellers come to closing with money and you’ll be amazed. Sometimes they have their own money, or retirement funds, or family steps in to help, etc, etc.

All that matters for our business is what we can offer on any deal. Our number is the only number I worry about. If the seller agrees to our offer, we have a deal. If they don’t or can’t, we part as friends and I’m always available to offer my assistance in their sales process whether they sell to me or to someone else. But we have purchased a lot of properties where the seller brings money to closing, so never “assume” that someone upside down on a mortgage can’t or won’t do that.

Again, your only concern should be your true number, your highest possible offer, what works for your business.

Besides, you actually have NO idea what is truly going on in the life of any seller. Talk openly and honestly about what you can offer and why. The seller will make their decision based on a lot of things that are outside your control. 

Then always make an offer. Why? Because, why not? Don’t think for the seller.

What do you do when a seller owes more than you can offer? Will this post change your behavior?

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