Expert: Todd C. Menard - 5/13/2008

Question
I have decided to help my son with his first purchase.  He lives in the Tempe area and has asked the help of a realtor.  I live in South Carolina.  Having been a realtor in Colorado, I know Colorado law and procedures.  I am not familiar with AZ law.  He found a home that is bank owned, a foreclosure.  MLS price is $134,900.  We are going FHA, which allowable.  I know we have to ask for 6% for seller contribution for closing cost and non-allowables.  My son is receiving 100% financing.  I am non-occupied co borrower.  We are being told that the list price is what the bank wants to net.  That if we even want to have any hopes of getting an accepted offer, that we should offer $140,000, ask for 3% seller cont. not to exceed $4200, $1000 Earnest money (I only wanted to give $500) and seller contribution of 3% for down payment.  This way it covers the 6% seller contribution and nets the bank right around their asking price.  I know as a buyer, we can offer what we want.  But I also know banks have accepted lower offers than list price.  Generally speaking, is it normal practice in AZ to raise an offer to cover the contribution?  My son really likes the home.  He is a first time buyer and the realtor has him thinking he has to go higher in price to "seal the deal".  The lender has pre-qualled up to $140,000, however I do not want my son to have to pay more than he really has to.  I wanted to offer the asking price with the 6% seller contribution.  Is this, in your opinion, to low of an offer to be considered, or should we stay at $140,000?  Will banks negotiate with a lower offer?  I feel that if they are offering out FHA they already know they will pay 6% contribution, and that will be deducted from their list price and we do not necessarily have to raise the offer.  Am I correct in this thinking?  (I have never done a foreclosure)  Thank you, Lisa Smagner, South Carolina

Answer
Hello Lisa - Let me begin by stating a real estate licensees duty is to provide information to the client in an objective manner by which the client can make appropriate price and financial decisions for themselves . OK- Now let me answer each of your questions. 1-Seller Contributions: Whether or not the contributions are added to the price would be based upon the List Price (LP) vs Comps. HUD indicates the banks are looking for approx 85 of FMV. If you enjoy the negotiation process you may desire to offer LP less the contribution since the seller is a bank and you won't offend them. Let the bank counter back... they probably will anyway so starting low nay be an appropriate position. 2-There are no laws which govern the banks REO and Loss Mitigation administrative processes, therefore if you have Colorado REO experience I would rely on your experience for use anywhere in the US. 3-AZ is a buyers market! The inventory levels are in excess of 8 months supply. This means the lenders are not in an advantageous position and may very well accept your low offer. Never should a real estate licensee, nevermind a REALTOR suggest earnest money amounts or suggest above LP if the buyer desires to pay less. 4-Your sons position is strong... if he can qualify for financing he is like gold! Qualified Borrowers/Buyers are hard to find today specifically in AZ. Your son has the control in this market, he should be stipulating the terms no matter where the property is located. I do not want to discredit the real estate agent assisting your son either with any of these comments as I do not know the specific values of properties in the neighborhood this property exists. An in Tempe, you can experience drastic price differences mile to mile. So "Tempe" even though it has a great reputation there is a fast diversity of product within every square mile, so location matters. 5-Your Offer: If you want to pay LP less contributions you should submit that offer. I agree that if the lender is offering the property in the MLS at a specific price and offers FHA as an acceptable form of financing they ARE expecting to pay the contribution for that type of loan. 6-Earnest Money: The amount of earnest deposit is not paramount to the buyer's ability to obtain financing and have the funds available to perform a successful close of escrow. If the seller thinks the earnest of $500 is too low they can counter. But once again remember... they are offering FHA financing for first-time home buyers... that's 100financing... this means the earnest is to be refunded at closing or applied to the settlement fees. So it is a rather mute point. The purpose of earnest money is for damages... see line 277 of the residential AZ contract. I recommend you submit the offer with the promise to deposit $500 at title upon bank acceptance. You do not have to give the check to the agent at time of offer either. Mis-applied knowledge. I believe I have answered all your questions and hope my answers have assisted you. Remember Article 1 of the NAR Code of Ethics... An agents duty is to always be considering his/her clients best interests at all times. - Todd