Counter Offer

A counter offer is a response to an initial offer that rejects the original terms and proposes new ones. In contract law, a counter offer terminates the original offer — meaning the original offeror is no longer bound by their initial proposal. The negotiation effectively resets, with the party making the counter offer now in the position of the offeror. In mortgage note investing, counter offers are a routine part of both the acquisition process (negotiating purchase prices with sellers) and the resolution process (negotiating settlements with borrowers).

Counter Offers in Loan Acquisition

When a note investor submits an indicative bid on a loan or pool of loans, the seller has three options: accept the bid, reject it outright, or counter with different terms. A counter offer from a seller typically adjusts one or more of the following:

In competitive offerings — where a professional seller distributes a tape to multiple buyers — counter offers take the form of "sharpen your pencil" requests. The seller informs the buyer that their bid is in the range but not the highest, and invites an improved offer. The buyer must then decide whether to increase their price, hold firm, or walk away.

With exclusive sellers who are not actively marketing their loans, counter offers tend to be less formalized. The negotiation may happen over a phone call or email, with both parties iterating on price and terms until they reach agreement or decide to part ways.

Counter Offers in Borrower Resolution

Counter offers are equally common — and often more consequential — on the resolution side of the business. When an investor contacts a borrower on a non-performing loan to discuss resolution options, the negotiation typically involves multiple rounds of offers and counter offers.

Discounted Payoff Negotiations

A discounted payoff (DPO) is a settlement where the borrower pays less than the full amount owed to satisfy the debt. The negotiation usually proceeds as follows:

1. The investor (through the servicer) sends a demand letter or settlement offer to the borrower.
2. The borrower responds with their own number — almost always lower than the investor's initial offer.
3. The investor evaluates the counter offer against the property value, lien position, borrower's ability to pay, and alternative resolution strategies (such as foreclosure or a loan modification).
4. The investor counters again, and the process continues until both parties agree or negotiations break down.

A practical negotiation technique: when a borrower submits a counter offer that is close to your acceptable range, counter with a very specific dollar amount rather than a round number. For example, countering a $3,500 offer with $3,746 instead of $4,000 signals that significant thought went into the calculation. This gives the borrower confidence that the number is grounded in analysis, reducing the likelihood of buyer's remorse after they commit.

Loan Modification Negotiations

Counter offers also arise during loan modification discussions. A borrower may propose monthly payment amounts or terms that do not meet the investor's return threshold. The investor then counters with modified terms — a different interest rate, a longer repayment period, or a required down payment — that better align with their investment objectives while remaining affordable for the borrower.

Legal Effect of a Counter Offer

A counter offer has important legal consequences:

• It terminates the original offer. Once a counter offer is made, the original offer ceases to exist. The original offeror cannot later "accept" their own original terms — they would need to make a new offer.
• It creates a new offer. The counter offer itself becomes the operative proposal, which the other party can accept, reject, or counter again.
• Acceptance creates a binding agreement. When a counter offer is accepted — whether verbally, in writing, or by conduct — it becomes a binding contract (assuming all essential elements are present).

For note investors, this means that verbal counter offers made during phone calls with borrowers should be handled carefully. A borrower's verbal acceptance of settlement terms may create a binding obligation depending on the jurisdiction. Best practice is to document all settlement terms in a written agreement before either party acts on the terms.

Best Practices for Handling Counter Offers

• Run the numbers before you counter. Whether you are responding to a seller's counter on a loan purchase or a borrower's counter on a settlement, your response should be driven by data — property value, unpaid principal balance, resolution probability, and your target return — not by emotion or anchoring to the other party's number.
• Know your walk-away point. Before entering any negotiation, define the maximum price you will pay (on acquisitions) or the minimum settlement you will accept (on resolutions). A counter offer that falls outside your parameters should be declined, not chased.
• Do not react immediately. When you receive a counter offer — especially a lowball one — acknowledge it, tell the other party you will review the account, and schedule a follow-up conversation. This gives you time to verify the facts and respond from a position of knowledge.
• Let the data speak. If a borrower's counter offer on a DPO is unreasonably low, present the evidence: the property's value, your lien position, and the alternatives available to both parties. A fact-based counter is far more effective than an emotional one.
• Document everything. Every offer, counter offer, and acceptance should be documented in writing — whether in the servicer's contact notes, a formal settlement letter, or the body of the loan purchase sale agreement.