This particular scenario has been played out four times in the last few months, and I’m tired of the liberal application of chap-stick to my ass. It goes something like this:
I take my overly qualified clients out on the town to look at homes. We find one they really like. It has everything they want: acre lot, built in 1969 but completely remodeled, close to town, great pool, a guest house out back for aging parents, the works. So far, so good.
Once my clients find this fabulous house, my real work begins: protect my client’s interests. You know, do a little research on market conditions, comparable properties, the recoupable costs of remodeling, all while keeping an eye on where the market is headed. Now, it would be easy for me to seriously lowball my offer in order to protect my client from market depreciation, but I don’t actually think that’s a fair thing to do. There is inherent risk in any real estate transaction, and it needs to be spread fairly evenly in order to work. My job is to carefully balance the risk so that my clients have as little as possible. The balancing act is in shifting more risk to the seller’s plate than they might have been prepared to eat. But, if I slide over a heaping helping of steaming risk onto the seller, I have doomed and relagated the negotiation to the realm of “principle.” Arguing on principle is not an effective strategy, ever.
Consider this recent example. A certain home had been purchased in 2005 at a price of $450,000. It was in various states of disrepair and an overall delapidated condition, so the sellers decided to put $100,000 worth of (very nice) upgrades into the home. It appears that the slab and walls are 1969, everything else (and I truly do mean everything) was 2006. Once the home was completed in mid-2006, it was placed on the market for $669,000. By the time my clients became interested in the home, is was priced at $515,000. The sellers had been steadily dropping the price over the period of almost a year.
Here’s where my research comes in. I determine that homes that are the same floorplan, in original or marginally updated condition, and being sold for about $400,000. Now, realizing that these particular sellers have put a lot of money into this home, I am advising my clients that the upgrades are worth something, just how much exactly? In all likelihood (since my clients will be financing the purchase) an appraisor will not grant the sellers the full cost of the remodel. I estimated that if the sellers spent $100,000, an apraisor would likely give them about 50% of the costs.
So, in my estimation, the offer should be crafted to take into account the seller’s remodeling job, the current sales at $400,000, and a little wiggle room for depreciation factors. So, with trepidation in my heart, and a beautifully crafted letter to the agent and his clients on the front of my offer, I make my presentation. The offer was for $435,000.
You can imagine how things went. I am castigated as an unscrupulous opportunist with cheap clients. The seller’s are incensed concerning the “ridiculous low-ball” offer we wrote, and my clients don’t get the home they really want. Oh well, there are plenty of other homes in the neighborhood.
the naked realtor says:
You the bad guy? Nope, the bad guy was on the other side of the table telling his/her clients that the offer did not dignify a reply.
A good agent opens the door, a better agent has you sit down and work things out, and a miserable, soon to be heard asking “would you like fries with that” agent either fails to invite you in or like a mutant slams the door on opportunity.
You will prevail….as for those that did not understand the word “counter”….well, there is always the golden arches.
January 18, 2008 — 11:28 am
Jim Duncan says:
Allen -I’ve been in the same position several times recently. It’s the nature of the market, and likely won’t change for some time.
All the data in the world won’t make (to use a recent example) a seller able to take a $300k hit.
January 18, 2008 — 11:56 am
Allen Butler says:
I think it is incumbent upon the listing agents to explain market realities to their clients. If the sellers that I referenced don’t have a chunk of cash to bring to closing, the home shouldn’t even be on the market.
January 18, 2008 — 12:22 pm
Doug Quance says:
I guess I’m missing something.
Are the $400K comps you speak of homes that have had a complete renovation/remodeling job?
From what you wrote, I assume the answer is NO.
So, if you think that a totally renovated property is only worth 10% more than one without substantial renovation – you might be your own worst enemy.
The houses are nearly 40 years old. If the location is good, those improvements (assuming appropriate for the property) will fetch more than 50% in resale value.
Look at it in the reverse.
If that home with all of its improvements sold for $435K… what value would you place on all of the other “original” or “marginally updated” properties?
It would all depend upon the value of the dirt they sit on.
So your example tells me that a vacant lot in that neighborhood must be worth over $200K… but for some reason – I don’t think so…
January 18, 2008 — 12:38 pm
Laurie Manny says:
Ugh! Have been in that position myself. Too many sellers not reality based, too many listing agents not able to reach their sellers.
January 18, 2008 — 12:39 pm
Jeff Kempe says:
Allen …
I had a similar situation – in substance if not in degree – a few months ago. I had very interested buyers and a home at a price that I couldn’t come close to in a comp.
Brian’s advice is even more important in a transaction than in trying to develop clients:
I called the listing agent, told her I had clients that were very interested, and also told her I was having trouble finding comps to justify the price. Would she mind sending me some of the comps she used?
There was some complaint – “I’ve been at this thirty years!” – but she did. As expected the comps may as well have been in a different state, but the communication lines were open. We submitted the offer as originally intended, they countered much too high, the buyers declined and walked. I called again, thanked her for her sellers’ consideration, and asked her to call back if anything changed.
Two weeks later she did, and the buyers closed within $5k of their original offer; everyone happy.
January 18, 2008 — 2:08 pm
Christina Ethridge says:
I just had a situation where I had the listing and another agent brought the buyers. The offer came in 15% below asking price. In our situation, I knew the absolute bottom the sellers could go (because they were bringing cash to the table and it’s everything they had). So I just talked to the agent. I told her where the sellers where. The absolute lowest they could go was $X. And I told her why. We submitted the counter and the buyers accepted. It was a fairly large gap, but the sellers couldn’t do any better and the buyers knew the property value was solid (with a little bit of equity to them) at the price they ultimately paid.
As others have said – the listing agent MUST have a philosophy of ALWAYS responding to an offer and advising their clients to respond, no matter how ridiculous it may seem or how “offended” the sellers may be.
Get the ’emotions’ and pride out of the transaction. That’s one of the reasons buyers and sellers HIRE us.
January 18, 2008 — 3:15 pm
Ann Cummings says:
Ah, I LOVE Christina’s response! That’s just how I approach offers. Our job is to work to put things together when we have a seller who wants/needs to sell and a buyer who wants to buy. Sometimes if the agents ACTUALLY talk WITH each other instead of AT each other, you end up with a win-win for everyone, even if the money isn’t quite what one or either party wanted it to be.
Leave the egos somewhere else, and actually get the job done!
January 18, 2008 — 3:26 pm
Jeff Brown says:
In these scenarios there are often some false assumptions.
1. The sellers assume the market cares about what they ‘need’.
2. Their agent acts as if what the seller needs is relevant to anything. It’s not, unless the seller needs the most of what the market is willing to give at the time.
3. The listing agent has a clue of any kind to begin with. This assumption alone is enough to kill the average deal these days.
4. The buyer isn’t indeed a bottom feeder.
5. And this one is really important. The seller actually spent the $100,000f which I suspect isn’t likely.
I agree with those saying preliminary conversations with the listing agent are golden. Whether they’re solid, experienced pros, are stumbling wannabes about to add ‘supersize’ to their vocabulary, it can be made to work.
Much of the time, at least in our experience, it’s the later type who is easier to manage. 🙂 We just do their work for them, making them look good in front of their client. This sometimes can be the difference when confronted with an agent soon to be employed by a company with a drive-through. 🙂
January 18, 2008 — 3:51 pm
Brett Wilson says:
Lowball??? Are you kidding me? My offer would have been about $340,000 max. If they were insulted by you they would love my offer.
In this market I won’t buy anything unless it is at LEAST 30-35% below current market value. If they don’t like it fine…more than liely they will call back. They always do..and then we end up telling them even the previous offer is too high. We buy on our terms or not at all.
Stick to your guns!
January 18, 2008 — 7:55 pm
Christina Ethridge says:
Brett – Remember, ‘this market’ is LOCAL. Making an offer “at least 30-35% below current market value” will get you NOTHING in our market, I repeat NOTHING. It also won’t get you a call back later 🙂
January 18, 2008 — 8:29 pm
Ben Bach says:
Christina, how right you are
Case in point: Tonight my clients were delighted to buy a home for 101% of list price in multiple offers, day one on market.
January 18, 2008 — 9:46 pm
Jeff Brown says:
First off — Brett? — Old School rocks. 🙂
Your approach no doubt works more often in Phoenix than in Austin, or Kansas City.
Christina probably has it right, viewing different markets as stand alone and not homogenous.
January 18, 2008 — 10:06 pm
Spencer Barron says:
Why should a seller take a low-ball offer? Especially when they haven’t tested the market at that price. In my market, that range is usually with 2%-5% of the list price depending on the neighborhood.
I sold a home last month that I listed for $450k. The previous year it was sold for $430k. Buyer’s agent comes in at $400k contingent on them selling their home. What’s up with that? Buyer’s agent trys to justify it by pointing to the foreclosures in the neighborhood and that it sold last year for less.
My response? “When we want to sell it for $400k, we’ll put it on the market at $410k and get 3 or 4 offers…
If you think these other homes are comparable and cheaper, then go buy them.” We didn’t counter. Why should we. Just because they threw out a number, should my clients then respond midway between the numbers or even at their bottom line? That just doesn’t make sense. I didn’t pull the list price out of my…
One week later we sold for $445k to another couple. The most important thing about a home’s value is what else is available. Truth is, when your client wants you to write an offer, you are sending the seller a message that their home is now the one of the best homes your buyers saw in the price range the home is listed in. You’re also telling them their list price is not so wrong that people won’t be interested.
I love this topic, can you tell? 🙂
January 18, 2008 — 10:26 pm
Robert Kerr says:
Good job, Allen.
Your mission isn’t to appease sellers or their agents and it doesn’t matter one bit how much money they paid or sunk into it after the sale.
As a buyer, I bid based on a fair pre-bubble valuation plus average inflation. It don’t care if the current owners overpaid $100K, or blew another $50K in upgrades. Not my problem.
As you can guess, I’m not making many friends among sellers or their agents.
Keep up the good work.
January 18, 2008 — 10:36 pm
Jeff Brown says:
Spenser — good stuff.
It all still comes down to empirical evidence. So many agents can be successfully bluffed with less than convincing but ‘pretty’ rationale.
One of my favorite pastimes is representing buyers in the purchase of income property — with sellers represented by ‘house’ agents.
They usually didn’t get it either.
January 18, 2008 — 10:36 pm
Jay Ovalle says:
So, are you saying that your clients could buy one the other $400K homes in the neighborhood and plunk $100K to make it comparable to the one you made the offer on?
January 19, 2008 — 7:35 am
Greg Cremia says:
In this type of situation I ask the buyer how they feel about it. Are they willing to remodel another house to save some money or is this the house they want and are they OK with the price.
I feel as a buyer’s agent one of my most important duties, after protecting my clients, is to find them the house they want. If I don’t don’t like the house or price of the house is irrelevant to the situation.
I have very loyal clients who I have sold overpriced properties to, I told them so, they knew it and where thrilled because the property was perfect for them. In fact one of them came back 10 years later and married me.
January 19, 2008 — 7:55 am
Ben Bach says:
Some markets are tighter than others…
http://agentgenius.com/?p=857
January 19, 2008 — 9:06 am
Doug Quance says:
Spencer: Bingo!
Unless the seller needs to unload a property very quickly – you are correct. Why should they take a low offer without testing the market at a lower price?
Every time I ask a buyer’s agent that question – they fail to give me a satisfactory answer.
Another thing to consider is this:
If your client really wants this property… I mean reeeeally wants it… a lowball offer can result in bruised egos which can kill the deal – or at least leave your buyer in a compromised position.
Haven’t any of you represented sellers who, after receiving a lowball offer, refuse to counter or sell to that buyer?
If the property is overpriced, I would simply call the listing agent to ask them for their help. Tell them that you have a client who would like to buy the property… but you’re having a hard time justifying the price with the comps.
Hell, I ask outright, “who’s idea was this list price?” since I want to know who I’m fighting. You’d be surprised at how many agents will tell you that it was the seller’s idea… and that’s when you can solicit their help in convincing the sellers.
January 19, 2008 — 9:30 am
Christina Ethridge says:
Spencer –
I still think the seller should always respond – even if they counter back at full price. I’ve even had a seller counter back at higher than full price. Guess what, I’ve had these homes sell too. The buyers are just testing and in certain cycles, when they realize the home they love isn’t going to be available at a lower price, they’ll buy it.
The key is, every seller has a different motive. The buyers don’t know the sellers motive. Additionally, you have to remember, 99% of agents don’t have the foggiest idea on how to price a home, which is why prices are all over the board.
In the case I stated above, the sellers had their home on the market for 5 weeks with me, 6 months with a previous agent. The did not want to lose the offer, but simply couldn’t go below a certain point, they didn’t have the finances to do so. The home was well priced at the listing price, competitive and the least expensive home like it on the market. The key was, the sellers were exhausted from the stress. They wanted it done with. They are thankful that a buyer came in, even at a ridiculously low offer – because we were able to ‘get it done’.
January 19, 2008 — 10:28 am
Allen Butler says:
Well, here’s the deal. The house in question, if you’ll remember, has been on the market for almost a year. They’ve already dropped the list price over 135k over that time.
Could my clients buy a home at 400k and do a remodel job at 100k and have the same home? Absolutely. The fact that the home in question is clearly the best one in the area, and is priced 100k over the competition (to account for the remodel) and still hasn’t sold, indicates to me that the buyers are not willing to pay ful retail cost of the remodel job. My clients aren’t either. If they drop the price a little more, so that buyers feel they aren’t absorbing the entire cost of the remodel, it would sell. The problem is, they are tenatiously clinging to the misguided belief that they are going to recoup their entire costs.
In my market, if a property is priced at 400k, any buyer is aware that they can buy it for possibly 375, with a good negotiator.
I predict that this home will sell for possibly a little more than we offered, but not much. We would have paid a little more, but they weren’t even interested in countering. Oh well, I wish them luck.
Allen
January 19, 2008 — 10:35 am
Brad Rachielles says:
The seller ALWAYS knows what their house is worth… in their own opinion. There must be some elusive “emotion” multiplier that they crank into the equation that is not covered in R.E. classes. Where the listing agent is gravely at fault is not being honest with the seller and conveying that the value of a home is only accurately determined by what a buyer actually pays for it.
Is the agent afraid of losing a listing that he has not sold in a year, and probably will not sell until he honestly conveys the facts of the situation to the seller? Sounds like the Listing agent and the seller need to have a meeting of the minds and take the property off the market for a few years until the pricing of accurate local comps rises to match the sellers perception. If the agent has done his/her job right and presented a real world recommendation and has still capitulated to unrealistic seller demands, his only course of action is clearly to raise a stink about offers that don’t support his gutless position.
Oh, FYI, the average selling prices for all properties in my little part of SoCal for the past 30 days were off 5.7% from latest listed prices… not necessatily from the ORIGINAL price listed.
January 19, 2008 — 1:06 pm
Brett Wilson says:
Christina, I only buy distressed properties and I am SURE I can get a property 25-30% or more below current market value…ANYWHERE..as for not getting anything in Idaho…well not really farming there…ot a big demand from our clients.
January 19, 2008 — 7:26 pm
Joe Hayden says:
Interesting post…
I think the most important thing to remember is that the best homes in the best locations will always sell for top prices in the shortest time. No matter what ‘market’ you work in…
This “buyer’s market” phenom that has swept the country has confused everyone from agents to buyers to sellers. I watch buyers lowball the home they really want, lose it, and then feel betrayed because it is a “buyer’s market”. I also watch them casually searching for a home and each time they finally decide to go see the ones they ‘want’, the listing is already pending. But wait…I thought…
January 20, 2008 — 11:26 pm
ribet54 says:
Lots of good comments. I have been a Realtor since 1969 (yup, that’s a long time) so I’ve probably seen it all. The best thing I can offer is to absolutely assure you that this will pass. It always does.
January 21, 2008 — 2:51 pm