The Price is Right
By Charles TurnerHouse is listed for X. What should I offer? Continuing the train of thought from some of the comments on another post, let’s talk more about pricing. I’d maintain that listing price has very little if anything to do with market price. As I said before, we suggested a listing price of $675,000 for a house that was then listed for $775,000 with another agent (about a 13% difference). Back in “the day” (2005), pricing was almost as easy as looking at the comparable properties and adding a little. Odds are there was a buyer. Now were spending much more time looking at and visiting comparable properties. Pricing is more important than ever.
Certain things remain true in any market:
1) An accurately priced house for the given market will sell.
2) An over priced house when listed will sell for less than it would have had it been appropriately priced on day one.
3) The first offer is often the best. This isn’t always the case but negotiating the first offer may be smart. Tends to matter more the closer you are to the listing date. A few months ago, we wrote an offer that was rejected by virtue of no response. It was too low for the seller to reject on paper. I talked to the agent and said, “I’m shocked that they won’t even counter.” He was surprised at my position. A couple of months went by and all of a sudden the house is on the market for $100 more than our original not-worth-responding-to offer. The closing price was less than my buyer would have paid on day one and the seller held a vacant house for two extra months.
4) The listing price sets the seller’s expectations. A seller that receives a “market price offer” on an overpriced listing is likely to think it is too low.
5) The listing price might come down without actually coming down. Say what? If the seller pays for work on the property the listing price is less likely to come down but the market value should have increased, closing the gap between the two.
When it comes to writing an offer, you have to consider all of the above and look at what the market is today. In order to have a discussion like this, I think we have to assume the buyer is ready, willing and able to enter the market today and remove the “market may drop, stay flat or increase conversation.” Everybody wants to buy low and sell high but markets don’t stop.
The comparative market analysis works just for the buyer just as it does the seller. Look at the comparable properties; sold and active. Does your offer make sense based on everything you can identify about the property and the seller? I know I place less value to listing history/sales of the subject property than others as I consider today’s market value to be more important. The balance is to get your lowest offer accepted without prompting a counter from the seller as in most cases, going back and forth with counters will raise the accepted price (we have recently had buyer’s counter a seller’s counter back to the starting price and get it accepted. Part of your agent’s job is to provide support as to why the offer is good as it is written (or why it is bad if it is and representing the seller). Sure, every once in a while a blind squirrel finds a nut. A rationally unreasonable (thought that was softer than lowball) offer may stick. No one ever said that emotion (or desperation) doesn’t play a role in real estate.
This is getting a little long so let the comments begin.
The first offer is usually best? What if the market is rapidly appreciating? The longer you wait, the more you make.
Charles, you are still in Mexico right? The $68,000 question: How severe was Montezuma’s Revenge? On a scale from 1-5. 1 being somewhat horrendous, 5 being extremely horrendous.
Hi, Charles,
Thanks for quickly starting this thread and the write up.
One thing I want to ask is that I often find that for the same house that is on the market, the “2007 apprasal value” shown in portlandmaps.com is often 20%+ below the listing price and sold price.
I assume this “apprasal value” is what the owner’s property based on, right? How is it arrived? What makes up the difference between it and the house’s real market value, those granite counter top etc stuff that I don’t really care about…?
Yes, in Mexico. Feeling dandy.
1) an appraisal is a matter of opinion based on research. Sales prices in relation to appraisal prices, ESPECIALLY with REFIs mean almost nothing. The TAX appraised value in Portlandmaps.com is even more misleading. Portland uses Real Market Value and Taxed Assesed Value to determine property taxes. You pay based on whichever is lowest and subject to increases (no more than 3%) per Measure five from the 90s. Sounds like a new topic.
2)The first offer is usually best? What if the market is rapidly appreciating? The longer you wait, the more you make. As a seller in a hot market, offers come in fast and buyers move on to the next property if the first one doesn’t go. We had a seller counter a full price offer over full price (seller is not obligated to sell at any price). Buyer rejected and moved on. That was the best offer we saw. Next offer, weeks later was for less and accepted. As a buyer, you’re not making anything if you don’t get your offer accepted. You have to have a ticket to ride the appreciation train up or down.
Thanks Charles for starting this discussion. I plan to buy sometime in summer and have been watching the phenomenon you describe. I agree that the best offer is the first offer. The seller can chase the market to the bottom or get off at the first chance.
I see properties whose prices seem based on comparable 2006/2007 sales prices in the neighborhood. My own approach will be to go back to a baseline before the bubble, calculate a historical rate of appreciation, consider improvements, and then make an offer not on what houses sold for last year, but what would be fair in a healthy market that slowly appreciates. I’ve found a realtor who is willing to make offers until someone accepts.
The properties that are the challenge are the investment properties that were bought at an inflated price last year. The seller will be hard-pressed to recoup even the cost of the original investment, let alone the improvements.
Comparable values are going to continue to be high as long as properties aren’t selling. That’s why I laugh when I see ads touting “below appraised value.” It’s meaningless.
The property tax thread would be quite useful. Yes, property taxes cannot increase more than 3% each year but it is my understanding that if significant improvements have been made or an appraisal has been done for refi, HELOC, etc or if the property changes hands the county can re-evaluate and exceed that 3% limit. At one time I located a document on Mult. county website explaining this…do you think I can find it now?!?!
It is very important for buyers to know since their taxes can increase significantly overnight if there hasn’t been an appraiser on the property in years!
Reading this blog certainly can give insight into why the bubble is deflating.
As a seller in a hot market, offers come in fast and buyers move on to the next property if the first one doesn’t go.
I thought in a hot market sellers could just sell to the next buyer. Isn’t that the idea of a hot market? How scarce are buyers in a hot market? How about in a cold market?
Charles,
For your clients, will you aggressively sell any offer that is made? (I.e. if you had a client that was offering $200,000 on a $300,000 home) — Do you ever balk at your client’s offer and refuse to make it?
Charles – Good post, good thread!
Questions:
1] Is there any mechanism for a buyer to know that her offer has been presented to the seller, other than the listing agent’s word that it has?
2] Hypothetical scenario: A great house in a great ‘hood comes on the market for 300k. I see it and go straight to listing agent, who agrees to be a dual agent on my behalf and I write up an offer @ 280k, but with very strong financing (i.e., 50 percent down, perfect credit, plenty o earnest $, no contingencies, etc.). She calls me back the next day saying they had four offers on the house but mine was the lowest, but strongest in other respects (i.e., 50 percent down, etc.), and if I go 295 the owner will accept. My question is: How can I know the agent is telling me the truth? This isn’t just a question about the perils of dual agency, as I deliberately chose to do it this way, because I believed that a dual agent would advocate for my offer, even if it was lowest, because it meant a bigger commission for her. Rather, it’s a question about the transparency of the bidding process. Whether a buyer already has an agent or asks the listing agent to also work for her, how does the buyer ever know that her bids are being presented?
Bugger real estate – focus on having a good time in Mexico and quit posting to the blog for a week or two
This is pretty much what I saw in Cali the last year or two.
Pice 5-10% under comps and get out – price at comps and roll the dice – with dropping sales most end up chasing the market down and losing a lot more than the 5-10% it would have cost them to price below market.
Uncle Git, it’s funny trying to explain to sellers that this market has and still is playing out in different areas, such as California. Somewhere, we’ve all got some crazy gene that says we must see it for ourself.
Was talking to a seller today about an investment property they’re ‘trying’ to sell. Of course they were having some difficulty understanding that this property was not going to make any money for them. And that it was now a question of lessening their loss on the property, or holding and renting for a few years, with a mortgage that’s too high for rent to cover.
Tiffany, if you can’t trust your Realtor, who can you trust? Damn if that sentence doesn’t make you laugh. Seriously though, in the future you could ask your agent to have the sellers initial the contract offer as declined. More importantly I believe, is that your agent is fishing with the $295K unless it’s in a written format with the seller’s signatures attached (i.e., a counter offer). Good luck with future offers.
Uncle Git, I’ve found the buggering real estate while on vacation is tempting, the overall experience is better doing a little work daily than trying to catch up a week later.
Tiffany, the real estate Earnest Money Agreement has a time a date that the seller’s agent presented the offer to the seller. The seller signs under that line. I don’t think that in a multiple offer situation that section could get left blank with the excuse that “your offer was insulting and therefore the seller refused to respond.” Your agent would be under a heap of ethic and legal issues. I’ll heed your note and ignore the dual agency issue!
Kirk, I don’t need practice writing offers. If I got a call from somebody I had never met saying they wanted to offer $200,000 on a $300,000 listing I would do some serious vetting of said client. The listing might only be worth $200,000 so no issue with that aspect. On the buyer side, it is the Realtor’s job to advise on the asking price that will get accepted as is. Most counters move towards the asking price. On the selling side, it is Realtor’s job to push the price back as close to asking. Dual agency opens a whole new can of worms.
Why are Portland sellers hesitant to lower prices? Approximately half the loans taken out over the past few years have been of the creative type: zero down, 80/20, option ARM, etc. And then consider the folks who have taken out a lot if not all of their equity to fund their lifestyles. What does all this mean? These sellers might very well be upside down or hoping to break even. If they don’t get asking price or near asking price the bank will have to approve th sale. I have noticed numerous homes go from stating normal descriptions to ‘motivated seller’ to ‘very motivated seller’ to ‘subject to third party approval’ to ‘bank owned’.
I am sure Charles can give some insight on the challenges of short sales (a previous thread) and the huge hurdles of bank repo’s. I am sure a lot of these ‘stubborn’ sellers will be short sales, if not foreclosures by autumn if not summer time.
Kevbo/ Charles – Thanks for your thoughts. This was a hypothetical situation, of course.
Re: stubborn sellers. I forgot to mention the 5-7% realtor fees. You are looking at around $15,000-17,000 for a $200K home and $15k-$21K for a $300K. Add that to the upside/break-even folks’ equation.
Many realtors are taking substantially less commission now. I interviewed one who agreed to list one of my houses for two percent.
Is that 2% instead of 3.5%, which comes from a total of 6%, in which you still have to pay an add’l 2.5% to the buyer’s agent? Or is it 2% total, where the buyer’s and seller’s agents are sharing that total?
Last year in California’s Bay Area, some realtors were taking 5% commissions. I met a top sales person from Coldwell Banker who routinely took less. She thought it was good customer service and she was making so much anyway, it was little loss to her.
Brach – Two percent for the listing agent.
Isn’t this a classic sympton of an over inflated market correcting itself? You’re seeing owners of mid-priced homes far more willing to drop their listing price than those priced above.
yawn
Sorry, Monk, but I did post the link for a great rebuttal for the Portland Magazine’s BUY NOW campaign from Clint’s Portland Housing Blog but it has been held up in Charles’ filter for, what, two days now. I hope he has a good excuse or this will be the first time I have been censored. Maybe he is finally enjoying Mexico and setting work aside?
bearlee,
I don’t need an excuse. Your comment has not been held in a filter because there is no filter. If your post doesn’t appear after you type in those six annoying characters verifying you are a person, it never will. Afraid you’re going to have to chalk it up to user error and not my censorship.
It went through this time. A few days ago after typing in the 6 funny letters it notified me that it was being sent to your email for verification. I was surprised because I thought you had said that would only occur if I c and p’d more than 2 links. It must have been a glitch. Let me know if it shows up anywhere.
I was able to recreate ‘my error’;o)
Here is the message I got:
An error occurred…
We’re sorry, your comment has not been published because TypePad’s antispam filter has flagged it as potential comment spam. It has been held for review by the blog’s author.
Go back to The Price is Right.
So I guess you aren’t completely familiar with your blog product?
Clint’s rebuttal for Portland Magazine’s BUY NOW campaign that was filtered