Is The Economy Getting Better? Ask And Listen

Posted on May 1, 2012 by

I talk to a lot of people.  It’s just the nature of being in real estate; people want to hear what is happening in the housing market and as a Realtor, I find new clients by sharing my information and listening to their stories.  When I hear someone is in construction, I am very keen to hear how things are going.  “Up and Down” one guy said to me yesterday, he builds custom cabinets.  Mark Brodsky, a good friend of mine, reps a high end cabinet drawer company here in L.A.  He tells me he just landed a large order for a custom home.  “It’s picking up” he says.  This tells me the high end construction may be on the rise.  Another friend, Larry Jassenoff is a project manager for a high end Malibu construction company.  He states they are starting to line up jobs.  He’s feeling better about things.  My carpet installer, Todd Walden says it’s still slow in new homes, but he’s seeing a slight pickup in remodeling/carpeting jobs.

I blogged last week that tight inventory is going to lead to new construction and that is going to awaken the sleeping giant of our economy: home building.  Yesterday a report came out highlighting the decline in home ownership to the lowest level since the early 1990’s.  For many like my friend and Cal Lutheran University economist Dan Hamilton, lower home ownership rates are the key to a stabilization in the housing market.  Dan hypothecated and his economic projection models suggest that no stabilization in housing can occur until home ownership levels dip to the 64-65% range.  We just hit 65.4%.   Something interesting to me is that many of the homeowners that lost their homes over the past several years were regular home owners who, for a variety of financial reasons, got caught in the downward spiral of the economy.  They lost their homes but they are not necessarily traditional renters.  By renters, I mean folks who really should never or will never own a home, and certainly not again, if they lost one already.  No, many “homeowners” lost their homes and they will be out there to buy as soon as they are able.  In fact, many are just starting to become eligible after short selling a few years ago.  Something most people don’t know is that under FHA guidelines, a person who short sold can purchase again within 3 years of their short sale, and do so with as little as 3.5% down.

What’s it all mean?

What it means I believe is this: we are poised to see an explosion in new construction, mostly in the form of apartment buildings, multi-use retail and residential concepts as well as work-live lofts etc.  People will be moving into town not out of, to the suburbs – these people I predict, will be young renters ready to step into home ownership but on their terms, that is, close in.  More people are going to buy in the next two years than we have seen in the past 5, as more and more of previously distressed sellers are eligible to reenter the market place, and as more of us feel the worst is over in housing.  This in turn means continued low inventory and ultimately low inventory in the face of higher demand leads to rising home prices.  Rising prices also means fewer distressed sales and the reemergence of the move up buyer; the one home owner category most devastated by the decline in values.  As equity increases, folks will finally be able to sell and parlay that equity into a large home.  Are there still pitfalls that can derail this train?  You bet.  The mortgage market remains almost entirely dependent on the government via Fannie and Freddie and the Federal Housing Administration.  There is still almost no marketplace for the sale of home mortgages outside of the government.  Hopefully as home prices stabilize across the country and begin the slow march higher, investment firms will begin feeling it is safe to buy mortgage backed securities again.  As rates rise, which virtually everyone agrees is inevitable, the lure of higher returns should also help spur investor participation along.

Yes it’s spring, and in real estate spring equals optimism.  But this spring is different from those of the recent past; it’s better.  Just ask someone what they think of the economy and they’ll tell you, it’s getting better a little at a time, all you have to do is ask and listen.

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The (not so) Little Engine That Could

Posted on April 28, 2012 by

As I read the Los Angeles Times this morning about the lackluster GDP numbers revealed yesterday, I started thinking about what might make those numbers really pop; what could single handedly effect job growth and as a result, personal income, spending, government revenues etc.?  Almost as if in passing, the article mentioned the housing market’s improvement, led by tight inventories.  …Tight inventories, curious right?   What about all those foreclosures and short sales we keep hearing about?  For nearly a year I have been calling bottom on the housing market.  In fact as early as June 2011, I said the worst was over.  I was even quoted by some real estate radio show in Pittsburgh, PA because I called a bottom, right here in the Real Estate Conversation.  I believe in fact, had it not been for Congress’s near government shutdown last July/August, we would be even further along in the housing recovery.  But what is the significance of tight supply?

We all now the basic tenet of economics is supply and demand.  As supply increases, prices must drop to move inventory – this is what we’ve been experiencing for the past several years, an oversupply of homes.  Conversely, when the inventory is down or “tight,” and demand remains the same or increases, pricing pressure increases along with it.  As an example, in my area, our home inventory has hit a (low) level not seen since 2004 and as a result, we are seeing a staggering 70% of all listings under contract.  That number is so ridiculously high, it’s hard to even fathom; 70%?!  You know this if you’re a buyer and if you sense you’ve missed the bottom, you’re probably right.

As you may or may not be aware, I started my career in real estate as a builder’s representative, selling new homes.  It’s a funny thing about new construction; it employs a lot of people.  From the earth mover, to the offsite improvements such as water mains and sewer line’s supplier, to the finish carpenter, painter, dry-waller  pick a trade; pick a supplier or manufacturer.  Today there’s even solar and other “Green” technology, so it’s not just guys swinging a hammer or digging a ditch, building has an impact on jobs in ways no other industry in America does: quite simply because it employs virtually everyone.  My father in law, Mark Bader, was in building for 50 years, selling and managing and he used to tell me as far back as the 1980’s that the building business is the engine that drives the economy.  “As building goes,” he used to say, “so goes the economy.”

Fast forward to the L.A. Times article today mentioning tight home inventories; aside from solving many of the underwater borrower problems that we have been so focused on for so many years now, rising home values and a tight inventory will also trigger new home construction.  Admittedly, many areas still have a surplus so this little engine of the economy may not be racing its engine at the starting line, but I can’t help but believe it’s starting to rev its motor just a little bit.  We’ve seen this in Southern California in the form of rising building permit applications though largely in combined residential and commercial projects; lofts; Live – work spaces; residential over retail, and this may be the trend: building closer in rather than traditional subdivisions in the outlining areas (which remain over built).  As this situation plays out and should the inventories remain tight for an extended period of time, that little engine that could can very quickly become the (not so) little engine that is.  And folks, when that high-speed rail leaves the station, hold onto your hats and get ready for what promises to be the strongest economy we’ll have seen in years.

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The Trouble With Appraisals

Posted on April 25, 2012 by

You just sold your home and you are so excited.  After years of a difficult and sometimes impossible housing market, things are finally improving.  You hired your Realtor, fixed up the old place, put the sign in front and Wham! You sold it.  Everything looks great; the buyer has good credit and they’re pre-approved.  The inspection is done and there’s nothing earth shattering on it so you are really over the moon… that is until the appraiser comes.  You know the appraiser right?  They’re the person in charge with validating your sales price.  What?  You mean a buyer and seller can’t just agree on a price and make the deal you ask?  Sure they can, but if there is going to be financing, the bank wants to know that the value of the property they are lending is what you have agreed to sell it for.

If a borrower is putting a lot of money down, more than 20%, then the issues with the bank largely go away, because even if the appraisal and the sales price differ, there is plenty of extra buyer money put in the cover a shortfall on value… a shortfall on value huh?  Why would there be a shortfall on value?  Let’s say that you paid $520,000 for a home and there was another home down the street, perhaps much larger that also sold for $520,000.  Yours was nicer of course, maybe it was even a one story so it had a greater desirability because you can’t do stairs at your age any longer or maybe you’re just planning for the future.  The home down the street is considered a “Comp” or comparable sale.  The appraiser will use that home to establish the “value” of your home.  This is not market value, it is lender value.  Market value is whatever a willing buyer and willing seller agree to without the presence of duress – Real Estate Principles – it’s the first thing you learn.  But market value is not at issue, what is, is the bank’s risk tolerance. The bank wants to maintain a minimum of a 80/20 ratio of loan to value.  Therefore, if you were putting 20% down on our $520,000 example, you are putting down$104K leaving a loan amount of $416,000, a loan to value of 80%.  However if that bank appraises that property at $500,000 and you bought it for $520K, you are short $20K and have to bridge the gap somehow.  The loan to value is either going to be greater than 80%   This means higher borrower costs by virtue of lender required default insurance, also known as PMI. Why? because $400K is 80% of $500K not $416K as before at $520, so you would have to put your $100K down, plus the additional $20K to get to $520K – make sense?  That means you need $120K plus closing costs not the original $104K.  In other words because the appraiser failed to make value, you have to come up with an additional $16,000 because the bank is only going to loan you $400K when you actually need $416K.

I tell my sellers that there are four scenarios that happen when an appraisal comes in light (low); the seller comes down in price , the buyer comes up with additional cash, the parties meet somewhere in the middle or the deal falls apart.  Can you appeal the appraisal?  Yes, however it’s about as hard to get an appraisal changed as it is to escape North Korea.  Why?  To answer this, you have to understand the new role of the appraiser.  When the market dumped and fingers were pointing in every direction looking for fault, the most defenseless group was the appraisers.  They didn’t have a big Washington lobby like the Association of Realtors; they weren’t big Wall Street investment houses or nationally chartered lenders, rather just a rag tag group of hard working folks who took the blame for appraising homes at ever higher valuations.  Are there examples of fraud and deception? Sure, but that crown fits a lot of heads.  But being that they had no advocate, Washington went after appraisers with a vengeance and the end result was a requirement that a third party “Management Company” be created to be a liaison between the lender and the appraiser, so that it was a blind assignment for the appraiser, that is, without any connection to the mortgage lender.  What do you think happens when you add a middle man to the process?  That’s right higher cost to the consumer; lower fee paid to the appraiser and now big profits for the management company.   And guess who owns the management companies?  That’s right, the lenders.  So when Wells Fargo needs an appraisal for a loan, they call RELS, their appraisal management company.  This is why consumers now pay more for an appraisal and good appraisers are leaving the business and why it’s next to impossible to win an appeal.

The significance of this incestuous relationship is that as the market improves like it is now, there are buyers willing to pay just a little bit more than a previous buyer for a similar property.  But the banks don’t give a hoot; they only care about their risk and if the value can’t come in and the deal falls apart, so what?  To the family who loses their dream home over an appraisal, well that’s just tough nuts.  This just happened to one of my buyers and he’s going to lose the house to someone else with more cash on hand to pay the difference.  This story is really unfortunate but with an improving market comes new problems and new bumps in the road.  The good news is that at least the market is improving and we are having a conversation about the problems of juxtaposing rising values with older comps, and that is a silver lining indeed.

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The Secret To Home Sale Negotiaton

Posted on April 12, 2012 by

I tell my clients there is just no short cutting the negotiation process even though everyone wants to.  Even the most astute buyers and sellers, prefer the easy negotiation to the tough slog.  When an offer comes in, a seller must be prepared to go back and forth a few times, maybe more than a few.   Why is that?  The answer might surprise you: trust.  The seller doesn’t know the buyer and therefore hasn’t established any level of confidence that the “other side” isn’t trying to take advantage.  When the Israelis and the Palestinians begin the laborious task of trying to settle their arguments over land, security, repatriation, etc., the level of their success has hinged on who the negotiators are and how much mutual trust exists.  Remember back to when Yitzhak Rabin was breaking with his conservative party and making broad concessions to Arafat, and vice a versa and peace actually for a fleeting moment seemed attainable?  This was only possible because the two adversaries knew each other well enough to know, that if one said they were going to do something, the other knew that he meant it.  Fast forward to today and the parties have so much distrust, that any meaningful progress has been scant, with each step seemingly like trudging through mud.

Apply this concept to home buying or selling.  Let’s say for argument sake that we have a home priced at $665,000 and a buyer comes in with an offer of $610,000 (8% off asking) and well below even the lowest of comps.  This type of initial offer does nothing to establish a level of trust between the two parties and is usually doomed from the get go.  The buyer is probably thinking, “I’ll come in low and worst case, meet the seller in the middle at perhaps a target selling price in this example of $637,500 or $640,000;” or maybe they really want the home and are even willing to pay fair market for it, but believe the only way to not get “taken” is to start really low.  To the seller, the buyer appears ridiculous offering so low.   I tell my sellers that when a buyer comes in really low, you really have almost nowhere to go.  However, I also tell them that we always want a deal to fall apart on the other side of the table, not our side, so you try and you counter.  I might suggest to the seller that they come back with a counter offer just a little off asking, maybe $663,000 or $662,500; something that shows the buyer that the seller is willing to negotiate and serious about selling but that there is much work to be done and they have to get “up” if that work is to be fruitful.  Yet, there is little optimism at this point, and let’s face it, some serious doubts exist in the sincerity of the buyer and this creates distrust.  If the buyer by contrast had come in at $630,000, the spread between the two sides is much smaller and the middle is around $647,500, still apart but at least the seller can kind of see where the target price for the buyer is.  When the offer is low, the buyer’s target price is a total mystery.

For the benefit of this example, let’s just say that the seller actually had priced the home spot on with the comparable sales of similar homes in the neighborhood; and that market value is somewhere between $650K and $660K.  Obviously even a price of $647,500 is still too low and further, may be well beyond the scope of what the buyer is willing to pay.  So here’s what typically happens; either the buyer quickly realizes this is not going to be fruitful negotiation and quits or presuming they really do want the home, they will quickly get up into a range where a successful conclusion can potentially be reached.  The target is clearer.  This however, is not how you “steal” a property.  To do that, the seller has to be vulnerable; ie: they are under distress or have been languishing on the market for a really long time and just ready to deal and get out of the property.  If a seller is not in a weak negotiating position, as steal simply isn’t possible and the only way a buyer can buy this property, is to “come correct” and bring a reasonable offer.

Consider this alternative scenario; the buyer wants the home and recognizes that the market value is somewhere in the a fore-mentioned mid $600K range, so they offer $635,000.  Now the two sides are only 4.5% apart with the middle $652,500.  Immediately, the seller perceives a little more trusting relationship because the offer is not insulting and rather suggests there is a buyer who wants to make a deal and buy the house.  Clearly, the higher the initial offer, the greater likelihood a deal can be put together; the seller is more apt to get to the middle a little more quickly.  We still have to “ping pong” some, but at least now the seller might be willing to come off 1% or more to show they are genuinely interested in selling.   This occurs because there is a greater sense of trust that at least both sides really want to make a successful transaction.  By the way, having two agents that know and like one another is also a very important component.  If they have trust between them, that will go a long way towards building trust between the principles.  What’s interesting here is that it raises the importance of agent selection.  How is that agent perceived in the real estate community?  If you are working with someone who is not well liked, as a seller or buyer, you may find that you are immediately at a disadvantage.  If you are a Realtor, it is essential that the reputation that precedes you is one that helps, not hinders.  This is especially true in small to midsized communities where everyone knows everyone.

Back at our negotiation table, we still have a gap.  We also may have much tighter limits as to how far we are willing to go up if we are the buyer.  If the buyer has come to the negotiating table with a strong opening offer, there may not be a lot of play in the amount they are willing to go up; and that’s OK.  I tell my clients that if we come back with a with a near-end-game counter, we can dig our heals in and stand pat or come back with a very slight increase in the next counter.  This is OK and it’s also OK to walk away.  Ultimately that is the trump card that both side have; the willingness to quit and move on.   But here’s the idea: when I negotiate, my goal is to get the chasm between the buyer and seller close enough where one side, the other or both, recognize they are within striking distance of a deal and the bird in the hand is worth two in the bush.  By starting close to an asking price, a buyer very often actually gets a better deal because they have developed trust with the seller and the seller better understands the buyer’s wants and will often be willing to take a little more off the price.  Naturally much depends on the level of motivation of the parties and the realistic-ness of the asking price.  For this reason, I counsel my sellers to price their home correctly and not price it too high.  The argument for “leaving room to come down,” and “the buyer is just going to offer lower anyway,” is not an approach that I believe is successful, because if a home is overpriced, it takes longer to sell, the price reductions are ultimately much larger than an initial lower price and if think we back to the “steal a home scenario I mentioned earlier, a seller becomes vulnerable as time is not a seller’s friend, even if they all the time in the world.

One last thought, when we negotiate, it is often forgotten that we are negotiating price and terms.  Very often we can give concessions on terms, and this in turn builds trust further.  Terms are concessions too and are often traded in exchange for price or other terms.  A seller for example may need a rent back until school ends and might be willing to come off price a little sooner in exchange; a buyer may be willing to come up if the seller will close faster perhaps preserving an interest rate lock expiration or even sell to a buyer, based on the buyer’s current home closing first.  If a party wants or needs certain terms, it is very reasonable to expect the other side will offer those terms in exchange for some other concession on additional terms or on price.

In the end, a successful transaction requires a measure of trust.  Establishing that trust early in negotiations and building on it throughout the process is the great secret to great negotiating.

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The Great Recession and the Retooling of the American Realtor

Posted on March 22, 2012 by

The Great Recession has caused Detroit to reinvent itself; Main Street to redefine itself; Wall Street rethink itself; Silicon Valley to reboot itself and the American Realtor to retool them self.  In fact all of the above will have retooled themselves in one way or another by now.  The way business was done before has forever been changed and those who’ve not adapted themselves will have fallen the way of the video tape.  This is neither new nor surprising.  It’s the nature of the every economy dating back to the earliest of mankind, that to survive, we must adapt…

Gor: “Thag, how much you want for rock with hold in middle.”

Thag: “2 Fish and sharp stick”

Gor: “Bong ask one fish and one stick!”

Thag: “Bong Neanderthal .  Rock with hole, roll.  Make work easy.  But today lucky day, give, one Fish, one sharp stick and club.”

Gor: “OK, deal.”

Thag: “Deal.  Now give club, me need go find Bong, hit in head… 1 fish and 1 stick, who he think he is?”

In 1990 I started selling real estate for a new home builder in Northern California.  I had many customers from companies I‘d never heard of; new companies called Sun Microsystems, Adobe and Oracle.  Apple I’d heard of but those people weren’t buying where I was selling; I was selling to young employees of the “start ups”… The thing was, I was the new kid on the block then.  Having only just become licensed, I didn’t experience the market boom of 1988-89.  Someone would come in and I’d hop right up and hand them a brochure; ask if they’d like me to show them around and I was always very proud of this line; ask them, “Are you a home owner form the area”?  To this they would either say yes; or we own a home but not around here, or no, we’re renting… Ding, ding, ding… alarms went off and I knew I had a “live” one.  By contrast the guys I was selling with – and they were almost all men back then – would sit at their desks, reading the newspaper, smoking a cigarette; they did that in the office in those days, and when someone would walk in, they would say, without looking up from their paper, “The models are over there, grab a brochure and let me know if you’re interested”.  They continued to do this until they went broke and went into home appliances or mortgage lending or cars.  Was the reason for their failure a bad market or perhaps their lack of effort, or maybe failure to adapt?  Obviously the bad market was a big part of it, but the main reason was their failure to adapt; to recalibrate their approach and recognize that the old way of doing business no longer cut it.  As a newbie, I didn’t know any better; heck if I sold a house I was over the moon.  I wasn’t used to selling out 20 homes on lottery, with people lining up to buy.

Just as the American Auto Industry has been forced to make fuel efficient, technologically advanced, safe and reliable cars, Realtors today have had to become expert in everything from staging and decorating homes, to human psychology and counseling, aiding and assisting people on the verge of financial ruin.  Who knew 8 years ago that there would be such things as distressed property specialists?

I just had a short sale deal fall apart after bank approval because the other Realtor failed to properly educate their client.  They failed to tell their buyer that the bank that was forgiving the debt by agreeing to allow the property to be sold “short”, was not going to agree to do any repairs.  You can imagine my disappointment and frustration when, after inspection, the buyer wanted things repaired.  The bank even accepted their ridiculous repair estimates and I was able to get an additional $35K off the price, but the buyer wanted the repairs done, not the lower price.  Aaaargh!  How dumb does that Realtor feel now?  They went from having a deal about ready to close, to uh.., nuthin’.  The Realtor had failed to adapt to the conditions we find ourselves in, didn’t properly educate their client and they lost the sale.

Adapt or die.  I don’t remember who said that but it sure is true.  So what’s next?  Most Realtors, those who are still around anyway, have reeducated themselves to this tough market; grinding sellers down off their price 10% or more in some cases.  But can they sit by now and expect the market to remain this way forever?  The answer is no, and they’ll need to retool themselves again if they want to keep up.

The British rock band Keane, wrote a beautiful song a few years ago with a chorus that went, “Everyone’s changing and I don’t feel the same”; it’s a great song by the way, in case you haven’t heard it, but the message resonates with me because it serves as a reminder that nothing stays the same forever, even though we might not feel the changes right away.

The housing market is changing as we speak.  It’s shifting to a balanced market from a buyer’s market and my hope is that it stays that way a while and doesn’t just blow through that barrier and quickly become a seller’s market.  The pendulum always swings too far to one sided and then the next.  It seems there’s never Goldilocks’ middle porridge that’s “just right”, it’s either too hot or too cold.

The Existing Home Sales numbers came out yesterday in line with Wall Street estimates… thank heavens, because I wasn’t worried that the numbers would be more bad news, on the contrary, I worried that it would be too much good news and the bond market, which dictates residential home loan interest rates would tank, causing rates to rise significantly.  For you doubters and fence sitters, just wait until the pending homes sales data comes out towards the end of the month and then hold on tight.  Like in the recent hit movie “Hugo”, this rocket’s going to the moon.  By the way, rates are up about a quarter point, just in the last week, so interest rates are already changing.  You can always count on Bond Traders to show the way of things to come…usually anyway.

As for us Realtors who want to be doing this into the next cycle and the one after that, adapt or die; that’s the battle cry.  We better get ready by watching and listening and be prepared to retool again, because the numbers don’t lie and the numbers suggest the market has shifted.  We’ll need to reeducate our buyers, because if we don’t, they will miss out on homes by offering too low, and Realtors will be left wondering what’s going on and why we’re not getting paid.  Then we’ll make our way to Sears to sell refrigerators… that is if Sears still sells refrigerators.

Bong: “Thag, what want?”

Thag: “Why you offer sell Gor, wheel so cheap”

Bong: “Wheel old, take too much space in cave, wife complain.  Me now sell fire, want see?”.

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Dear Abby I’m Not…

Posted on March 16, 2012 by

The following is an excerpt from a recent experience…

Dear Tim,

We need to speak with you about our situation.  My husband has lost his job after having his income decline over the past several years.  To stay afloat, we’ve had to draw on our home equity line of credit and or credit cards.  We are filing for bankruptcy but we want to stay in our home, is there anything we can do?

Sincerely,

Desperate and Struggling

Dear Desperate and Struggling,

Yes, I can try to help you to short sale your home (where the bank allows you to sell for less than you owe), but you might want to read my blog, TheRealEstateConversation.com because I published a 4 part article on how to successfully obtain a loan mod.  Let me know how it goes.

Tim

Dear Tim,

Will you handle it for us?

D & S

Dear D & S,

I’ll look into it.

Tim

After attempting to modify Desperate and Struggling’s loan for 6 months they were declined.  Their income was just too low even though the lender agreed to reduce the interest rate to 2%, extend the amortization period to 40 years and forbear part of the loan balance, which they were willing to do.  Forbearance is the postponement of a portion of the debt without a re-payment requirement until the remaining balance is paid off either via monthly payments, refinance or sale; and is also done without accrued interest.  To accomplish this however, and to comply with the Government’s HAMP (Home Affordable Modification Program) mandated 31% DTI (Debt To Income) ratio, the bank was going to have to forbear 65% of the loan – well above the mandated cap of 30%; this was something the lender was unwilling to do.  This meant the race was run and there was no way D & S could keep their home.  Now we have to short sell.

Dear Desperate and Struggling,

I heard at a recent short sale event for Realtors that Chase frequently sends out a “Solicitation” letter asking troubled homeowners to short sell their home instead of being foreclosed on and they will pay you as much as $30,000.  Unfortunately many homeowners either don’t open the letter, or just ignore it.  So, I contacted your lender and asked them if they ever sent you such a letter.  They said they did back in July.  However, they won’t send me a copy.  Did you ever receive such a letter?

Tim

Dear Tim,

We don’t recall it but when you come to list our home you can look through all out correspondence from Chase.

-D & S

When I went over to the seller’s home and they signed the listing agreement with me, we went through their pile of paperwork from the lender and guess what I found in the pile of bank mail?  That’s right, the “Solicitation” letter! 

At this point Desperate and Struggling’s story hasn’t got an ending; rather it’s a real story of real people fighting for real financial survival.  I will be listing their home soon and am hopeful that my next posting about this couple will end, not with their signature Desperate and Struggling, but rather, Happier Than We’ve Been In A Long Time.  Wish us luck.

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How Important Are Comps? OR A Funny Thing Happened On The Way To The Closing.

Posted on March 12, 2012 by

Just how important are comparable sales in the home selling process?  In “Real Estate Principles,” the fundamental course for all real estate licensees, students are taught that market value is, “Whatever price a willing buyer and willing seller agree to, without the presence of duress” – duress meaning pressure from distress, divorce, job loss, health, etc.  The duress component is a little ironic considering the effect of distressed sales in the market place.  In fact there are markets where appraisers choose to completely ignore distressed sales because they are not comparable at all to the “regular” sales.  Buyers of course are quick to point out every distressed sale when justifying a low-ball offer.  So just how important are comps really?

When we experience a market in decline like we have just gone through, the low sale comps become an increasingly difficult current to swim against.  Many times I have am able to justify my clients’ asking price or counter offer price by picking the comps that best support my value argument.  Sellers invariably want to cherry pick comps to support an unrealistic asking price, and will always point to the “one” highest sale as proof of their argument for a higher valuation.  So do sellers look at comps?  You bet – sometimes.

Sometimes?  What about when a market is changing?  How do comps fit into an equation where the numbers are all over the place?

As a general rule I tell my clients that any offer that differs more than 10% from the asking price leaves virtually no where to go with negotiations.  For a seller, 10% below asking represents a low-ball offer, even if the comps support it.  This is an example of sellers who do not look at comps, or do and choose to ignore them.  When I list a property I explain my “10% rule observation” to the seller and I usually get the “If I don’t ask for it, I can’t get it” argument or “the buyer is just going to negotiate anyway so I need to leave room to come down.”  Then there’s the “But I NEED to net ‘X’ amount off this sale to live on or buy my next home” as if that has any relationship with the market value of their real estate.  Many Realtors will give in to this seller’s price opinion just to get the listing, figuring after it doesn’t sell, they can get a price reduction to where it should have started all along.  This is called “Buying the Listing”.  Aside from the obvious, it creates a problem for a buyer who may legitimately want to the home, but is not going to over pay.  Thus that buyer is left with two choices – write more than 10% off, a doomed approach especially on a new listing, or wait for the inevitable price reduction.

When I sit down with my buyers to write an offer we have the same discussion although the buyer doesn’t care about what the seller thinks, only what the comp-supported value is.  So really the first part of the discussion has to focus on what kind of market are we in and is it clear cut?  If we are truly in a transitional market, then the comps have to be adjusted p or down to reflect the changing market condition.  If we can buy any one of a number of comparable properties (a buyer’s market), we are going to push for a lower price than the comps and the seller has little choice but accept our lower offer if they want to sell, because if they don’t we’ll go buy another property.  However, if we are in the mode of waiting for something new to hit the market, the buyer must understand so must there be other buyers doing the same and therefore, the market may be more of a seller’s market, and that means we may have to pay above the comparable sales even if those comps are just a couple months old.

Here are three examples of offers I wrote for buyers this past week.

The first offer I wrote was for a very expensive home.  We were told the seller wanted $3M.  The highest sale of a similar or comparable home was $2.775M and noting had approached $3M in this neighborhood in 15 months; there had even been a model match (the exact same floorplan) that had just closed 2 weeks earlier for $2.6M – a solid 15% below this seller’s asking price.  We went in using the comps to back-up and support our offer but the seller didn’t even respond.  As I said before when you write for more than 10% off there really is nowhere to go.  Still we came up to the high side of the comps and even added a little extra to motivate the seller to accept.  But the seller argued that we’re in a changing market; that inventory is low, and that their home is worth even more than we’re offering –  “the person who buys our house won’t be looking at the comps.”  Uh, I’d like some of that Cool-Aid please because I don’t know any buyers who aren’t looking at the comps I said.  Ultimately we let that property go, because a small premium is one thing but a 7.5% premium did not make sense, changing market or not, it’s not changing that much, not yet anyway.

The second offer I wrote was for an older property in a quality neighborhood.  The home had just come on the market for $595K which seemed like a pretty good price given what else was available in this neighborhood at this time; that is until we looked at the comps.  The comps showed the market value (even at a premium which my client was willing to pay because he liked the home) was around $530K.  Uh-oh, more than 10% off asking price. The buyer likes the home but again wasn’t going to over pay and certainly not that much, so after considerable discussion and analysis we offered 9% off asking in the hopes the seller will have a reality check and come down.  I also immediately checked with the buyer’s lender because I needed to know how quickly we could get an appraisal on the property since there are two nonrefundable out of pocket expenses a buyer must incur when buying a home: appraisal and inspection.  In our area each cost about $500-$600.  Normally, knowing the home is sound (which we learn by having an inspection), is usually the first thing we do before authorizing the lender to order the appraisal.  However in this case, we have serious doubts the property will “make value” and we would then have to cancel since the seller would likely be unable or unwilling to come down to the appraised value because of how much they owe.  Therefore,in this case  knowing the condition of the property  becomes secondary to whether we can finance this property.

The third offer is on a property listed for $539,000 and agent told us about how much she thought the seller might come down and while it was still a bit of a reach for the buyer, it was a really nice home with a beautiful pool and totally move in ready.  Better to pay a little extra I argued, for turn-key home at 4% interest, than pay less but have to come up with thousands of dollars cash after closing to fix the place up.  Then we looked at the comps.   The comps suggest $490-515K is market value for this place; uh-oh again, almost 10% off, even in its really nice condition that’s a stretch.  Now what?  There are no comps that support the higher asking price, but there seems to be a shortage of homes on the market in this kind of condition.  We’ve also been told, there’s another offer coming in today from someone else.  So now we are to compete for a home that is overpriced?   Yikes.

Back to the initial question, do the comps matter?  The answer is yes but… only in so far they are a guide to market value but not a definition of market value, because in the end, market value is, just as the RE Principles suggest, “Whatever price a willing buyer and willing seller agree to, without the presence of duress”, and that is never more difficult to determine than in a transitional market.

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