"Minnesota ESPECIALLY Nice"

Christmas & the Housing Market

There are plenty of reasons to explain why the housing market decelerates around the holidays: it's customarily a time to celebrate with one's family; take a respite from work (vacation, even!); and generally reflect on one's -- shall we say -- existential circumstances.

Plus, the weather (at least in Minnesota) is lousy.

All in all, a time for spirituality -- not commerce.

No Time for Lowball Offers

However, I'd posit that another, related factor is at work: Christmas spirit doesn't exactly go with aggressive negotiations.

Even if the market is soft and a home isn't necessarily worth the owner's asking price . . . Christmas just doesn't seem the right time to make that point (at least to a real, live human being -- vs. say, a bank).

Wishing all my readers a peaceful, happy Holiday, and a prosperous 2011!

Listing Prices & "Leaving Room to Negotiate"

No Discount on This One

In a Buyer's market like today's, it's not unusual for gun-shy Sellers to want to "pad" their initial asking price.

Their rationale?

No matter where they set their initial asking price, aggressive Buyers are simply going to discount further from there.

So, why not pick a listing price that "leaves a little room to negotiate?"

There are three reasons that's not a good idea:

One. Self-selected peer group.

If you set your price too high, your home will be compared to more impressive homes asking the same price. And found wanting.

So, yes, you may have "left yourself room to negotiate."

But that hardly matters if there aren't any offers (or even showings).

Two. Even in a Buyer's market, well-priced homes can sell quickly, for above asking price.

Case in point: 5035 Glenwood Ave. (pictured above) in Golden Valley.

Listed in late March for $289,000, it sold -- in multiple offers -- the first week.

Ultimate selling price: $305,000.

Three. No Realtor can promise their client that they won't receive lowball offers (for all I know, the owner of 5035 Glenwood received lowball offers, too).

But lowball offers are a lot easier to repel when there is also a full-price offer -- or even better, multiple offers above list price -- on the table.

For Sellers, negotiating leverage is all about how many prospective Buyers are interested in your home.

If you price too high, the answer is usually few . . . or none.

P.S.: another fringe benefit of pricing well, and attracting broad interest: Buyers tend to pull their punches when it comes to negotiating any inspection issues.

The "Too-Fast Offer"

"Love at First Sight?" Probably Not

Is there such a thing as a "too-fast offer," especially in a Buyer's market where lots of homes are sitting?

The short answer: actually, yes.

Most Buyers seriously contemplating a home will go through at least twice, just to double-check their first impressions, see it with fresh eyes (vs. 5th on a list of 8 showings), etc.

If they are contemplating major work, a 3rd visit, accompanied by contractors, may even be in order.

So what does it mean when you get word that an offer is coming in barely hours after a first showing?

It could mean that it was "love at first sight," and the Buyer knows all they need to know to make an offer, then and there.

Or . . . . the prospective Buyer is looking a for a deal. A very good deal.

In my experience, such Buyers don't invest much, emotionally or time-wise, in the properties they're scouting because it's all about the price.

If one Seller rebuffs them, they just move on to the next. And the next, and the next. . .

Learning to Love Lowball Offers

Low Ball Offers: Insult -- or Compliment?

More than many businesses, residential real estate can be emotional.

One of the best examples of that is Sellers' reaction to low ball offers.

While many take it in stride, other Sellers can feel insulted or offended, become angry, etc.

By contrast, as a Realtor I understand -- and take pains to explain -- that a low ball offer is really a compliment. Perhaps a not-so-politely conveyed compliment, but a compliment nonetheless.

It may not be the most PC example these days, but I consider a low ball offer to be the real estate equivalent of a pretty woman getting a loud whistle as she walks past the construction site.

While she'll certainly rebuff such a coarse overture . . . at least it means she's getting noticed!

Getting it Out of the Way

In fact, in today's market, attracting one or more low ball offers is many Sellers' first real indication that they're getting close to selling.

Just as many Sellers today feel the need to "pad" their asking prices in order to then make "concessions" later, many Buyers feel the need to first "try" a lowball offer just to see if it works.

When it's invariably rejected -- and they almost always are -- they return, often quickly, with a "real" offer.

Lowball Offer as Harbinger

Good Realtors also understand than an offer -- any offer -- is useful leverage on more serious Buyers.

Whenever a lowball offer materializes, it's a good bet that there are one or more serious Buyers who are considering an offer on the home, but lack a catalyst.

And guess what?

Getting a call from the Listing Agent that the Seller is negotiating with another Buyer is a pretty good catalyst!

I don't (and can't) tell other agents how strong or weak another offer is.

However, the reality is, many offers that start out weak get stronger surprisingly fast (per above). And Buyers and their agents know that -- or should.

So what's the bottom line?

A low ball offer frequently signals that the market now thinks a Seller's home represents good value.

So much so that I've almost come to regard them as a good luck charm:

I've now had three deals in the last six months, where, within weeks of receiving a low ball offer (all from the same Realtor!), the Seller received (and accepted) a significantly stronger offer from another Buyer.

"Highest & Best," Explained

Multiple Offer "Rules of Engagement":
Highest (Offer) & Best (Terms)

Careful readers of MLS listings these days will notice more references to the phrase "highest and best" -- as in "highest and best offers due by noon, Tuesday."

What exactly is the listing agent talking about? Two things.

First, multiple offers have been received for the property in question (duh!).

Yes, these are increasingly common at the lower end of the market, particularly with bank-owned foreclosures priced, shall we say, "conservatively."

Once it's apparent that there are going to be numerous offers, a standard tack is to inform both prospective Buyers who've already submitted offers, as well as those who are on the verge of doing so. A deadline 24 or 48 hours away is announced, and everyone gets a chance to (re)bid.

Two. "Highest and Best" also means, "one round, with no chance to raise."

I've had more than one client, who, upon learning that their offer in a "multiples" situation fell short, insist on submitting a higher offer.

Unh-unh -- that's not how "highest and best" works (assuming, of course, the Seller is playing by the rules).

In fact, that's the whole logic behind "highest and best."

Instead of going multiple rounds with multiple Buyers, the Seller is basically saying, "cut to the chase and get to your highest offer -- with the best terms (contingencies, closing date, etc.) -- now."

Buyers in this situation not only have to decide what the property is worth to them -- they also have to guess what it's worth to the competition!

Multiple Offers and $40k Over Asking Price

[Editor's Note: want to see what happend to this house? See, Fern Hill Flip]

Where: 2641 Kipling, in St. Louis Park's Fern Hill neighborhood

What: 3 BR/2 BA; 1,678 FSF

Asking Price: $165k

Sold Price: $205k

Days on Market: 3

Closed: 3/9/09

Forty thousand over asking price??

That isn't supposed to happen in a market flooded with inventory, and specifically, bank-owned foreclosures like this one. And yet, that's exactly what happened here.

I profiled this home one month ago when it went pending after less than 3 days on the market ("What's Selling? Fern Hill Foreclosure"). At the time, I speculated that it went in multiple offers, and that the ultimate selling price would be over the asking price -- perhaps well over.

Good call (if I say so myself).

One of the biggest misconceptions in today's market is that, no matter where a house is priced, it will ultimately sell for a big discount from that price.

Sellers who subscribe to that mindset invariably pad their asking price -- and then wonder why they aren't selling.

Buyers who subscribe to that mindset miss out on a lot of great deals (and waste a lot of time and energy writing unrealistically low offers).

Lowball Offers in a Bear Market

Housing Bear Market Brings Out
Two Kinds of Low Ball Offers

Although they're invariably upsetting to Sellers who receive them, not all low ball offers should be summarily dismissed. Especially in a housing bear market, there really are two kinds of low ball offers.

The first kind is the stereotypical, "I'd like to steal your home in broad daylight" offer. The amount is insultingly low, there's little or no context or introduction offered by the Buyer's agent, and the financing terms are even weaker than the offer price (if they're even included).

In the case of investment properties, I've even seen offers where key information -- like the property's address -- is wrong, and the entire offer feels sloppy and incomplete. Clearly, such would-be Buyers are throwing, er, spaghetti against a wall and seeing what sticks, i.e., making hasty offers on multiple properties in the hopes of finding a truly desperate Seller.

(Another sign of such a strategy is that the Buyer has only been through the property once. Especially with single-family homes, serious Buyers typically make multiple visits to weigh pro's and con's, study the home's key features, and initiate a dialogue with the listing agent)

"Leaving the Door Ajar"

The other type of low ball offer telegraphs more sincerity and interest -- and therefore needs to be treated more carefully.

While I strongly discourage my Buyer clients from making low ball offers -- as often as not, they backfire -- clearly not everyone feels that way today. Egged on by housing headlines, or thinking they see weakness where a home has languished on the market (note to Sellers: don't let your home languish on the market), some Buyers feel compelled to start out with a very, shall we say, aggressive initial offer.

Once that's been rejected, it's almost as though the Buyer "got it out of their system" and can begin to negotiate seriously.

If the Buyer in fact is serious, they'll typically continue circling the property, making incrementally higher offers.

What happens next depends -- on the home's location, price, and condition; the presence (or not) of other suitors (a direct function of location, price, etc.); on how patient the Seller is; and on the Buyer's psychological investment and interest in the home.

Sometimes the would-be low ball Buyer raises their offer enough to entice the Seller to accept. Sometimes, they don't, and move on. However, a third possibility --and one that seems increasingly common -- is that while the low ball Buyer is dithering, a second, more motivated Buyer appears, steps through the door the first Buyer left ajar . . . and snatches the property.

In fact, I just handled one of these transactions.

Not only is the second Buyer viewed as a White Knight, but often the first Buyer isn't given a chance to match or beat the White Knight's offer ("if they were willing and able to offer more, they shouldn't have wasted my time beating around the bush").

Closing Deals in a Soft Market: Understanding Buyer Psychology

What’s the difference between a good real estate agent and a great one? A good agent thinks that their job is to attract a well-qualified buyer willing to pay the seller’s asking price. A great agent thinks their job is to find . . . three or four of those buyers.

Especially in a buyer’s market like the current one, the difference is crucial, for four reasons.

One. Leverage. A seller negotiating with a solitary buyer doesn’t have any leverage: if the seller doesn’t like the buyer’s offer and can’t get them to raise it, their only other choice is to wait. In the meantime, the seller must pay the mortgage, property taxes, insurance, utilities, and maintenance. In a weakening market, waiting also means anticipating new listings that compete with their home, hoping interest rates don’t rise, etc.

Two. Motivation. Buyer’s markets are characterized not just by a scarcity of buyers relative to sellers, but by unmotivated, even spoiled buyers who lack any sense of urgency. The same sense of anticipation that grinds down sellers and fills them with angst has the opposite effect on buyers: their attitude is, "there will be even better choices tomorrow than today, at even lower prices, so why rush?"

Often, the only thing that can counter that psychology is the appearance of a second buyer interested in the same home. In fact, multiple offers in buyers’ markets (yes, they still happen) often start out with several buyers noncommittally circling a property. Then, once one "fence-sitter" jumps, they all do.

Why? Because suddenly the time horizon for buying a given home is no longer infinite, but very finite. And if someone else wants the home the buyer is interested in -- out of all the dozens that are available -- maybe there really is something unique and appealing about it, validating their own judgment.

Three. Follow-Through. Great agents know that there are many, many steps between a would-be buyer submitting an offer, and consummating a deal with that buyer at closing. Buyers who don’t hear footsteps drive hard bargains. They make low offers that they raise slowly, if at all; put down little earnest money; and ask for steep discounts for any issues identified during the inspection.

By contrast, buyers who know they have competition try not to rock the boat. They overlook inspection issues, and are careful not to do anything to drive the seller into the arms of another suitor.

Four. Deal Insurance. Great agents know that even solid-looking deals can derail. The parties may not be able to resolve a major inspection issue; or, the buyer’s financing may fall through. Even when a buyer receives a firm financing commitment, if they lose their job or suffer a financial setback, the lender may still back out.

That’s why great agents keep the pressure on, aggressively marketing a property until the buyer’s inspection contingency is removed. Identifying backup buyers in advance not only minimizes the fallout from a broken deal, it actually reduces the risk of that happening, by lessening the buyer’s willingness to test a deal to the breaking point.