Out-of-touch buyers
Monday, November 24, 2008 at 11:11PM Last month, I wrote about out-of-touch sellers. Now, let's discuss out-of-touch buyers.
Like out-of-touch sellers, out-of-touch buyers ignore market data. Their strategy is to offer what they wish the house is worth. I have some sympathy for the theory: "Well, I don't want to overpay, so I will offer the lowest price possible", or "I know the bank has to sell, so they will take whatever I offer", or "I know this realtor-owner has to sell because business is down so he will take whatever I offer". Sometimes they really expect to get a gift of someone selling a house for 20% below market, other times they figure they can just come back with a new higher offer if the first one is rejected.
Out-of-touch buyers go around making lowball offers with the theory that "one of them will stick". But that never happens. Instead, one of two things happens: the offer is rejected, or they lose out to another buyer who made a simultaneous but better offer.
In real estate, time is your enemy. The more time you waste by thinking about how much to offer, throwing out offers that "might stick", or delaying in presenting the offer, the more you give a chance for something to go wrong, like another buyer with a better offer.
I think the word is out that lowball offers are a waste of time. An REO listing agent told me in her time of listing REOs, the bank has always come back with a counter, except for one time. Most offers are within just a few percent of the bank's asking price. Buyers realize that bank owned homes are already significantly discounted. So it makes sense that lowball offers are rarely made. I assume the same goes for regular homes.
REOs
However, there are a few buyers who just don't get it. There is a false perception among a minority of buyers, that bank owned homes are being given away. "The bank must sell, so they are crazy to reject my offer even though I am 30% under market", is the thinking.
Wrong!!!
On average, bank owned homes sell for 98% of asking price. No wonder! They are already cheap.
What happens when you make an offer to a bank? In my experience, banks won't even counter with a price. They either reject the offer outright, stamped "REJECTED" on the purchase agreement, or they find themselves in the favorable position of having several offers at once, in which case they ask each of the buyers to come back with a "best and highest" offer.
Best and highest refers to a combination of highest price and best offer (no contingency, no FHA, VA, or CalHFA). They want a solid buyer offering a market price. They prefer not to deal with FHA or VA loans.
I have seen many well qualified buyers think they could steal a bank owned home, get extremely frustrated with their offers being rejected. The problem lies not with the seller, but with the buyer. These buyers just end up frustrating themselves.
Negotiate well!
If you want to have your offer accepted, please educate yourself on market data, know your seller's motives, look at the time on market, and don't lowball. Give the other person a decision to make. If it's vice versa, and they close you out, then you lost your power. Don't ever let them close you out. Don't ever let time weaken your position. Don't give away any information, but try to glean what you can from the other party. Be ready to walk. And let me say it again - never put yourself in the position where the other party closes you out!
Call me if you have any questions on negotiating for a purchase on a home, or analyzing the San Diego real estate market.
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Reader Comments (25)
Rubbish, i have bought many reo's they will take low offers if the property needs work. shaun styles
I don't believe it. Please give me the address of at least one San Diego REO you bought for more than 10% off listing price. Email me at sb@berklandgroup.com and I will keep the address and your info confidential.
Your best prices are at courthouse auctions.
Great article. You are totally on the money. There are a lot of out-of-touch buyers that think the banks are begging people to take their properties. Maybe in Detroit or Cleveland, NOT in San Diego. Buyers quickly learn what's up after a month or so of looking. Your only chance with a lowball offer in San Diego is on a super fixer uppper property that a conventional lender would not lend on.
I also find a lot of people that read the media, only surf Internet forums on the Internet and go to Real Estate get rich quick boot camps (but don't make offers) have this false percetion as well. People actually IN the market right now in San Diego, making offers, know that lowballs don't work
Sorry, Schahrzad, but I'm not buying what you are trying to peddle and I doubt that most of the buyers in this current real~estate market are either. For the most part, foreclosures are driving the market. It's a 'buyers market' for a reason: buyers are dictating the terms. Buyers have the upper~hand. Buyers have the luxury to shop and not rush into a purchase. Sellers are being given a taste of what they doled out to buyers in the last 6 years. I sold my real~estate in the last 4 years. I didn't buy anything in the U.S. since 2001 (immediately after 9/11 I picked up a couple of deals from sellers who were spooked by 'terror alert' fears).
I remember not to long ago some silly real~estate agent telling me that 'the sales price of foreclosures don't count [toward median~sales] because they are DISTRESSED SALES'. That was a laugh riot then and it's even more of a laugh riot now, that foreclosures ARE bringing down the values of Southern California real~estate.
Earlier this year I went around making LOW BALL offers. No one bit (you are correct on that~~~but a couple of sellers really dropped their prices), until a true bargain foreclosure popped into the picture. I offered full asking price (once again you are correct~~~I figured the bank HAD priced the property as a BARGAIN and offering any less would probably have lost me a wise investment opportunity) and an all~cash deal. We entered escrow. One of the sellers of a property I had low~balled came back and said they would sell, but by then I had lost interest in their place and refocused my attention. The purchase I made has dragged down values throughout the community and two of the houses I low~balled are now lost to foreclosure. The seller who came back to see if I was still willing to strike a deal, still has his house on the market~~~at close to my low~ball offer price!
If anyone should be afraid of timing, IT IS THE SELLERS WHO SHOULD THINK LONG AND HARD WHEN REJECTING LOW~BALL OFFERS. I low~ball, but I guarantee closing by not having any loan contingencies. Sellers who want to wait out may very well lose their homes in the process. Those are the properties I am interested in. If someone puts their house on the market and prices it at summer '08 values, they are hoping and wishing for someone to come waltzing in~~~there are very few of those buyers today. Lending has stalled, unemployment is escalating and the bottom for the real~estate market is not yet in sight. This is a good time to buy, but ONLY IF YOU GET A BARGAIN. Paying current market value while prices slide is illogical. I won't buy anything unless I can get it at 2002 prices or earlier.
My other recommendation to anyone who is thinking of buying today or in the near future: NEVER GET INTO A BIDDING WAR. I ALWAYS walk away if a seller asks me to come up with a best price by a certain date so they can compare with other offers. Why in the world would ANYONE bid up a house price in this day and age? Much better to go around making low~ball offers on a bunch of houses. If more and more of us go around doing this we will break the spirit of the sellers and force them to either lower their prices or force them to take their houses off the market. We only want desperate sellers of distressed properties today. Distressed sales are an exciting part of the market and I am back searching for more properties that I can hold onto as rentals.
Although I disagree with you on certain topics, I really enjoy reading your blog. Lots of interesting information and you go out to bat for the sellers. Definitely someone I would like on my side when I want to sell.
Best regards and may you and yours have a joyful Thanks~giving. And let us all look forward to a more prosperous New Year. I think we can all agree on that much.
Thank you Clarissa. You nailed it on the head.
Everybody listed is right and wrong. Its all localized not acrossed the board. In some areas that I deal with Riverside and Corona asking price is selling price if not higher, In others 5% to 10% maybe if the home has been on the market. .
I stumbled across this site by accident. Now I know why it was an accident: the author is 'out of touch.' The posting on 'out of touch' buyers is some of the dumbest dribble I've seen in awhile and surprised someone would spend time writing something like that, let alone posting it in the public domain.
Mike S.
From the mouth of a filthy 6 percenter. I want to know when the masses are going to gather with pitch forks and torches and demand the NAR and its dirty agents get jail time.
Get this - we got an REO report from the back for a home in Murrieta, REO price $128,000. We found the home listed by several brokers (aka felons). The listing prices ranged from $220,000 to $245,000. We said to the broker we would like to submit a bid for $160,000. The broker told us this: YOU CANT DO THAT, "we" wont let you. And if you submit low ball bids all the brokers/agents on the county will hear about it and will ignore any bids you every place again, you wont be able to buy a house at that rate.
Did you see the issue, I will be black listed by a clan of mobster-types who make treats if you do not make them their unearned dollars. There are many names of this, extortion, coercion, intimidation, etc etc.
when-o-when will the brokers and agents start serving jail time.
Thanks for all the comments. CalFord, that agent should be fined! One of my clients told me that her prior agent kept trying to talk her up in price, and she found out, by contacting the seller, that her offer was never submitted, so she reported him. He should have lost his license, but only had it suspended for 1 month. Horrible!
I never tell a client what to offer, and I submit all offers. Likewise, a listing agent cannot tell a client what offer to accept. If a higher offer comes in later, the listing agent is in trouble. For me, working with buyers, I don't ever tell them what to offer. But I do give tons of information on the market, and I set up active clients on a special Gateway for pending and sold homes, so they can track the market. But some don't want to know what is going on. So they have not succeeded in getting a home.
Still, we have lost a few bids on well-priced REOs, because the buyer wanted a discount off the already low REO price. There are too many buyers out there to compete with.
Clarissa is right. To get price drops, ALL buyers have to lowball or walk.
The problem is, there are too many buyers out there, willing to pay the prices, so those of us looking for bargains are getting outbid.
REOs sell on average for 98% of asking price, with some selling lower, and some *over* asking price.
Expect REO inventory to drop dramatically until next summer, for the reasons I will outline in my subscriber post soon. There is a leveling and slight increase of prices in the low end, under $250K. Too much demand, not enough supply.
Months supply went from 16 down to 5, it's a hot market.
But I am not buying until the bottom hits, around 2012 - 2016.
Clarissa, my experience in San Diego, working in price range of $250K - $995K, is not as you state:
"It's a 'buyers market' for a reason: buyers are dictating the terms. Buyers have the upper~hand. Buyers have the luxury to shop and not rush into a purchase."
I have worked with buyers who have lost each of their bids to other buyers who made higher offers. These buyers have almost 800 FICO scores, 20% down. Sellers are dictating the terms in the experience I have had.
If you are getting an FHA or VA loan, you have no power at all. You are the bottom of the pile for an REO. A lower cash offer will win over FHA anytime.
If you want to get a home in today's San Diego market, you are in a competition.
I always like to hear other examples from readers, so please share if you have any other experience. But from what I hear from REO listing agents, this is going on everywhere in San Diego.
Perhaps in Chula Vista it's different. Too many homes for sale, low demand.
The market above $ 1mil is in serious trouble, and you should never expect to pay anywhere near asking price.
If you are looking over $1 mil, then you are in the driver's seat for sure!!
Okay, just won't buy then! Let's wait and see who caves first.
Any REO that has been or ever will be purchased for 10% of the actual list price is a complete sh*tbox.
Reality
Reality, notice we have not yet heard back from Shaun Styles.
For those who bash realtors, I think it's kind of funny. Actually, you don't ever have to use a realtor. You can represent yourself on your real estate transactions.
My friends who are doctors, lawyers, investment advisors, they always use a realtor. True - most realtors suck big time. Shahrzad, you prove you are different than the rest. Love your blog!!!!!!
Schahrzad, I really like your tenacity and your conviction. I don't believe all realtors are evil or worthless any more than I believe my fellow man is evil and worthless. Most agents and brokers are hard working and follow the rules and by~laws of their trade. Some bad apples have given an entire segment of society a black eye. This, of course, is unfair.
Regarding San Diego real~estate, that is a market I am only slightly familiar with. I am considering making a purchase there in the future, but I will wait a bit before I jump into that particular pool. I checked out some bargains in the Marina area~~~I liked what I saw and was surprised at how much you could get for your money. It's been almost 9 months since I spent a weekend searching and I imagine prices have come down since then (I'm talking about 1Mil+ high~rise condos with views). San Diego has some of the finest weather in the entire U.S., and the market there seemed to be one of the first bubble~cities to be hit perhaps because of some over~building. Still, San Diego is a wonderful place to live or a vacation destination and with bargain prices in real~estate, it's a place to keep on my radar. I predict that San Diego will be one of the first California markets to bounce back. And when it does, I think it will go through the roof again, and many people will be looking back at all the bargains that were available 'back when'...the way we look back at the bargains of 1996.
Regarding purchasing an REO, I find that I have the best luck if I deal directly with a listing agent in any foreclosure. By offering all~cash and no loan contingency and working with the listing agent, I tend to have a leg~up on the competition.
I guess I'm a little late here, but wanted to share anyway. We've been looking now for almost 9 months. We've seen homes listed 7-8 months ago at $615,000 now listed at $460,000 and still no bites. Or more recently (3 months ago), an agent told us she could get a home for us from the bank at $450,00 with the asking price being then $469,000. That home is now offered at $415,000.
Why would we want to buy at this point when sellers are only beginning to realize that the market is in the process of correcting and will continue to do so through 2009 and 2010?
We are now at the point where real bargains will start to emerge if we are patient. Keep looking, but don't get into fear of loss- we've got a long way to go.
Also,I did a search via Realtor.com of homes in our area priced over 1 million dollars and got 41 pages of homes for sale with approximately 6 listings per page.
Why are all these people selling now? And who will be buying these homes?
By the way, I'm not a S.D. area poster, I live in Ventura and my search was for Ventura and Oxnard. We don't have the employment opportunities you guys have, so who's going to buy these homes? And when these home sit on the market and eventually are forced to reduce their hefty prices, what pressure does that exert on lesser priced homes lower down the food chain?
Thank you.
Alan in Ventura
In-touch buyer
The real cause of these high home prices was not the fact that the homes magically got more expensive, it was because the lenders loosened the loan gridlines. The fact is that the median income for most people cannot sustain the over inflated housing values. Eventually regardless of what the REO prices are the homes prices will need to come down to sell. I'm sure a lot of buyers were holding back cash reserves to buy REO's when the prices came down, premature acquisition in my opinion, that’s what driving the REO market presently; that won't last forever my friend. A few sure things in this world like gravity are the math of these transactions doesn’t add up. The hopes and dreams of the realtors will come crashing back down to reality.
Alan I live in Ventura as well and commute into LA for my job every day, but I still cannot afford these prices. I make more than most couples combined, but the math remains the same 250k - 280k is my affordable range.
Interesting discussion. I live in Sonoma and have been looking at REO's here and in Santa Rosa up the road for most of the year. Overall the REO market is not a buyers market, one either bids close to the listed price or someone else picks up the deal. My overall impression has been that folks are overpaying for property those who purchased in Feb 2008 vs Nov 2008 have lost some real money and home prices continue to decline. Many investors were active this year and during the summer converting them to rentals but the rental market is bloated now so I don't think it will be a very good for investors. Also seeing several rent to own/lease to own outfits that have done the REO rehab and now trying to unload them for significantly higher prices to lower credit risks.
A local REO realtor told me that significant inventory will be hitting the market in Jan 09 so maybe the banks will get better with pricing as lots of property is just sitting now.
With all due respect (I like your blog), this sounds like the old "you'll get priced out of the market" mantra, when houses were going parabolic in price. I see much more downside to home prices nationwide before the bottom is in.