Desperation Mining: How a Buyer Hits Paydirt (and How Sellers Can Avoid it)

I had actually started writing this last month, but one of my favorite blogs just ran a picture of a listing sign that included the caption "REDUCED But Not Stupid or Desperate". I beg to differ on the former. On the latter, time will tell.

Most successful real estate investors are really skilled desperation prospectors. They make their money when they buy the property - the actual sale only confirms the success they previously had.

Here's the really good part: Most of the folks they buy from did it to themselves, by letting irrational greed rule them.

For buyers, there are three parts to this game: Persistence, a good buyer's agent, and being willing to move on the the next if this one won't deal yet.

For sellers, there are three failures: Failure to consider your property's real position in the marketplace and price accordingly, failure to consider your resources, and failure to consider your fallback options ahead of time.

The fact is that most buyers shop for homes by the value to them. There may be an explicit budget involved or there may not, but most people have a decent idea of what they can afford. The smart ones shop by purchase price, the silly ones based upon payment. During the Era of Make Believe Loans, many got burned even worse than usual by that, but it's still around. The point of the matter is that if there's a house down the street priced at $350,000, while you want $400,000, you are going to have to convince someone who doesn't have any ego invested in the property that your property is worth the extra $50,000 to them. If they won't willingly pay the extra, you are doing nothing but wasting your time. If, on the other hand, you can get them to pay the $50,000 extra, you have won. But people don't shell out $50,000 extra for stuff that's only worth $10,000 to them. They go buy the other property, and spend $10,000 making it into what they want. This is different only in degree from the folks you see comparing different bottles of aspirin at the supermarket.

So if you're not offering something worth $50,000 extra to one particular set of buyers, you are wasting your time as long as there are any competing properties on the market - and there are always competing properties on the market. Even during 2003 when the average time on market locally got down to about three days, there were properties that spent months languishing, and never did sell. I don't think it's news to anyone that this situation has become more likely rather than less.

Now, if you've just been transferred and can't afford to keep this residence, or your loan has reset and you can't keep making the payments, or any number of other situations, you have a deadline for action. Not only that, but your backup or alternative plans are the pits. It is critical to understand that if you need to sell, all of your hopes for getting a good price hinge on the first few days on the market. If it's priced appropriately and you don't make it too difficult to view, it'll draw visitors. If if is properly and attractively maintained and presented, especially vis a vis the competition, it will get offers, and probably good ones. If any one of these four conditions fail in the current market, the property will sit unsold. Once it's got thirty days or more on the market, buyers become decidedly less interested in the property. Most of them won't even look at it on-line. The only way to get that interest back is to lower the price - and I mean significantly lower than it needed to be in the first place. The feeling on the part of most buyers is that "there has to be something wrong with it" Most people trust the collective wisdom of the market perhaps a little too much, because it ain't necessarily so, but you can't tell them that. They're not listening to you. They aren't listening to me, either, and there's nothing I can do that will change that, except for individual buyers whose trust I have earned, on individual properties. Instead of trying to change what you can't, change what you can. Most people don't want to, but that's the difference between success and failure - overcoming that reluctance. Yes, it means you agree to hope for less money, or you agree to spend money you were hoping you wouldn't, but those hopes were illusory from the first, like a short fat kid with no ball handling skills who hopes to play in the NBA. One thing I can absolutely, positively guarantee you is that prospective buyers don't care what you need to get to make a profit, or what you'd "like" to get for a property. If they did, I'd tell everyone I'd "like" to get two million dollars for that one bedroom condo in the 'Hood sandwiched between the methadone clinic and the Pawn Shop. They care about how the property and the asking price compare to the competing properties.

It is critical to understand a property niche before you put it on the market. What are the competing properties? What do they have that yours doesn't? What does yours have that they don't? Where do you fall on the pricing scale? One of the critical functions of a good listing agent is to critique your property soundly and fairly, and if you choose the agent who says only things that make you happy, expect to pay for that happiness with ten times the misery later, not to mention much less money and significantly greater expenses. The biggest red flag I know for a failed listing is an easy listing discussion. Mind you, you shouldn't end up mud-wrestling in the street and kicking and punching each other through walls, either, but if your agent isn't willing to argue with you and point out property deficiencies, and overcome your objections, how are they going to overcome the objections of the buyers and their agents?

On the buyers side, the best way to successfully mine desperation is to zig when everyone else is zagging. Unattractive presentation? I'm there. On the market for six months or serially listed? I want to see that property! Viewing restrictions difficult enough to make the most exclusive nightclub ashamed? I will figure a way to see it. Obviously overpriced? No obstacle. Why? Because each and every one of these properties is making themselves unattractive to everyone else. Some of them will lose the property to foreclosure before they do something smart, but others will deal with me and my desperation mining clients. But nobody else is going to make an offer, so barring foreclosure, eventually they'll deal with me and my clients or someone else doing the same thing.

You do need an eye for property if you're going to do this, something a good agent will help you with. There are more Money Pits than potential winners out there. Vampire properties that will suck your wallet dry without returning a profit. Neighborhoods where the surrounding properties won't support the price level you need to make a profit. I know I said that buyers don't care what sellers need - but at this point you're a buyer. If you know ahead of time that you're going to spend $40,000 by the time you're done fixing it, and the neighborhood won't support the acquisition price plus costs of selling plus $40,000 plus your profit margin, that is not the property you are looking for.

There's a very old saying, "Before you find your prince, you've gotta kiss a lot of frogs." Nowhere does this apply more strongly than desperation mining. You've got to deal with something more far more unpredictable than the Heisenberg Uncertainty Principle: whether this particular seller has had the epiphany that this is about the best offer they're going to get yet. A good buyer's agent can do quite a bit to cause that epiphany, but if the listing agent is stuck in the Land of Happy Thoughts, it becomes decidedly unlikely to work. I don't have much mercy on the subject of enlightening them; they willingly did whatever it was to their client and cost that client at least tens of thousands of dollars. What's a little professional discomfort as compared to that? The ones who learn from the experience become better agents (one actually called just to thank me a while back), the ones who don't, I'm not likely to encounter very often. To be fair, I was this sort of agent once. Briefly.

But the point is that the hit ratio on these offers is not anything like the ratio on the more standard buyers who are looking for the beautiful, fresh on the market property. Famous desperation mining advice: "Some will. Some won't. So what?" There's always a fresh desperation assay to perform on another property half a mile away. There are always property owners who put themselves into the position of having no better option than to accept your offer. Whether they actually will or not right now is uncertain. Eventually, most of them will accept someone's offer. I don't resent it when they accept someone else's offer later. My clients benefit just as often from someone else's set up offer, and everybody has their limits on the number of properties they can handle and the money they have available. The supply of such properties is always being refreshed by wishful thinking and bad agents who cater to it.

How can sellers avoid this? By understanding their property and where it falls in the market, and pricing it accordingly. This number has to be modified for showing restrictions, presentation, and many other factors, almost all of which have a negative influence. The listing discussion you have with prospective agents should not be easy - that's a sign of an agent who's just telling you whatever they think you want to hear. There should be some arguments, perhaps even heated discussion, as to what is appropriate and obtainable by comparison with the competition, but trying to get more is much worse than drawing to an inside straight. You can hope for that winning card in defiance of all rationality, but if you lose that bet - and just about everybody loses it - you're setting yourself up for a far worse situation than you really can get if you act correctly in the first place. Overpricing the property is not a "no lose" event - it's a situation where a very few win an extra $10,000 or so, while the overwhelming majority lose several times that amount. Planning ahead and knowing your time-line, and being up front about it with your prospective listing agent, will also save your backside. If you can only make three more payments, or if it's already in or close to default, you need to price accordingly. Nothing happens instantly in real estate. If you need it sold inside of ninety days, you need a solid fully negotiated contract in under sixty, and you're most likely to get the best offer within the first thirty days, if not the first week or so. Wasting your first couple of weeks or months overpriced because you "want to get more than that" is the best way I know of to end up with much less by putting yourself squarely in the crosshairs of desperation miners, because nobody else is interested in your property.

Caveat Emptor

Article UPDATED here