Some Secrets to Good Transactions

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Be prepared for trouble before it happens, know how strong your position is or isn't, and don't ever overplay your hand.

Real estate transactions are the largest transactions most folks get involved in. Even small percentages of $500,000 or more are lots of money. A 1% difference in the purchase price, or cost of repairs, means more money than a lot of folks take home in a month. People will lie, cheat, and steal for much smaller amounts that that. It's a bad bet in general, and a worse one in real estate, but people do it. The new siding that hides the clues that say cracked foundation. The new paint that hides the water stained ceiling. New, well padded carpet over old wood where rot has set in. These are just the tip of the iceberg.

The most common game, though, I call the chiseler. Someone who comes into the transaction and may actually negotiate the initial contract reasonably, then proceeds to demand more than is reasonable every time there's the least little item for possible concern. There's another agent in my office has one for a client right now. I've told that agent that I'd drop that client at least half a dozen times. Even if the transaction gets finalized, this chiseler is going to come after this agent as soon as there's anything he can manufacture a complaint about. The other side is a desperate seller, or they'd have told this guy to get lost long since. The chiseler is getting a screaming deal just from the basic contract, and he's wanting hundreds of dollars in concessions to fix stuff that costs a dollar nineteen. My opinion is that before the transaction closes, he's going to ask for one thing too many and they're going to tell him no, and the transaction will be off, no matter how desperate they are.

"If you want peace, be prepared for war." Ancient wisdom. I'm not advocating war for real estate. Wars are expensive and usually a net loss, whether they're waged with bullets and bombs or lawyers and contracts. There's always another property for sale, always another buyer. You never have any more power over the other side in the transaction than they choose to grant you. It may be intelligent for them to grant it, but you can't make them. Similarly, they never have any more power over you than you are willing to grant them.

A quick lesson from the annals of real warfare. In 279 BC, Pyrrhus of Epirus fought the Roman legions at Ausculum. He won the battle, but when congratulated upon doing so, replied "One more such victory, and we shall be undone." The Romans could afford the losses much more easily than his army. It set the scene for the Battle of Beneventum, after which he gave up fighting the Romans. From the experience of Pyrrhus comes the term, Pyrrhic victory. He was supposedly a brilliant general, but if he was so brilliant why couldn't he win a battle without catastrophic casualties?

Any time lawyers get involved in a transaction, it's a reasonable bet it has become a Pyrrhic victory at best. Chances of recovering actual money in your pocket greater than your legal fees are slim, no matter how rotten their case or how much worse off than you they end up. You still don't have the transaction you wanted, and meantime, you've likely scared off other buyers or missed opportunities at other properties.

Knowing when a transaction is broken and being willing to counsel a client to get out of it are two of the hallmarks of a good agent. Recognizing it before it has become undeniable is crucial. Precisely when the transaction is broken is itself a function of the market. The current market certainly allows buyers to drive much harder bargains than has been the case any time in the previous decade, but there is a point at which even the most desperate seller should tell them, "No," to further demands. Of course, a really good listing agent won't let it get that far, any more than a good buyer's agent will. I'm perfectly willing to tell my clients in private that they're on the verge of messing up a contract that gets them the best deal they can reasonably expect, all because they tell themselves they want a little bit more. But if that messes up a good transaction, nobody ends up with what they wanted. See the chiseler, above. In order to know what's broken and what's not, you have to really understand the market.

None of this is to say that capitulation is the first order of business, any more than scorched earth. Both are the province of the agent that needs to get fired. What is necessary is judgment and market knowledge and an understanding of what a good compromise really is. A good agent has contingency plans for everything in negotiating, and throughout the transaction. If they do X, we'll do Y. If they want A, we want B. If they don't want to go for that, we'll offer D for C instead. The other side does not necessarily have to lose for your client to win. Indeed, it's the good agent that knows how to substitute other things for money, and the good agent who knows how much of the clients agenda to reveal. Information is always power, but sometimes knowledge of the other side's agenda enables us to craft a compromise that makes both sides happy.

Cutting corners is always bad, as is the agent who doesn't stay on top of the transaction. Listing agents should negotiate individually with each offer, and respond to every offer within a week at the most. The transaction coordinator should not be used in lieu of individual agent involvement, or as a "talk to the hand" type shield from the other side. That's a good way to lose some of the best offers you'll get on the listing side.

Time on market is a killer for the seller's pocketbook. I don't know where the urban legend about "The longer you wait the higher the sales price" got started, but it is a counterproductive myth. If research found some kind of positive correlation between lengthened time on market and sales price, it must have been conducted in a market going up 20% plus per year. Time on market turns buyers off. "If it's so great, why hasn't it sold by now?" is a quote I've heard from pretty much every buyer client I've ever had. In point of fact, the longer a property is on the market, the further the seller will have to cut price in order to sell (and the more desperate they likely are), and the better the deal it is possible for the buyer to get. In a normal market, the longer a property takes to sell, the lower the eventual sales price will be. The idea of putting it on the market overpriced "just to see if we can get it" is a good way to cost yourself money. Price it competitively out of the gate. If there are better properties for less, your property won't sell until after theirs does - and there will be more better properties for less on the market then.

The proper response varies with market conditions and the response you're getting to the property from the market. When I originally wrote this, if a given seller wouldn't recognize that desperation is the only valid reason for marketing a property when there are 40 plus sellers per buyer, a good buyer's agent doesn't need much reason to abandon a property. Just the fact that this seller or their agent was trying to act like it's still the seller's market of a few years ago is enough, and the sooner the idiots doing anything to get listings including misrepresentation of the market realize this, the sooner this will change. My most important questions have been and will continue to be concerning their need to sell and what possible alternative plans there might be. When things are bad for sellers (and wonderful for buyers), the only reason for a property to be on the market is if there is no other reasonable alternative. I told several people, everyone who had a reasonable alternative, "I'd love to sell your property, but given the state of the market right now, the kind of sale you want is not going to happen. I can list your property for sale, but it's not going to sell in this market unless you outcompete all the similar properties that are already for sale. All it would do is frustrate both of us, and get you angry at me, and for good reason. Here's my card, and if you decide you need to do what it's going to take, please call me. Otherwise, I'll check back in a few months and we'll discuss the state of the market again. I'm confident that waiting will get you more than enough extra money to be worth it."

Later on, the buyer's market that we had when the bubble burst went away. Bidding wars and price increases were the order of the day. Sellers didn't have the kind of power they did when the bubble was going gangbusters, but they had a lot more than they had, providing their property is priced correctly and in a desirable micro-market (e.g. Central San Diego, but not Escondido or El Cajon - people realize that gas is going back to $4-5 per gallon as the current administration and Congress have no intention of doing anything to fix the basic problem). The more people want your property, the more power a given seller has and the less power would-be buyers do. Nobody can force them to come to grips with reality, so if they're not going to listen to reason, it may be the listing agent's fault but the owner is the one who's going to suffer the consequences. Similarly on the other side. If the buyer's agent doesn't understand the market, their clients are either going to end up frustrated or rooked.

You can't learn this stuff on the fly, by the way, nor can you prepare retroactively - you have to be ready when the offer comes in. If you don't hire a sharp enough agent, you can't go get them when it drops in the pot. First off, you won't be able to recognize that it has dropped in the pot, and that you're now roast. Second, because the reason it doesn't drop in the pot with a sharp agent is because they're prepared, and they never let it get that far.

Don't ever confuse "sharp" with "experienced," or "high producer." Yes, a certain amount of experience is helpful and I learned a lot on my first few transactions. But the only times I've ever heard anybody say something like, "I've been in the business for three geologic eras" is when they were trying to defend something indefensible. The last time it was a woman who I found out didn't have a valid listing agreement (and it wasn't a small technicality, either!) bragging about her forty years in the business. And often the reason that someone is a high producer is the willingness to throw their client under the bus in pursuit of an immediate commission check. Ask what problems they've dealt with lately and how they handled them. There are always problems to be dealt with; it's the nature of the business. Sometimes it's the property, more often it's the people. Not every transaction, but if they don't have a certain proportion, it's more indicative of inability to recognize a problem than it is of not having any. On the loan side, I've done more loans than 99 percent of the loan officers out there, and I deal with problems by recognizing them and fixing them before the underwriter sees the file. It's not my experience - there are plenty of loan officers who've been in the business thirty years who still insist upon doing it the hard way. It's not the fact that I've done X number of loans in a month. I've learned more since the month I closed 100 loans than I knew then, by an order of magnitude. As a matter of fact, high volume is incompatible with significant problem solving, either in loans or in sales. There's only so much time in the day. It's that I've learned how to recognize this stuff and deal with it before it bites my client, even if I have to work much harder or do more work or wait a little longer than I originally thought I would. That's what makes a good agent or a good loan officer.

Caveat Emptor

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About this Entry

This page contains a single entry by Dan Melson published on December 30, 2013 7:00 AM.

Wanting a More Expensive Property Than You Can Really Afford was the previous entry in this blog.

Avoiding Foreclosure in Bankruptcy is the next entry in this blog.

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