Buying and Selling: August 2009 Archives

There's an old saying in sales: "The best way to achieve your dreams is to help others achieve theirs". I wasn't able to run it down to the original attribution, but it is as true a saying as can be imagined. The first thing to understand about any transaction that doesn't flow from the point of a metaphorical gun is that all parties are made better off thereby. The way to get as much as possible for a property is to show prospective buyers that they are getting as much as possible for their money.

As a seller you have real property. As fantastic an investment as it is, it is also completely illiquid. You can't go up to the counter at the grocery store and pay with a couple square millimeters off your lot. You have to have cash and for whatever reason, you have decided you want cash. You can't spend real estate, just like you can't live in cash. Buyers have cash or the ability to get what is cash to you via the loan they take out to cover the difference, and they want a property. Therefore, you have the makings of a real exchange that leaves both parties better off provided that you can persuade them that your property is the one that they want.

What you want is for prospective buyers to be willing to pay you as much cash as possible. Since Make-believe loans are no longer with us, this means you have to show real value to them. At the present time, the only widely available loan that does not require a down payment is the VA loan, and selling to someone with a VA loan has its own set of issues. What this means is that the buyers need a down payment, and they are going to have to qualify for a real loan with an ongoing income stream. Neither one of these is easy. Buyers understand money they had to build up for the down payment dollar by dollar out of their paychecks is real money much more clearly and at a more visceral level than they have the same understanding about money they borrow. They understand the payments they are going to have to make at least as clearly, and neither one of these is subject to the same kind of handwaving "let's pretend you can do it" loan qualification as they were a few years ago. Therefore, buyers are aware of value today in a way they were not aware of it a very few years ago.

One thing that you must understand in your bones before your property hits the market is that buyers are shopping for the lowest possible price for the best property they can get. Nobody ever bought a property because it was that property's "turn" - quite the opposite in fact, as the longer it's on the market, the less valuable a property is perceived as being. They bought it because it was the best value for them that they could afford. If there's a better property out there cheaper than yours, that's the one buyers will want. They will not automatically come to your property when that one sells, either, unless you're the best remaining value on the market. If another property comes on the market that's a better value, that's the one people will want instead of yours. It's what you did when you bought. Understand that's what everyone else wants to do when they buy. You are competing for those buyers attention and you are competing for their desire.

Fortunately for sellers, every buyer values property in slightly different ways, and therein lies your potential for profit. Some buyers want the absolute cheapest property they can get, while most people will pay more for certain amenities. But what every single buyer has in common is that you have to offer them something that they perceive as being more valuable to them than the difference in price between yours and the cheaper property down the block or around the corner. Not more valuable to you, the owner. More valuable to them, the buyer. Otherwise, they're going to buy the cheaper property, or at least make an offer on that one instead of yours.

Each and every buyer has a mental list of amenities they are willing to pay extra for, and ones that they are not. If your property is priced higher because you expect them to be willing to pay more for something in particular and they are not, your property is stricken from their list. The more things you try this with, the narrower your marketing niche. This is why you need to understand how prospective buyers think - what marketing folks call "hitting a target market" You or your agent need to understand the target market for your property, and work to hit it. This is not to say that no property ever sold to someone who wasn't in the precise target market, but those people are not usually willing to offer as much money, which defeats your aim in properly marketing the property because you want the people who are willing to pay the most for your property. People are willing in general to pay more for beautiful kitchens, good floor plans, extra bathrooms and nicely landscaped yards they can actually enjoy, but not every person and every target market is so willing. Your area, your neighborhood, and your location also influence your target market, and most particularly, the target market's willingness to make an offer and their willingness to make a higher offer in negotiations. Practically everything else in the way of amenities means you are trying to hit a narrower target market in order to get the most money, and any time you narrow your appeal, you have to make even more effort to be more attractive to the prospective buyers who are left in your target market.

Another thing to understand is that if the prospective buyer cannot see the property with their own eyes, they are not going to make an offer, and they are definitely not going to make a good offer. The phrase "pig in a poke" comes to mind. Fewer people who are able to see your property means a lower selling price. What this means in practical terms is make the bar to seeing the property as low as you possibly can. Yes, it's a pain when someone wants to see the property and you had a quiet day at home planned, but think of it this way: Your property is probably valued around $400,000 (at least in San Diego that's a good ballpark mode, in the mathematical sense of the word). If it makes a difference of 1% to your sales price, you are effectively paying yourself $4000 for a month or less of making your property accessible - and 1% is a very low estimate of the difference this makes to sales price. Put the heirlooms away, put the dog in a run or a portable kennel, get a lockbox on the door so people can see it when you or your agent aren't there (both conditions make it much less likely you'll get an offer). If it's tenant occupied, anything you spend to negotiate with them to make the property completely accessible will likely more than pay for itself. When my clients ask me "can we see the property today?" and the answer is "No, because it's tenant occupied and we need to have 24 hours advance notice" what do you think happens? We go see other properties, and if they like one of those, they're no longer interested in yours. When that happens, you're left with something you don't want - an unsold property. If you still wanted it, it wouldn't be on the market, now would it?

Caveat Emptor

Article UPDATED here

Hard as it may be to believe, I've never done an article comparing asking price to sales price. It's way past time.

Asking price is quite simply, a written representation of an offer the seller would be willing to accept. It's amazing how many agents have forgotten that, if they ever understood it. If the seller would not be willing to accept that price, they are committing an intentional misrepresentation when they enter the number as the asking price. In short, fraud. This violates the legal requirement of "fair and honest dealing with all parties" which agents agree to upon commencing the practice of real estate. It isn't fraud on the scale of which many were guilty during the Era of Make Believe Loans, but it is still fraud. By entering an asking price of $X, you are representing in writing that the seller would be happy to accept that offer. But if there are already higher offers from qualified buyers (as is very often the case in the current market) you are defrauding those who come to investigate that property based upon the misrepresented asking price.

Why do agents do this? Some of them hope to generate a bidding war. Bidding wars are certainly nice, but they are unlikely to bid the property back up to the price it could have gotten by setting the asking price correctly in the first place. In such cases, it's the obviously lower than comparable properties price for a valuable asset that attracts potential buyers, and if the low price is no longer applicable you can expect them to lose interest.

Most of them do it as a way to make contact with prospective buyers who don't know any better, so they get a chance to act as that client's buyer's agent. Never call the listing agent to show you a property. Their loyalty should be given first, last, and always to the seller of the property. If it's not, they are failing in their primary duty as an agent and you definitely don't want an agent who would hose their client so they can get more money. If their loyalty is so given to their listing client, it isn't being given to you, the buyer. Either way it's a bad situation you should know to avoid. Because it happens and it isn't rare or even uncommon. In fact, it is disturbingly pervasive, especially when the market is hot, like it is now.

Sales price is the price at which two unrelated parties decide to willingly exchange a property for money, because both of them believe they are made better off by the exchange. You need to understand that, too. If you don't, petition the courts to appoint a conservator for you, because it is the basis for all economic transactions other than the ones that flow from the point of a gun. If two parties are related - whether parent and child or corporation and controlling interest in that corporation or any other permutation - it is not a true sale because the goods being exchanged on the record are not the only ones being exchanged, and it should not be used for comparison for other properties. Related party transactions are tough to do correctly, and many people don't understand that until they get bitten by it. In fact, an awful lot of what appears in MLS for two days or less is quite likely a related party transaction pretending to be a regular "arms length" transaction. Some are because an agent is hosing their clients, others are because someone wants a loan and therefore is trying to make it look like a legitimate arms length transaction when in fact it is not.

There are still plenty of reasons why both parties can agree on a sales price that leaves each of them better off in their own opinion. One of them needs a place for their kids to grow up, while the other no longer has that need being the classic reason. Perhaps one of them needs to buy another property somewhere else, and the proceeds from this property enable them to do that. I can go on all day, and I'll bet most of you can, also, if you try. The point is that in order to be a viable transaction with a hope of actual consummation (In other words, the exchange of property for other valuables actually takes place), both parties to a purchase contract must believe they will be better off after they make the exchange. Otherwise, one of them is going to find a reason to not actually carry through.

Sales price is generally lower than asking price. Not always, and certainly not now where everything on the market is seeing multiple offers within the first week, but in general this is so. As we are experiencing now, there are exceptions to that rule. Just because someone would be content to accept an offer if it were the only one does not mean they will feel compelled to accept that offer in the face of better ones. My objection to the abuses of the process detailed above is in asking prices that everyone involved knows are not anything like the price the seller can expect to receive.

Nor does the act of putting a certain asking price on a property mean that you're likely to actually get that price, no matter how long you wait. I don't know how and why the urban legend about "if you wait long enough, someone will meet your asking price" got started, but it is pure myth. The longer a property is on the market, the less desirable it is perceived as being by most buyers, because what buyers really think is "It's been on the market for sixty days and everybody else passed on it. What's wrong with it?" The longer a property is on the market, the more you are likely to have to reduce your price in order to actually sell.

The numeric relationship between asking price and sales price is complex, and governed by many variables. The ones that leap immediately to mind include the economic target market, the ease of qualifying for a loan, interest rates on loans (The mortgage market controls the real estate market), sales prices of similar properties under prevailing conditions, and most importantly, general economic supply and demand. In other words, how many people want to buy versus how many people want or need to sell. If the first number is higher than the second, expect prices to rise. If the second number is higher, expect them to fall, at least in terms of affordability if not absolute numbers. If you don't believe me, consider how fast real estate market conditions change when a relatively small number of people drop off one side of the equation at the same time a few more jump onto the other.

Caveat Emptor

Article UPDATED here

Or, games listing agents play that hurt everyone, including their seller clients, but allow them to make more money.

Things have been crazy these last few months. Crazy frustrating for both buyers and sellers, for different reasons. Mostly, it is because of the rise of the corporate listing agent, whose name is on everything but whose involvement is as minimal as he (or she) can make it.

Here's the set up: A year ago we had depressed prices and nobody was buying because everyone was waiting for "the market to bottom out." It had bottomed out, but the major media hadn't picked up on the fact yet. Some of this was because they typically talk national where San Diego was significantly ahead of the national curve through this entire boom and bust cycle. We started going up earlier than just about everyone else and we had the bubble pop about a full year before the rest of the nation. Furthermore, major media tends to look backwards economically and extrapolate what the national trend during that period forward. Doing that has a certain applicability, but not to specific real estate markets because there is no such thing as a national real estate market, and anybody who talks about a national real estate market as if such a thing really existed has just labeled themselves a clueless bozo. Except for the effect of changed policies and rates on real estate loans, every local commuting area is different.

The second thing to be aware of is that for the last several years, the way to survive and prosper as an agent was by listing lender owned property. The margins on lender owned property are thin, but if you do enough of them, you can make good money. First off by doing practically nothing to sell the property - sign in the yard, entry in MLS - but a wasteland buried in excrement will sell if the price is low enough. Matter of fact, there's a certain brand of investor who does very well out of those and looks for them, so the agent doesn't have to do any marketing. They also make money by using their listings to make contact with buyers who don't know any better.

For short sales, the other major component during the downturn, given that sellers weren't getting anything out of the sale anyway, they didn't do much in the way of diligence about the agent that was going to be listing the property. There's a certain brand of agent who may be good at nothing else, but they're good at being sympathetic to the people who didn't do any due diligence before they bought, and didn't do any before they signed a listing agreement, either. Net result: signature on a listing agreement. But if you pretend you can adequately represent both parties, there's good money in being an agent for short sales. Throw enough mud at the wall and keep throwing it long enough, eventually enough of it sticks.

Into this environment came the strongest turnaround I can remember. We've always had cycles in southern California real estate - it comes with the territory. But this one was extraordinary both for its strength and for the suddenness of onset. Why this happened is pretty easy to figure out: The stock market was tanking and people who are focused on what's happening to their money right now pulled it out and went looking for something else to invest it in. A couple trillion dollars nationally realized that real estate was already about as hard hit as it was possible to get, so they pulled all that cash out of the stock market and decided to invest in real estate. The result is a sudden influx of all cash offers and offers with major amounts of cash down as all that money that was in the stock market seeks a safer haven. This led to a major demand spike, easily comparable to the 2003 spike that occurred because we had a drop in the number of people that wanted to sell.

Finally, we've had some changes in the loan market. Tightening of loan standards, anti fraud standards. The government and lenders always bolt and weld the barn door after the horses escape, but here the lenders were colluding in the equine escape. Finally, Home Valuation Code of Conduct came along and threw a humongous monkey wrench into the ability of people to purchase the home they're under contract for.

The net result has been pure chaos. Frustrating chaos for both sides, even though it didn't need to be, but the minimally involved corporate agents with all of the listing contracts have no idea whatsoever how to design a transaction that actually works, and they have no capability or intention of dealing with the volume of offers they suddenly got. I haven't listed any in the last few months, but it's a golden opportunity to do very well for seller clients by doing it right when everybody else isn't. Of the sixty-odd offers I've made on behalf of prospective buyers, I got an acknowledgement that they had received the offer out of seven. They can't so much as acknowledge that they have received an offer, and they're wondering why everything they're doing is falling apart in this lending environment? And falling apart it is. Something like sixty percent of accepted purchase contracts are falling out of escrow because the listing agents are bozos, plain and simple.

Furthermore, these listing agents (particularly on short sales) have gotten used to setting "teaser prices" on real estate. Say they really expect that they can get $400,000 for a property. They'll talk the owner into listing for $350,000 because "It's not like you're going to get any money out of the sale anyway". They then use this to make contact with the sort of buyer who assumes that because the asking price is $350,000, someone who can afford $350,000 might well be able to afford it. Not really - but the agents are using it as "bait" to make contact with buyers. Even after the lender has rejected offers of $350,000. These people are weak on the concept that the listing price is "a written representation of an offer the seller would be willing to accept". They tell the buyers who contact them that "this property just got an offer accepted, but I'll be happy to find you something else." Basically, they're liars from the start - but many people don't know any better than to call the listing agent.

Other games are going on also. Despite the addition of "Contingent" status into our local MLS for properties with an accepted offer that need external release in order to happen (primarily short sales), many agents are doing their best to pretend the property is still available. I am really tired of being "the bad guy" who has to tell my clients that the listing agents are playing games and that property is not really available - particularly those clients who are looking for hard to find things like 2 living units on a lot.

I am also disgusted by the lack of response to offers from listing offices. I understand that every property that's not hideously overpriced is seeing multiple offers. That's no excuse not to respond to offers that are made. If you're too busy to respond properly (an immediate acknowledgment followed within a couple days by a counter-offer), that's a pretty good sign you shouldn't be taking any more listings until you hire more agents. But agents, unlike minimum wage office staff, take a percentage of the profit on the deals they work, so you can guess at what really happens. As I said above, I've made sixty-odd offers this summer on behalf of my clients - and have gotten some kind of voluntary response (an acknowledgment of the offer) seven times. No counters, which every reasonable offer should get.

All of this leads to an environment that is extremely frustrating to buyers. I would advise buyers to just move to the sidelines for a while if I thought it was going to get any better. If I didn't think prices were going to be headed up as quickly as the appraisals can be found to justify them.

It's also frustrating to sellers, as their agents haven't done a very good job choosing offers that are resilient - able to consummate despite the obstacles that exist in pretty much every transaction. The big one has been HVCC, which has caused appraisals to go from an occasional problem that can be avoided to something that's an issue on every transaction. If I were listing a property with multiple offers, the questions I would be asking are "If the appraisal comes in low, how able are these buyers to consummate?" and "How much do these people really want the property?" There is way too much fallout of transactions these days - and it's mostly the listing agent's fault. The good news is that this enables the frustrated buyers to have a second, third, fourth, chance. The bad news is that tt's even more frustrating, however, because even more prospective buyers dogpile into it on subsequent attempts, and the listing agents aren't doing anything better on those go-arounds, either.

If I were advising prospective sellers in another market with comparable conditions, I'd say be careful to do your due diligence on the listing agent before you sign that listing agreement. Not "how much real estate do they sell?" because the agents that are causing the problems sell an awful lot of real estate - eventually, and for far less than they could get, but it does eventually sell, which is all "top producer" tracks. But are they set up to give your property the time and effort and attention it needs? A good first test is to pretend you're a buyers agent - respond to their phone tree as if you are a buyer's agent, leave a message as if you are a buyer's agent - at least until you get an actual agent on the phone. If that proves to be difficult, well, you know how they'll treat your property. As a seller, you don't want your listing agent representing both you and the buyer any more than the buyer wants their agent to be the listing agent, so agents that aim to make dual agency the order of the day are not ones you want listing your property. If you're in San Diego, of course, the solution is easy.

Caveat Emptor