The practical file
When yours is the only offer.
Someone reading that headline in Dubuque, Iowa may be wondering, "Whaddya mean, 'when yours is the only offer'? What's the alternative? More than one offer?"
Yes, Virginia, in this area, multiple offers on a home have been the rule, not the exception, for most of the past ten years. Not that every home here has sold with multiple offers. Even in the most overheated of markets, some homes sold with "only" one offer, and sometimes they didn't sell at all. And there've even been brief periods since the late 1990s when most homes sold with only one offer, if they sold.
We're in one of those one-offer markets now, in many but not all neighborhoods.
Not that multiple offers have disappeared completely—these days they're almost a standard feature of the bank-owned home—but there's no doubt that demand is down in most other markets, from even the muted level of pre-September 2008. So of course buyers are lining up, chomping at the bit to make offers in what they don't call a "buyer's market" for nothing.
Except that buyers aren't lining up, of course, or they wouldn't call it a buyer's market. (Ponder that.) Instead, buyers are desperately looking for reasons not to line up, and not having to look far. But for the handful of buyers perspicacious enough to recognize a buying opportunity when they see one—even if the opportunity isn't spelled out in neon lights, because it never is, which is why they call it a buyer's market—gather 'round while we briefly explore the opportunities and, yes, challenges a one-offer market presents to buyers. We'll especially look at the opportunities and challenges of buying, not just a place to crash—and I've never met a buyer looking just for a place to crash—but the house, the neighborhood and the city of your dreams.
Let's approach this from the perspective of buyers looking for a home in a desirable, upscale city we'll call Wonderfulville. It's May 2008 and the Wonderfulville market has been red hot. No, Virginia, not every market nose-dived in 2006. Not only has the Wonderfulville market been red hot, but the so-called "entry-level" end of the Wonderfulville market has been blistering hot. Hotter, in fact, than it was in 2005, when it was mighty darn hot. And not only has entry-level Wonderfulville been blistering hot, but certain entry-level neighborhoods have been—what's hotter than blistering hot?—really blistering hot. And not only have certain entry-level Wonderfulville neighborhoods been really blistering hot, but a certain type of home—anything not a flat-top—is, well, you get the idea.
Hot hot hot. (Touches imaginary object with forefinger and flinches as if burned.)
It's May 2008 and our buyers have been looking for six months and made one offer, a very good one that netted them third place in a three-offer race. And if that wasn't demoralizing enough, they lost to an all-cash offer...in the near-$2M price range. Obviously, the competition is not only well-heeled but liquid. "Who are these guys?", our buyers wonder. Our buyers are also well-qualified, and they're trying very hard, but prices for those hot hot hot properties I mentioned have rocketed up about ten percent in two months, something hard to wrap your mind around when every other area seems to have death-spiraled down ten percent in those two months.
Our buyers really want Wonderfulville, but then, so does everyone else and, and this daunting competition has them ready to give up. Then, in late May, a home comes on the market that's what they've been looking for. It's listed in their price range but, based on experience, it'll certainly be bid up above what they want to pay. Their agent sees it on broker's tour, they see it at the open house with relatives who live around the corner, and all agree that the house is just about perfect. But all also agree that it'll sell in a week for more than the buyers want to pay.
A week later both the buyers and their agent do the same thing: check to see if the house has sold. It hasn't. Their agent calls the listing agent to make sure she doesn't have three buyers waiting in the wings to present offers that day. She doesn't. She did have some interest earlier in the week, but it never materialized. Those hesitating buyers, either sensing opportunity or just procrastinating, have decided to watch and wait, looking for a sign of weakness from the seller. "We'll wait for a price reduction." So either our buyers and their agent have over-estimated the house's value or, more likely, the market has suddenly shifted. Why? It's late May, graduation is bearing down and vacations are just around the corner. It's time for buyers to go off and do their summer thing and for the local market to drift into its summer doldrums. And, in fact, were you to chart demand (aka absorption) and average sales price for this area, you'd see that every year both drop slightly during the summer.
So a list price that two weeks ago would've unleashed a no-holds-barred bidding war is now a list price that has buyers interested but not enough to get into a bidding war. Our buyers, on the other hand, also see opportunity: no, not the opportunity to watch and wait—that's usually a great way to watch opportunity go galloping by—but the opportunity to get a house, one they can happily live in for thirty or forty years, without fighting off other buyers. The next day they meet with their agent, and that night they're in contract.
Except it isn't quite that simple. Carpe diem rarely is.
Because what would you do if you thought you were the only game in town? Right. You'd start grinding something off your offer, a little here, a little there. Gradually your full-price offer, the offer the sellers would be fools not to accept tonight, even though they know it's less than they would've gotten a month ago, yes, your oh-so-tempting offer turns into a less-than-tempting less-than-full-price offer that tempts the sellers only to drag out negotiations or try their luck with the next buyer while you're trying to grind a percentage point or two off the price. All the while thinking that what the sellers are asking is reasonable. All the while knowing that yesterday you'd have jumped at getting the house at list price.
And remember, entry-level Wonderfulville is still a hot market. It isn't a hot hot hot market anymore, but it ain't no Ice Age either. And you're not the only buyer in that market. Remember those other buyers who've decided that watching and waiting is a real strategy? There's a limit as to how long they'll stay on the sideline. And other buyers will notice the home too, probably get just as excited as you and maybe write their own offers. Then you'll lose the huge advantage of being the only game in town. In fact, you'll be right back to what had you ready to leave the market.
Right now you have a very small window to make an offer good enough to tie up the house and put it out of reach of those other, hovering buyers. You'll have a contingency period in which to have your own inspections, and your agent is reasonably certain that the inspectors he'll recommend will find a few more things wrong with the house than the sellers' inspectors did, things that'll help you negotiate a credit from the sellers. In fact, he sees a few maintenance items, identified in the sellers' reports but without costs, that'll give you leverage with the sellers as soon as you know those costs.
And that's exactly what happens. Clients get the house they want, without having to beat off other buyers, and with the additional bonus of a credit, equivalent to what they were tempted to knock off their offer price, toward closing costs.
Pretty slick, huh? Well, maybe not. Because a few days after closing, our buyers' mortgage broker tells them, "You know, I'm not supposed to tell you this [and, by the way, if you ever hear those words coming out of your mouth, pause a moment, collect your thoughts, and make sure you really want to say what you're about to say] you paid too much for your house. When you're the only offer you're supposed to get the house for a whole lot below list price".
And you know what? She's absolutely right—for the market she typically works, an area south of Wonderfulville, an area without the local, national and even international reputation for quality of life that Wonderfulville enjoys. It's an area where buyers can pretty much take or leave each house and neighborhood because each house looks pretty much the same and each neighborhood looks pretty much the same and is the same, where each neighborhood offers pretty much the same minimal benefits, and where it's no coincidence that prices have been flat or declining since 2006 because everybody and his brother isn't turning themselves inside out trying to get into these neighborhoods.
A normal area, in other words.
So imagine what might've happened to these buyers if their agent had been from a "normal area", an agent with the mindset of their mortgage broker. The Wonderfulville neighborhood these buyers like looks nice, sure, but it doesn't look super-deluxe and, in fact, you can get a neighborhood that looks just like it for a whole lot less in most nearby cities. Yes, the neighborhood school has a great reputation but, hey, every Wonderfulville school has a great reputation. So what's the big deal? This isn't rocket science. The house hasn't sold, right? Alright! Let's sharpen our knives and write a low-ball offer that'll probe, and not delicately, for the sellers' pain threshold. Because where we come from the market's been soft and slow for years and we can count on whoever else is interested in the house to wait and watch while we perform surgery on the sellers.
Yes, we've got all the time and leverage we need. We'll hit those sellers like a runaway beer truck. Whap! What was that? Oh, just some Wonderfulville agent and her clients leaving tire tracks over your back. Better luck next time.
Which is why clients from "normal areas" who bring their "normal area" agents with them always do so poorly in Wonderfulville. And then complain that Wonderfulville listing agents don't give out-of-area agents a chance.
But let's say you don't have either the means or the motivation to buy in Wonderfulville. One of those "normal areas" will do just fine. How do you approach those markets?
It depends, because not every "normal area" is the same. Some are in dire straights, others are just slow, and a handful are booming. Most midrange neighborhoods around here are s-l-o-w, with a few exceptions, but still not overly receptive to the low-baller. They're just too nice, even if they aren't as spectacular as Wonderfulville, and too unaffected by the subprime crisis. The low-end neighborhoods, on the other hand, seem tailor-made for the low-baller, with a handful of desperate sellers competing with a horde of desperate banks for scarce buyers. Except it's not that simple, because buyers are flooding those areas, the banks aren't as desperate as you've heard and they've learned to ration their homes to create a shortage of inventory. Besides, there's always a good reason or three why these neighborhoods are so cheap.
My advice? Find an area you can comfortably afford and that you'd like to live in, even if it's three or four notches down from Wonderfulville. Then find a home that's your first choice for that area. Sure, start out with a low offer or two, depending on how much inventory there is, how long the home's been on the market and how steeply prices are falling, if they're still falling. Maybe even build a further price decline into your offer. Be sure you know how much below list price homes like your target home have been selling for. If it's, say, 8 percent below list, don't expect much from an offer that's 20 percent below. Be honest with yourself about how hard-nosed you really are. If you don't care whether your low-ball offer loses the house or not, then I'm not sure why you made it, unless you're an investor.
And don't be surprised if your low-ball offer goes nowhere, even if it's the seller's only offer, and even if it's your third- or fourth-choice neighborhood. Especially if it's your third- or fourth-choice neighborhood. Because, these days, as the market warms from the bottom up, these are some of the hottest neighborhoods.