The practical file
Don't wait for a price reduction. Make your own!
In this week's episode I strain myself trying too hard not to sound typical.
Whenever I'm holding a house open, I always bend over backwards to not say anything that sounds like "typical" real estate agent talk. You know, the kind of thing that might get posted incredulously on a blog that very night: "Get what I heard this agent say at an open house..." Which is kind of a shame, because a) I've let the bloggers set the boundaries (must re-think this) and b) some lessons are best conveyed to real estate consumers in the language of "typical" real estate agent talk.
For example, a few weeks ago I was holding open a home that's been on the market for over four months. Despite the fact that it's become a permanent fixture on the local real estate scene, it's a nice home (not my listing), in nice shape, in a nice neighborhood, in a nice city, and still getting a nice turn-out. Buyers come back a second, third, fourth, even fifth time and spend half an hour mentally moving walls and arranging their furniture. Then they walk out, for the second, third, fourth or even fifth time, meekly hoping mean old Mr. Seller will reduce his price and wondering why he won't. Because the home's only real drawback is price—it's priced nicely for the pre-September 2008 mid-Peninsula market which, as you may recall, was a pretty decent market. But that was then, and this is now, and the stock market is down a zillion percent and home prices are down about 10 percent and maybe more.
So what's up with the seller? Doesn't he know what's going on?
Well, as so often happens in a declining market, the word's reached buyers before it's reached sellers. What's the hold-up? Partly it's a matter of people hearing what they want to hear. Partly it's a truism that ranks right up there with "there are no atheists in foxholes": in the early stages of a declining market, the only optimists are sellers. "The market will get better soon, I feel it". And partly it's a matter of desperate sellers: most aren't, at least not in this area, at least not yet.
All this may change, depending on how deep and long the recession hits Silicon Valley, but until then, motivated buyers need to take matters in their own hands, achieve a meeting of minds with sellers and helpfully nudge them toward the new market reality. Agents can't do this by themselves. It's a big job, but I know buyers can do it.
How? Let's use this house as an example. Say it came on the market in October 2008 at $955,000; it didn't, but say it did. Also say that, when after a few months it became apparent that the market had changed (something that doesn't take a few months to become apparent), the seller made a token concession to the new reality with a price reduction to $935,000. What might this tell a buyer interested in the house, but not interested enough to pay the old price and perhaps not the new price either?
A price reduction of this size tells the buyer—or is supposed to tell the buyer—that the seller is a reasonable sort who wants to sell but won't be railroaded into giving the house away. The "reasonable" cue comes from the act itself: "I, seller, hear the market". The "won't be railroaded" cue comes from the modest size of the reduction: "I, seller, know what I've got and know what it's worth". Of course, with prices down 10 percent or so, any price reduction of less than 10 percent will appear unrealistic and futile to the average buyer: "I, average buyer, won't budge. It's my market, and I'll wait for you, seller, to come to me". I call this the "average buyer" or "passive resistance" approach to price negotiation. Now, I won't deny that passive resistance can work, especially if used at the right time and as a defensive measure against its counterpart, proactive thinking, but it's inherently a lousy way to make things happen. In fact, it's a great way to make sure things don't happen.
In a moment, you'll know better than to rely on passive resistance because, in a moment, you won't be the average buyer. But a journey of this magnitude starts with a single step, and our first step will be to ask why the seller didn't drop the price to under $900,000, say to a flashy $895,000. Why not get the attention of all those buyers who've come back two times, three times, four times, even five times without writing an offer, the ones waiting for the seller to come to them, the ones, in other words, waiting for the BUY NOW sign to flash before they make their move. No, $895,000 isn't the 10 percent price reduction the seller theoretically needs to compete in the new market, but $895,000 might be enough—it is a nice house in a nice neighborhood—to get at least one or two buyers and maybe more off the dime.
And when you, seller, have one, two or more offers, you have one, two or more engaged buyers who've at least opened the door to dialogue. Each offer is the vehicle by which you, seller, can now communicate with people who previously were incommunicado. It's like getting past the gate-keeper. It's like getting a really good contact list for free.
Not only that, your home, seller, has boosted itself from being just another impersonal listing on the Internet to being in serious contention as someone's new home. You, seller, have buyers (by itself a big step) far more committed to buying your house than they were a day or two ago, simply through the sequential acts of 1) deciding to write an offer, 2) writing an offer and, 3) waiting anxiously by the phone hoping to hear that you've accepted the offer. The key word here is "act". Fence-sitting isn't an act. Like passive resistance, it's inaction with a capital "I".
So, buyers, why doesn't seller roll the dice and price for multiple offers? After all, only good things happen if he does. Either he negotiates a sales price he likes, or he doesn't. If he doesn't, he's lost nothing. No, he hasn't advanced, but he hasn't retreated either, and at least he's broken the stalemate, however temporarily, which by itself could be called a victory. Anything is better than this deadly trench warfare. Best of all, the sortie doesn't cost seller a single casualty, just a few hours of his time. Not a bad strategy, considering the potential pay-off.
Knowing this, should you, buyer, be unhappy that seller has made only a token price reduction, and not the deep price cut you and all those other buyers who've been back multiple times are expecting? Of course not! (I'm starting to sound like Robert Bruss.) Because not only has seller signaled you that his resolve has weakened, however fractionally. Not only has he taken that first fateful step toward publicly acknowledging that maybe the market has changed, by itself good information. But he's also neglected to turn on the BUY NOW sign that every buyer who's come back two times, three times, four times, even five times waits for.
Seller has created a new opportunity, the opportunity to sneak through a newly opened door no one else sees. If you can, great. You'll get the house you want, at a price you like, and get on with your life. If you don't get the house, it hasn't cost you a cent, just a few hours of time. Not a bad strategy, considering the potential pay-off.
So what does all this mean in real life? Let's say the house was worth $955,000 back in September, when the agent helped the seller price it, but is now worth maybe ten percent less: $860,000. No, let's back up and say something fundamental: let's say you really like the house. Because if you don't really like the house, don't bother. Ain't no one giving their home away these days, not even—and especially—banks. Thinking of offering $750,000 on a house listed at $935,00 but really worth about $860,000? Then take the three or four hours you would've wasted writing the offer and reviewing the disclosure package and missing dinner and rushing to your agent's office after work and maybe lining up a baby-sitter and spend it on something more productive, like watching cable programming in a language you don't understand.
(Actually, foreign-language cable is about the only TV I like these days, which tells me how visual the medium is and how irrelevant TV writers are, but I'm in the minority on this, at least in my own household.)
So how much should you offer? That's up to you, of course, based on the months you've spent looking at homes and getting a feel for the market. A buyer has any number of approaches he or she can employ, some of them potentially productive.
You might ask yourself, for example, "What would I pay for this home today if I found myself competing with other buyers?" In other words, operate under your worst-case scenario. What's the most the house is worth to you? Whoa! Isn't this just more "typical" real estate agent talk? Shouldn't you low-ball the seller, or at least leave something in reserve to negotiate with? Low-balling may work in the long run—I've seen it happen—but it can take weeks or months or never to pay off and you run the risk of merely softening up the seller for the next buyer who comes along with a better-looking offer, which is almost certainly the next buyer who comes along.
Leave something in reserve? Sure, not a bad idea, but balance this with the certainty that all the ego and emotion you've invested in your offer—yes, admit it—will be reciprocated by the seller. The further away from list price your offer falls, the more likely that seller will thunder, "What part of list price do you not understand?" But that's okay, up to a point, and that point differs from seller to seller and from buyer to buyer and hey everyone knows this is just a game—everyone, that is, except the seller and the buyer and maybe the agents too. So what's wrong with a little hard-nosed negotiation? Nothing, nothing at all—that's what agents are for—assuming you get that far. You're probably prepared to believe that "take your offer and shove it" doesn't start things off on the right foot from the buyer's perspective, but you'd be surprised to know how hard it is to negotiate with nothing but dead silence at the other end.
"Hello? Hello???"
So however you approach it, don't be afraid to help the seller accomplish his goal and yours, the sale of the house. Roll up your sleeves and make your own price reduction.
Unfortunately, I know at least one buyer couple, a couple I met at the open house, who probably won't make their own price reduction, not because they can't grasp the concept, but because it's one of those concepts that should have been couched in "typical" agent talk and wasn't. It's the couple who's seen the house five times and, after spending half an hour mentally moving walls and arranging furniture for the fifth time, I see that they're about to walk out the door for the fifth time. This is nuts. They want the house, that's obvious. Presumably their agent won't be too upset if they buy the house. The seller wants to sell the house. The listing agent (not me) wants to sell the house. I want to sell the house, not to get a commission check (not my clients) but because I've more-or-less agreed to hold the house open until it sells and don't want to make a career out of it. The approach the buyers are using—passive resistance—isn't getting it done, and will never get it done.
I step in.
"You know, they just lowered the price."
"Again?", grunts the husband. The wife laughs and points at him, as if to say, "That's what I'm dealing with." I note the folded arms, the wide-planted feet, the out-thrust jaw. He's not my client. I'm not his agent. I chuck what I should have said: "Don't wait for another price reduction. Make your own. You're not the only one who likes this house, but it looks like you like it the best. You snooze, you lose."
Oh heck no, that would have sounded too "typical". But I can't tell you what I did tell him, and he probably can't either, because whatever it was that came out of my mouth tried so hard to tip-toe around "you snooze, you lose" that it got lost several times, fell in a ditch and ended up dazed and bloody at the wrong address.
And probably got posted on a blog.