real estate negotiation Archives | Fabulous South Bay

The Golden Rule

It’s natural to believe with all the doom and gloom that is in the news about the housing market these days that there must be dozens of unbelievable bargains just waiting to be purchased. Unfortunately, the real deals don’t stay on the market very long to wait for the Buyer to make up their minds and arrange their financing.

In this market, the number one “Golden Rule” to remember is the old joke “He who has the Gold, makes the rules!” In this case, the Gold is the loans and/or cash and the first, most important, and most difficult thing to get in this market is financing. A Buyer shouldn’t even start looking at homes until they have completely nailed down their financing arrangements, including hopefully a pre-APPROVAL, not just a pre-qualification, letter. This will allow the Buyer to make an offer quickly and confidently when you they find something that does appear to be a bargain, and having their financing settled will make their offer stand out against other possible competitors in any bidding war.

It’s hard to believe there could still be bidding wars! But the best located, competitively priced properties are still going extremely quickly with multiple offers – my office just listed a very tired fixer upper in Manhattan Beach. The 2 bedroom home was basically a wreck but had a great location within walking distance of the beach and interesting architecture — it would take some real money and determination to make it habitable, but it was a true diamond in the rough. It was priced at $799,000, which if you follow Manhattan Beach real estate at all, you know is ridiculously low. Within 2 days, the client had 7 offers, including 2 all cash to choose from. The listing agent said the client was going to decide by tonight, so I’m not sure what it will end up at, but you can bet it went for well over asking price.

Another great property I saw recently in Rancho Palos Verdes had 3200 square feet and panoramic 180 degree ocean views. It was priced at $1,500,000 — not cheap, but much cheaper than that view usually goes for. It sold in 10 days with multiple offers. My estimate is that with about $50,000 of work, it will be worth at least $2,000,000.

These two deals were rare examples of properties that had a lot of equity built into them from the start. Most homes in this market, however, also have pent-up equity built in — the equity the Buyer will gain after living in it for a few years! No one promises, when you buy real estate, that the market will go straight up without a hiccup or two. But over the long-run, South Bay real estate has been a remarkably good investment, returning an average annual return of close to seven percent — much better than the stock market!

Trying to find the real deals on your own by using the publicly available MLS’s is not a winning proposition. If the home is really a deal, Realtors and their clients will have bought it already, because they will get to see it before it hit the Multiple Listing Service or at least get a call immediately that one of the really good ones has come up. Again, EVEN IN THIS MARKET, THE BEST LOCATED, MOST COMPETITIVELY PRICED PROPERTIES ARE STILL GOING EXTREMELY QUICKLY!

To really find a bargain, a Buyer needs to work closely with a Lender and a Realtor. The financing should be all lined up so the Realtor knows exactly what can and can’t be negotiated. And the Buyer needs to be very clear about their needs versus their wants, and exactly how much of a “fixer” they are ready to take on. Buyers need to really understand what they will compromise on — because every home is a compromise in some way unless you are fabulously wealthy. Buyers probably can’t have everything for the price they want to pay — the reality is that if the home had everything, than it should and will be priced higher, reflecting its higher value.

Will you give up location for size? Will you give up that dreamed for view for a better school district? Unless you are clear in your own mind about what you really need vs. what you want, you will not be able to decide quickly when your Realtor (hopefully Moi!) gives you that call that says “Guess what! A home just like what you are looking for just came into our office — it’s going to go fast!” But if you’re ready — the next bargain may be yours!

Lowballing and Why it Rarely Works

(cross posted at my column at The Beach Reporter)

“Low balling”, or the process of making very low offers on properties,is a technique that is taught by many a self-styled “real estate guru”on late night infomercials or expensive seminars. In theory, it sounds great — make an offer much less than asking to see how desperate the seller is, especially if you have a very strong (perhaps all cash) offer. These gurus are filled with stories of how much money they saved doing this. And of course, they make a lot of money by”teaching” people how to do it themselves, which was really the whole point of their actions.

In reality, the market sets the price,and Realtors have a saying that “there’s a lid for every pot” or a buyer for every property IF the property is priced correctly. If a property is in a good location, meets your needs and is priced well according to the comparable market analysis, then offering close to asking price or even more is NOT a bad idea. If the property IS a good one and you offer a low ball price way less than asking, the most likely outcome is that your offer will be ignored, you will be way outbid by others who see the value in the property at the asking price,and you will not be offered a chance to participate in any multiple counter offers. Many times sellers will refuse to even respond to whatthey consider an insultingly low offer.

What about when a property is over priced? Well,of course that is when you should bid lower than asking, but not simply by applying some arbitrary percentage reduction like these gurus teach. You need to try to determine the fair market value and the strength of your bargaining position (all cash? no loan contingencies?) and then base your opening bid accordingly. In this case, because the property is priced so high, it is possible that the Sellers will still ignore your offer as they don’t understand or are not willing to accept what the market is telling them, but at least you’ll know when to stop bidding — and they may call you back when they decide to face reality.

Seller’s often don’t understand why pricing a property too high ends up making all offers, even low ones, dry up. It is because Realtors have learned that the low ball offer rarely works, so they don’t like to show property that is overpriced and they don’t want to waste time writing up offers that will be rejected. So if you are a Seller, don’t price your property high, or no one will see it and be able to fall in love with it. At the right price, there will be offers, no matter what the property’s challenges in terms of location, condition, or style may be.

The point I am making is that because the market demand sets the price, if a property meets all your needs, you should not just arbitrarily bid lower because “everyone else is” or you may lose the property tosomeone who took the time to understand the market. And if it doesn’t meet your needs, then you didn’t want to buy it anyway, right?

Understanding the Short Sale and REO Negotiation Process

(cross posted at our column in The Beach Reporter on-line Real Estate News)

These days, many clients come to us to find deals in the distressed property market, including short sales, homes with notices of default, homes scheduled for foreclosure, and finally, bank owned properties known as REO’s.

Negotiating on these properties requires that you understand what stage of the process the home is in, so let’s start with a few definitions and the differences in negotiations for each.

A “short sale” is when the current owner owes more than the home is currently worth and needs to have the bank accept a sale at an amount that is “short” of the amount owed. These homes may or may not also be somewhere along the foreclosure process. In these sales, the bank MUST agree to accept the reduced amount or the sale cannot proceed unless the seller is willing to contribute cash to the process. Generally, the seller must prove hardship to the bank, such as why they need to sell, why they can’t just keep paying the mortgage, etc.

There is a LOT of paperwork in the Short Sale involved for the Seller, and these sales can often stall because the Seller, who naturally is in somewhat a state of denial, drags their feet on this paperwork. The bank must also obtain Broker Price Opinions (BPO’s) on the property from several real estate firms in order to satisfy their shareholders that they did the best they could to collect the monies owed, which also takes time. Further, the banks do not even begin the process of approving a price until at least one bonafide offer (and possibly dozens of offers) is/are submitted, and then they typically take 4 to 6 weeks to analyze the offers, only perhaps to decide that the offers (and the asking price) was nowhere near high enough. In order to provide an offer attractive to the bank, it is important to make the best possible offer, including limiting contingencies and having the most possible down payment. Short sales can be VERY frustrating for everyone involved as there is typically a LOT of competition — we have heard of several cases where there were over 20 offers and the final price was over $100,000 over the asking price.

A home that has a Notice of Default, or NOD, is at least 90 days late with the mortgage payments and the bank has begun the process of foreclosure, but the seller can still bring the note current and “cure” the default. When buying a home that is in this stage, it is important to remember that not only does it have all the problems of the short sale, but additionally there is now a 90 day clock ticking on the home. If the home is not sold before the 90 day foreclosure period is over, and if the bank’s bureaucracy does not allow an extension, you can be very close to buying the property and then lose it to another pile of bureaucratic nonsense.

Once the home is officially “in foreclosure” the home is scheduled for sale at an auction at the courthouse. Although it is possible to get a really good deal on these, it is important to realize that if you bid and win, you MUST buy the home or lose the required 10 percent deposit (which must be brought in Cashier’s checks to the auction.) There is NO right of inspection, no investigations possible once you’ve bid. You had better have your financing lined up or be prepared to pay all cash … and perhaps get a few rude surprises when you take possession and find problems. As Realtors, we feel that this process is so risky that we will not represent people at auction proceedings.

Finally, often the home will not sell at the foreclosure auction and the bank effectively “sells” it to itself or to another bank. The property is now known as an REO, which stands for Real Estate Owned. At this point, the bank generally analyzes the price, hires a real estate agent who specializes in representing the bank, and tries to sell the home as quickly as possible. You can often get the best deals on these, as the bank’s loss mitigation department has already done the analysis and figured out the price they will accept, and the bank is now carrying the cost of the home such as utilities and taxes, so they are very motivated to get it “off their books.” It is very important to have your own Realtor represent you on these purchases, as the homes can sometimes have been “stripped” of appliances, plumbing fixtures, and even the copper wiring in the walls; you need to have someone who cares about your interests and isn’t just working on the bank’s behalf.

Each distressed property sale is different — some are priced so agressively the competition will be fierce, some are not really very good deals, and some will not qualify for the low cost FHA financing that most people want. Be sure you don’t attempt to wade through the shark infested waters yourself — get a Realtor involved.

Finally, don’t limit yourself to only these properties — because distressed properties have affected average pricing, many ordinary properties are out there that are very good buys — and they won’t have the bureaucracy, delays, and hassles that characterize distressed property sales. Let your Realtor (hopefully us) know what kind of home you need, not what legal status the property is in – and then let us do our jobs for you!

The Importance of Patience in Buying A Home

I recently sold a home in Hollyglen, a lovely little area of Hawthorne, California that is “Manhattan Beach adjacent,” to one of my favorite clients, Warren V. Warren is a very analytical kind of guy, very smart and very thorough. He also respects the value of expertise, both mine and other professionals, which of course is one of the reasons he is one of my favorite clients!

Warren made an offer on this really darling house and got a very good price on it in the beginning, mainly because the seller was ill and kept cancelling open houses and making it generally very difficult to see the home. Warren was persistent though — he really liked the location and the look of the home from the outside and was willing to be PATIENT — a key word that will be repeated here throughout this little tale — in order to finally get into see the home. After he and his lovely fiance’ Caryn both were able to see it and liked it, we made an offer that, after some back and forth, was accepted, but with only TEN DAYS to complete all inspections and remove those contingencies.

For those of you new at this game, the reason Sellers do this is to shorten their period of worrying and waiting — if you are going to find something you don’t like about the house, you will tell them in 10 rather than the standard 17 days and then they’ll be able to put the house back on the market a whole week sooner. It makes sense from a Sellers point of view and usually is no big deal because most homes can be inspected in 1 day. So we agreed that the 10 day clock could start ticking on Saturday, which meant Day 3 was Monday. I couldn’t get a home inspector scheduled on Sunday, so first thing Tuesday, Warren and I were there with Tom C, my favorite inspector. We also used this day of access to have a hardwood floor refinisher stop by to give an estimate, to have the appraisal done, and to have my husband the architect stop by to talk to Warren and Caryn about future kitchen remodel plans — there were guys everywhere at one point!

Now you have to understand that this home looked very well cared for. It still had original late 1950’s bath fixtures and kitchen cabinets, but they were in remarkably good shape and had obviously been cared for. The home had new windows, a reasonably new roof, was freshly painted, garden fairly well kept. We weren’t expecting anything major on this inspection. But Tom found cracks in the fireplace and chimney that might lead up into the flue (a special camera would be needed to tell), leaks coming from the heater/air conditioning condenser unit, a faulty switch and bad seals on the heater, a broken oven and dishwasher, and most worrisome… dum, dah, dum dah (the music from Jaws plays here) a LOT of water under the house from unknown causes. There weren’t puddles where he could actually tell exactly where it was coming from — it was just profoundly damp. WAY damp. A whole lot damper than it should have been given that we haven’t had a lot of rain.

Many Buyers might have panicked at this stage and backed out of the deal — the whole idea of the home having this many things wrong would have spooked them, and we would have had to start over. Some Realtors might have too, since they don’t have the expertise to get the right support team in to find out what’s what. But Warren, smart guy that he is, knew that he had been looking a while and his budget was tight. This street and location was perfect and the house’s floorplan was good. The structure of the house was sound and the square footage of the home was quite large due to a permitted addition that had been done quite nicely. So Warren decided to be PATIENT and as I call it, “pull the thread” to see where further investigations would lead us. It might tell us that the problems with the house were so severe that they couldn’t be repaired reasonably, or it might tell us that they actually weren’t as bad as they initially seemed.

By the next day, Wednesday, Day 5, we had a FIRE certified chimney/fireplace inspector, a certified and licensed Heating, Ventilation and Air Conditioning (HVAC) contractor, and a plumber scheduled.

The chimney guy had good news — his camera showed that the fireplace cracks were in the exterior brick only and had not gone through to the flue pipe. The repairs could be done and the home would not be in danger. Next came the HVAC guy — he too had good news and his repair costs would be minor. The plumber had to reschedule to Day 4, but he was able to find the source of the leaks and determine that they too were repairable.

Finally, the appliance repair company came on the morning of day 10 and gave us an estimate for the repair of the oven and dishwasher.

We were able to negotiate with the Seller’s to give Warren a credit for ALL the necessary repairs. He offered a credit option rather than insisting that the Seller repair everything before escrow closed because the Seller was ill and the repairs would have been a hardship for her. Another few weeks of her living there wasn’t going to make a big difference after the years and years that she had already had the leaks.

This was another key area where PATIENCE worked in Warren’s favor. If he had insisted that everything be fixed immediately, the hassle factor probably would have had the Seller saying “NO!” just because she couldn’t emotionally face the idea of that many strange workmen traipsing around her house while she wasn’t feeling well. Refusing to give Warren the full credit wasn’t going to really work, though, because if he went away, she would most likely have had to have the repairs done for any other Buyer in advance of the sale. So because he was patient and willing to wait a few more weeks to get the problems fixed, he was able to get a fairly large repair credit back from her and he will be able to have the repairs done by the workmen of his choosing rather than have the Seller try to hire somebody who perhaps would offer her a cut-rate price and possibly cut-rate level of service quality.

Thus, patience resulted in a win-win situation for everyone — Warren and Caryn get a house they really like, the Seller gets to stay in her home and rest for a few more weeks before her move, and the Realtors on both sides feel like the professionals evaluated the situation and therefore we can sleep at night!

Although this is one of my longer blog entries, I felt that the whole long story was necesssary to demonstrate the importance of patience in buying a home. This whole process only took about 2 weeks including the negotiations of the initial price and the negotiations for the credit back, even though at times I’m sure it felt to Warren and Caryn as though they were plowing through wet cement. It if had been rushed, we wouldn’t have had the right experts, and the only choice would have been to walk away from the cute house at the great price or take a huge risk that we were guessing the right amounts for the repairs. Pulling the thread is always the right decision, even though it seems hard to wait to see what is at the other end. Often, it’s your dream house!

Counter offers (and Counter-Counter Offers)

You finally find the house you’ve been looking for, agonize over what price to offer, settle on a strategy of price and terms that you feel will be attractive to your seller, and wait, hoping for the phone call that will tell you that your dream house is soon to be yours. Instead, you hear the words “There’s a counter offer coming in.” This can happen even in this Buyer’s Market for the most attractive, most attractively priced properties! Now many buyers, in my experience, tend to panic at this point, while in reality this is just a part of the give and take of the normal negotiating process. You probably didn’t offer full price — you are trying to get the best deal you can. So are the sellers. The happiest real estate deals are where everyone thinks that they pushed the other side just about as far as they could and still made the deal happen.

So the key to counter offers is to read between the lines and determine “”What is the issue that drove the counter?” Is it simply price? Or are other things, like the seller needing a longer escrow, or the seller wanting more “earnest money” in escrow to feel comfortable, or perhaps the sellers’ needs to rent the place back for a week or two after closing also driving the deal?

Many times, what seems to be just a straight money issue are really emotional issues about these other things that get mixed in. One time, a seller actually countered back with an offer that differed essentially by only $500 — he just had to be able to tell his friends, I guess, that he had countered at a higher price! The buyer signed laughingly and we had a deal and the seller could happily tell everyone what a hard negotiator he was.

When you are the only buyer that a seller is countering to, you do not have to simply accept the counter offer or walk away. You can send back a “counter-counter-offer” and this can go back and forth a number of times until you can reach an agreement. It can even be fun if you try not to take any of it personally and try to put yourself in the other sides’ shoes and think about what do they need to feel whole and healthy at the end of the day. If you really try to be fair and objective, and while you want to get a good deal, you also want to be honest and fair, you can almost always find a way to compromise and give them what they want without sacrificing what you want.

However, when the dreaded “multiple counter-offers” box is checked on the form, all bets are off. At this point, you have to ask yourself, how badly do I want this house? Because sometimes even if you agree to all the terms on the counter offer, you won’t get the house, because someone else will also agree to all their terms and they might like their downpayment better or whatever.

If you really want it, you have to make the grand gesture and go OVER what they asked for in some way. Maybe not money, maybe it is some other thing, like not asking for the refrigerator after all, or offering to close escrow faster if you know that will make them happy. Usually, though, my mentor in real estate says “If there is one other offer, go at least full price of the counter, if there are two other offers, go $10,000 over the counter.”

On the other hand, sometimes the multiple counter offer box is checked because they happen to have one great offer (from you) and are lucky enough to have one horrible, crummy, lowball offer from an unqualified buyer. I say lucky because this legally allows the seller’s agent to check the little “multiple counter-offer” box. Do you know which situation it is? Nope. It’s like poker. They could be bluffing. You just have to decide how badly you want that particular house and whether you are willing to pay x amount for it in order to ensure that you “win” the “hand.” As your Realtor, I can advise you, and I can try to figure out if there really are other legitimate offers. But only you can figure out how you are going to feel if I tell you that you lost the house by a few thousand dollars. Maybe you’ll say “Fine, it wasn’t worth more than what I bid.” But if there’s a chance that you’ll feel sick at heart, then remember that the seller holds the Aces in the multiple counter offer situation. If you really, really, really want the house, then you sometimes have to be willing to raise the stakes.

The Golden Rule

Lowballing and Why it Rarely Works

Understanding the Short Sale and REO Negotiation Process

The Importance of Patience in Buying A Home

Counter offers (and Counter-Counter Offers)

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