What makes an offer lowball?

Lowball offer - baseball with the word LOWBALL imposed over it - what makes an offer lowball?Silicon Valley real estate offers few simple answers but many recurring questions. One of them is whether or not you should write a “lowball offer“. So the first question is this: what makes an offer lowball?

What makes an offer lowball?

In general, contracts with prices more than 10% lower than list price will be considered low at best, and insulting at worst, but there are many nuances, and this may not always be the case.

  • What is typical for the area? If most properties are being sold at 10% lower than list price, then 11% or 12% won’t be viewed too dimly if the home has been on the market for a while.
  • How long has this piece of real estate been listed for sale? What might seem low in the first week might look OK after 3 weeks.

What’s the immediate market climate like there?

What makes an offer lowball is above all related to what is happening in that precise micro market. It’s entirely relative to how the market in that area (not the county, not the state, but that particular area) is selling.

If houses in one area of San Jose are selling within plus or minus 1% of list price and you come in 5% under, the seller may feel that your offer was not in good faith, that the offer is insulting, or you are not a serious buyer who takes the opportunity to buy seriously.
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Estimating the Probable Buyer’s Value

The probable buyer’s value for a home is very similar to market value, as a home is only worth what a buyer will pay. If the seller wants more than that, it won’t sell. If it’s unlikely that their ranges overlap at all, we’ll have a listing that is difficult or impossible to sell.

Quick summary on the probable buyer’s value:

  • The probable buyer’s value is a range of what most buyers would pay for a particular property if there was no undue pressure on the buyer or seller.
  • The probable buyer’s value will be impacted by many factors, such as the timing (if there are other houses which are more competitively priced or no other inventory), the property condition, the presentation of the property, the accessibility of the property (how hard is it to see – is it vacant or occupied?), the marketing (photos, floor plans, etc.), and many other things.
  • The buyer’s terms weigh heavily on what the buyer can or will pay for any home.

Sometimes it can be tricky to estimate what a home might sell for. I usually talk with my seller clients about trying to find the probable buyer’s value.

In a balanced market, the seller may have a range of prices that he or she anticipates and would accept. So too with the buyer, whose range will likely be lower than the seller’s. The key is finding where the buyer and seller price ranges overlap.

In an overheated market, which we have now, it’s fairly simple to figure out the floor of pricing, a price point that is supported by past sales, but it’s harder to ascertain the ceiling, which is where very capable and driven bidders may take the price. Next, please find a long-ish (12:36 minute) video on price and terms, mostly regarding overheated markets, but some info on balanced markets, too. 

 

 

Balanced Market

In the balanced or more neutral market, buyers and sellers often have some common ground on valuation of the real estate. This chart below was used in the video above (for those of you who will skip the video):

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Ten Houses

As a general rule of thumb, home buyers who have clear criteria and priorities need to see ten houses before they are ready to write an offer.  Some may be ready with fewer, say 7 or 8. Some may need a few more showings. On average, per the National Association of Realtors, ten homes is the number that most home buyers need to be ready to write an offer.

Also generally true is that sellers need to have ten showings for one offer.

Ten is almost a magic number for real estate, and it’s a number that can provide a “reality check” on whether a listing is getting enough showings or if a buyer is either seeing enough homes or focusing enough to write on one that fits their stated budget and criteria.

 

Victorian houses in San Francisco with the word - Ten houses - is what most buyers need to see before buying a home -

 

 

House door lock with key - words What is normal - 10 houses over 10 weeksTen houses over ten weeks

The ten houses will usually be seen over several weeks. The Realtor Magazine article, linked at the bottom, says the average home buyer sees the ten houses over ten weeks.

Most buyers who are focused can know enough to write an offer on something at by the 2.5 month mark. In my own experience, if buyers go 4 months or more without writing, it is unlikely that they will be buying a home soon.

Ten houses and writing an offer on something

Every home buyer will want to be reasonably cautious before purchasing a home. On occasion I’ve had clients who wanted to draft a contract on the first house they see with me. In those cases, I ask them to humor me and see a few more just to be sure that they have a solid footing for this choice. It’s too expensive of a decision to make without that baseline experience of seeing at least a few homes, if not a full ten.

Sometimes, though, buyers are enormously cautious and nervous, and they become somewhat paralyzed and are unable to act. Or they have unrealistic expectations of what is achievable and are holding out for that “really good deal” that is unlikely to exist. If you’ve seen dozens of properties but you’re not getting serious about any of them, something is amiss.
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Are you motivated enough to buy a home?

Quote on being motivated and determined This is a tough market for home buyers. If you aren’t sufficiently motivated, you may write offers, but you won’t be buying a house.

I am a member of several online groups of Realtors and other real estate professionals who share ideas, give feedback, marketing, challenges, safety or tech tips, and more. Sometimes these groups are support for weary real estate agents.

Just now I read one agent in the deep south complain that her buyer won’t pay more than list price “on principle”, despite what the comparable sales indicate the value to be, despite the market conditions, 20 offers on a house, etc. She cannot get that buyer’s offer accepted because the buyer is staunch on offering exactly list price in every instance, and it’s just too low to be viable.

The real estate sales person has explained the market,  the competition, the sale to list price ratio, but the buyer does not care about the data. The buyer only wants to pay list price, even if the house is under priced.

Guess what the 200+ real estate professionals advised her to do? If you guessed “fire the buyer“, you’re right. And I agree. She is not able to help him to buy a house. She is spinning her wheels. (And while doing so, she’s unable to help buyers who will buy, or to find new business so she doesn’t go broke working on something hopeless. As a business person, she either needs to help the buyer to write viable offers or she needs to let him know that she cannot assist him further. She’s not doing him or herself any favors to continue working with him under those circumstances.) (more…)

Increasing demands by some listing agents on what is to be included with purchase offers

Offer checklist for some listing agents in Silicon Valley

For a long time, Silicon Valley real estate agents have expected home buyers to be preapproved, not just prequalified, for a mortgage or loan when they submit an offer to buy a property.  So the offer package would consist of an agency disclosure, the contract (PRDS or CAR), and a preapproval letter from the home buyer’s lender.  (Some listing agents require the buyer to be preapproved with the listing agent’s lender. This is especially true with REOs.)

Over time, a few disclosures got signed to go with the submission, too – such as one on the dangers of writing non-contingent offers, another on brokers potentially submitting offers for competing buyers, etc.

When the market gets overheated, as it is now, listing agents begin to require even more things upfront, with the offer – not after it’s been accepted.   In many cases, listing agents want all disclosures signed upfront, plus the covers of any inspections.  This often means initialing and signing 60+ pages.

Cash offers traditionally come with “proof of funds”.  That means bank statements or eTrade or other statements proving that you’ve got the money.  Sometimes it’s a portfolio showing how much stock one owns. (Last week I got 22 offers on a listing and one agent, who”s been in the business for decades, showed me his preapproval letter when I asked for the proof of funds. He didn’t understand.) Naturally, we black out or white out or otherwise obfuscate the account numbers for safety’s sake.  In recent years, though, the strongest offers come with proof of funds no matter the size of the down payment.  Many Realtors in the San Jose, Los Gatos, and Saratoga areas expect it.

Buyer’s agent: do your visual inspection upfront, too….

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Home buyers, think before calling the listing agent

Home buyers - think before calling the listing agentIf you’ve ever had the experience of selling your car, perhaps you’ve also had someone phone you who’s never even looked at your vehicle and ask you “what’s the lowest price you’ll take?”  Most of the time, auto sellers aren’t too happy with that question: the caller is low balling without even looking at what’s for sale. That may be the first impression provided if a buyer who already has an agent phones the listing agent directly.

Today I got a phone call from a Silicon Valley condo buyer who asked me, without having seen my listing, “will the seller take less?

Not a great question, for a whole lot of reasons.

First of all, part of a real estate agent’s duty is to protect the seller – and that means not telling consumers the lowest amount that a seller would take, or even if a seller would take less at all (unless, of course, the seller gave express directions to do so, which is very rare indeed).

Secondly, it is a little insulting to call on a property you’ve never viewed and start to verbally bargain down the price, or fish for the lowest possible price. What that does is make the listing agent feel “on guard” from the very beginning. Guess how that impacts your position if there are multiple offers?  You will have made an impression – but not a good one!

Most of the time, a home buyer is better served to not call the listing agent directly at all, but instead to have his or her buyer’s agent place the call to get some information.  There are better ways to figure out if the seller is motivated,  how the pricing looks, whether there will be multiple offers etc. – and Realtors and other real estate licensees are usually pretty practiced at getting the information without damaging the buyer’s position for offers or even potential multiple offers later.

Most of us wouldn’t try to represent ourselves in court, but sometimes don’t appreciate that these same principles apply with real estate; that is, the value of having a fiduciary, an agent, helping us not just when the offer is presented but every step of the way.   Let your agent represent you from earlier stages, and you will likely find that you are presented in a better light than you could do yourself.  Think before you pick up that phone and call the listing agent directly!

 

 

Direct Lender vs Mortgage Broker: Does it Matter for Buying a Silicon Valley Home?

If you are in the market to buy a Silicon Valley home, you’ve probably noticed that about 1/3 of all real estate listings are distressed sales. Of those, most are short sales but some are REOs or “Real Estate Owned” by a bank or lending institution.  Most Silicon Valley REO listings, and even a few that aren’t bank owned, have comments from the listing agent insisting that the buyer be pre-approved from a direct lender. Some will go so far as to insist that it be Wells, Chase, B of A or some other institution. Or even that the buyer be pre-approved via that listing agent’s hand-picked lender.

Why all the fuss about direct lenders? Isn’t a pre-approval from a mortgage broker just as good? Isn’t that asking a bit much to tell buyers who gets to see their financial info?

Pre-Approval versus Pre-Qualification

Typically, in my experience, when a bank or credit union (both are direct lenders) issue a pre-approval letter, it’s only after the buyer has actually submitted everything (pay stubs, taxes, bank account names etc.) and the info has been verified by the bank, submitted to underwriting and OK’d for a window of maybe 90 days to complete the sale. When they say a consumer is pre-approved, they mean it (the vast majority of the time).  In other words, direct lenders usually don’t write fake pre-approval letters.

Mortgage brokers sometimes do.  (Not the better ones, of course.) What they have in hand may really be enough for only a pre-qualification (or “pre-qual”), not an actual pre-approval.  But sometimes mortgage brokers will issue a pre-approval letter.  We Realtors know that this is not an uncommon problem, and many of us don’t trust a letter from such a lender if the loan agent is an unknown person to us for that reason. With mortgage brokers there’s a crisis of credibility and that’s Problem # 1. (This is not always the case, of course. Many mortgage brokers are very careful and thorough so I am not saying that they are all terrible!) (more…)

The Advantages of Presenting and Receiving Offers In Person

In the last few weeks, I have been very busy with Silicon Valley home buyers and on average am writing at least two offers per week.  Most of the time, the listing agent requests that the offers be faxed or emailed in.

Why do so many listing agents do this? It’s faster, it’s more expedient. But it may not give you all the information you need to know if you’re a seller (or a seller’s agent).

This week, I had the pleasure of twice being able to present an offer “in person”. In the first case I presented my contract to both the listing agent and her clients at the agent’s Cupertino office.  In the second I met with the listing agent at the home my buyers were bidding on in San Jose’s Cambrian Park (the seller is out of the area).  We got into contract on the first and are waiting to hear on the second.  Both were multiple offer situations (one with 6 offers, the other other 5 bids).

By presenting in person, the agents can get additional information, ask questions, and lots more.  They can also size up each other, get a sense if they could work together and whether the other agent is competent, for instance.  In some cases, a personal meeting may leave the seller or listing agent uncomfortale. With mutliple offer situations, this is huge.  The “red flag” may be there in person but not via email.

My hat is off to all the good real estate agents in Santa Clara County who slow down long enough to meet with the Realtors or real estate licensees who have taken the time to draft an offer on their listings.  Professionalism like that is to be respected and appreciated. I know it matters to me!

 

 

 

Real Estate Purchase Offer Terms to Consider When Competing in Multiple Offers (Part 6)

In addition to the financial part of your offer and your contingencies and timeframes, there are other terms that may help you to be more competitive when writing an offer in a multiple offer bidding situation in Silicon Valley.

What other terms could matter, beyond price and contingencies? Lots – they will matter to the seller and they’ll matter to you.

As Is Offers

Sellers always want to sell “As Is” if possible. They don’t want to have to do repairs, to spend the time or the money to fix what may not be perfect.  This is an extremely important area to research, weigh, and understand prior to drafing your real estate purchase agreement, particularly if you are not the only one trying to buy that real estate.  When it’s a seller’s marker (and with multiple offers, it IS a seller’s market), the seller can request and will usually be able to sell As Is.

Buyers always want every imaginable repair done, if at all possible.  Buyers don’t want to have to do termite, roof, electrical or other work on the home. They want a “red ribbon deal” where the home’s been or will be in very good to excellent shape.  They want a section one clearance from the termite & pest company.  They want a leak free roof warranty. When it’s a buyer’s market, and you’re the only one attempting to buy the house or condo, you can usually request and get the seller to do all the basic repairs.

The important point is to understand which of these two markets you’re dealing with – buyer’s or seller’s – if it’s a seller’s market and you’re behaving as though it’s a buyer’s market, you will hurt your odds of getting the property if you request repairs or if your contract provides a seller’s warantee.
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Competing Against Multiple Offers: Contingencies and Timeframes (Part 5)

In the first four posts in this series on writing an offer when competing against multiple offers to purchase a Silicon Valley home, we focused on the financial terms.  In the next few posts, we’ll address the non-financial terms that can “sweeten the pot” to help you succeed – without giving away all your rights!

Price & terms work together like the scales of justice.  When they are “level” to each other, you have a normal sale with a good reflection of market value (normal terms, normal price).  If one is low (poor), the other will need to be high (good) to “even out” the balance.  If the terms are fantastic, the seller may sell the home for a little less or may pick that offer if there are multiple bidders.  If the terms are terrible, the seller may only sell the home if it sells for a bit more to compensate for the terms.    With multiple offers, sometimes you can only go just so far with price.  But often you can improve your offer with the right terms.

Offer ContingenciesToday we’ll focus on contingencies specifically.  Contingencies are not the only terms, but they’re among the most important terms in your offer to buy a home.  We’ll look at both which contingencies may be involved in your offer and potential transaction, and how much time (how many days) to allow for each.  In my opinion, you should never write an offer with NO contingencies. It is just too risky!

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