When I Can't Support the Price

The most common phrase I've used lately when showing property seems to be, "Its priced too high." When I talk to listing agents about one of their listings I want to show but think is priced to high, they often agree in a 'wink, wink, nod, nod' way. A telling question I often ask is, "Is this your price or the seller's price", and in almost every case its the seller's price. Another request, which is often telling about the listing agent support of the price, is to ask the listing agent for comps to support the price. For most of these overpriced listings, they can't.

Then they ALWAYS say, "Please show the house. Please bring an offer and I think we can make a deal."

So I show the overpriced house. The buyer falls in love with it. I bring an offer well within what I consider a supportable price range. Possibly at the low end of that range, so there's some room to move up. But certainly not in the 'bargain hunting, bottom feeding' category.

But no matter how much listing agents encourage offers, it just isn't working a lot of the time. In fact, its often backfiring. Sellers often get angry or offended at the 'low' offer, rather than being appreciative that there's a buyer interested in their property that's been on the market for 6 months or a year. Buyers are often frustrated and disappointed, because there's a house they like but they're loathe to pay over fair market or appraised value.

I feel like a killjoy or spoilsport because I'm the one often saying to the buyers, "I think the price is supportable in this range, but anything above that, I just don't see it." Buyers are in a difficult position. They're in a situation where the seller won't move below "X" dollars, but I'm telling them that I don't think the house is worth more than "Y" dollars.

This probably sums up one of the major differences between being a buyer agent and a more traditional seller's agent. I'll tell buyers my thoughts on price, share comps with them, and tell them - ahead of time, when we're in the bidding process, whether I think we might face an appraisal shortfall. Seller's agents, for the most part, don't. If they sense a house might appraise light, they don't typically bring that up to the buyer during the offer process. Buyer and seller agree on a price, and lo and behold, 6 or 8 weeks later when the appraisal is done it comes up short. Sometimes lately, WAY short. If the appraisal gap is less than 5%, buyers may be willing to bridge it. But if its more than 5%, in many cases they're not. Without a major price reduction from the sellers, the deal falls apart.

I'm very proud to say I haven't had one deal fall apart this year due to an appraisal shortfall. I've had a couple of short appraisals, but in those cases I had already prepped the buyers for that possibility, as well as told the seller's agent, from the get go, that we'll likely have an appraisal problem and to expect some price renegotiation in the event of a large shortfall.

I'm always struck at how often things come as a 'surprise' to sellers and their agents. In trial law, the common wisdom is that you never call a witness unless you know all the questions and the answers. No surprises on the witness stand. Yet houses are trotted out to market like unvetted witnesses. The buyer does a septic test and the septic fails. The buyer does a water test and the water fails. The real estate equivalent of "Duh" is the typical response from a seller or their agent. Why don't seller agents encourage sellers to vet their houses BEFORE putting them on the market — have the septic pumped, the water tested and any major repair items identified. Likewise, an unanticipated appraisal shortfall should be very rare.

I'm getting a little gun shy. And listing agent cries of "Show the house and bring an offer" are starting to sound a little like crying wolf. I particularly notice when a house has been on the market for longer than 6 months, and there have been no reductions in the asking price. That does not indicate a motivated seller. The possibility of being able to do a deal within a realistic range for a house may be little more than wishful thinking on the part of the seller's agent.

Comments

[Dan F]

I would put the blame entirely on the selling agent (if we were looking for a cuplrit here, that is) I believe that an important part of the process is managing the expectations of the seller in terms of offers. Clearly, the seller was not prepped in the cases you are eluding to. If you come in with a firm offer close to indications and the seller scoffs, there was clearly a case of someone dropping the ball. Also, I think much is lost in the translation from the seller to the buyer. A huge amount of trust is needed in real estate relationships. Sounds like there may be a bit of that absent on one side or the other...

[Susie]

This is really interesting stuff David. A rare insight into the process and expectations. Thanks for sharing it.

[Tom Fry's Ghost]

The operative word, David, is "credible."

It will literally take two if not three more tax seasons for sellers to change their prices. Until then the next phase is trying to pressure the buyer with fancy financing, as in: "The seller is willing to hold paper."
It's all deja vu.

[Chris L]

It's all about the upcoming spring. The spring will turn everything around. Just couple more months.

At my current job, the company is relocating 26 employees to North Carolina. We are located in Middletown, NY and roughly half the people live in Orange and half in Sullivan. Those that live in Sullivan County live in the southern region around Rock Hill, Yankee Lake, Basher Kill. Only two of them put the house on the market and the rest will list the house in spring to get top dollars. They have to be in NC by January 28th. We had a Christmas party last Friday and started to talk about the housing market with the guys that are leaving. Every single one of them believes that the home prices will bounce back in the spring. The few of as that actually know little about housing market try to explain to the movers that this housing slump will go for at least another 1-2 years. Some actually got angry and walked away. Later they were telling everyone else that we were just jealous about them moving down south and we're trying to ruin the fun of it. On Monday I even printed Devid's market page and try to show to some of those guys but I was getting evil looks so I stopped. People just don't even want to hear that their house might be worth less. All I was hearing is that people are moving up from the city and homes will never drop in the Hudson Valley. There is many sellers that live in their homes and they are "not in the rush" to sell but those guys are moving 750 miles south and will have to sell quick. I think that this spring the inventory will sky rocket due the the fact that most people are holding for the summer that will magically fix the market up here.

[TR]

Chris L. writes:
"I think that this spring the inventory will sky rocket due the the fact that most people are holding for the summer that will magically fix the market up here."
-------------------------

Huh?

More inventory up here has led to lower prices - supply and demand.

And, I believe you'll see more inventory come on the market this winter and the 1Q of 2008.

The Sullivan County MLS is showing about a 1:6 to 1:10 ratio of closed homes to new listings.

And to respond to David's original post - most - not all - agents will usually not turn down a listing (eventhough it be unrealistically high) due to the fact that they can usually spin off that listing to another similar property either in their in-house inventory or elsewhere and hopefully retain the prospect.

Happy holidays to all,
TR

[JM]

The good thing about an economic recession is that it cleans out the market excesses in real estate and in financial markets. Any economist will tell you that recessions are good at doing that very well. In order to create normalization in real estate, we need a good recession to scrape the slate clean. Sellers will lower their expectations on what their home or raw abandoned land is worth. Higher real-estate taxes will also put a little fire under their feet to sell. We are currently in a twilight zone of stagnant housing b/c the average person "doesn't have to sell".

I am amazed at how certain sellers still think they can make a profit on their speculative flip as opposed to walking away with a loss. Sellers are constantly being offended with offers. Many sellers cannot come to grips with just a 50% return on their investment. They are offended if their profit is less than 100%.....wait until the recession comes and passes....it will be like KATRINA.
It will be an issue of limiting losses, not maximizing profit.

[Dan F]

If anyone has ever read "On Death and Dying" by Elizabeth Kubler-Ross. You will see an uncanny parallel to selling a piece of real estate in a declining market. Based on seller behavior, it seems they are dealing with the declines the same way people are said to death with death...Someone should do a study. Kubler Ross states the levels of people dealing with the death of a loved one is

1. Denial
2. Anger
3. Bargaining
4. Depression
5. Acceptance

Sadly, I think this could definitey apply to Real Estate !

[tom fry's ghost]

Sullivan County:

1. Denial
2. Blame
3. Guilt
4. Again denial
5. Still more denial
6. Depression
7. More depression.
8. "It's the kid's problem."
9. "Find me someone from WS."
10. "Over my dead body."
11. "It's THEM. If they were not living here..."
...

[Steve]

I'm surprised that there's no comments regarding the seller's agent. The seller's agent offers the asking price. He/she is the one who works with the seller regarding expectations of the market. He/she is the one who attempts to determine value. I think a large part of any blame in setting prices can be sourced to the agent. On my current house, the agent was emphatic on listing the house $60K higher than I thought it was worth. Sure enough, we lowered the price because it wasn't moving. He's not a bad agent, but he's following the behavior of the other local agents.

The economy is still strong. Mortgages are still plentiful. Buyers may seem overly cautious about purchases, but the reality is that a recession is not a depression and that prices may be lower than last year because Sullivan is not the trendy spot it once was, but that does not mean they are 40% down from last year.

I had a conversation with one of my agents a few months ago about a house opening he had. There was a lot of anger and even hostility among many of the locals at the cost of real estate. That is understandable. The buying power of the local economy cannot compete with the buying power of the City or parts of Jersey. The City people are skittish about plunking down a lot of money right now. That's understandable as we don't know what's around the corner. Until these two things are reconciled, then there will be this misunderstanding between buyers and sellers.

[tom fry's ghost]

"A representative of Camp Rov Tov, a summer camp affiliated with a Satmar school in Williamsburg, Brooklyn said...the group has signed a 5-year lease on the property...owned by Kutshers Resort.

Mark Kutsher ...denied granting a lease to Camp Rov Tov."
----------------------------------------------------

Lemme see. First you pay a lawyer to draw up a lease. Then you sign it...AND THEN... you deny having ever drawn up the lease. This is wonderful to read and I hope when they make the musical I can get center seats in row four.

"Vacuums are always filled."

[David Knudsen]

Dan F, great points about the stages of dealing with 'loss'. I'm going to move your comment to its own blog post. What I've been seeing in the last month or so is a lot of the denial-anger stage on the part of sellers, and just can't seem to move beyond it to the bargaining and acceptance.

Steve, your point is also a good one about selling agents. I think one of the main problems were seeing is that most real estate agents working today have been raised on the abundance of a rising market, and don't have experience in a falling one. I think bringing buyers and sellers together in this market takes a lot more skill, and the ability to talk numbers, particularly with sellers. Most agents I talk with have 'feelings' about what's going on, like its 'slower' and its 'harder to make a deal happen.' But few, it seems, know the numbers. On a year-over-year basis, the median sales price is tracking about 10% down while the average is holding close to year ago levels. But take a look at the slide since the peak in June of this year, and its a very different story. Both the average and median are off in the range of 15%. Yet sellers are stuck in La-La land, with the illusion that nothing has changed. A good seller's agent needs to be able to sit down with a seller, with graphs and charts and figures, and discuss the changes in the market, as well as review recent comps of similar sales and other competing houses on the market.

[JD]

As an agent that generally lists and works for the sellers, I must say that saying that selling agents are the to blame for the housing slow down is a little much. I deal with unrealistic expectations from sellers everyday, and yes I have listed a home or two well above what I thought it was worth. I advised my sellers of what I thought it was worth, and backed it up with numbers and comps.

Very often we have sellers who do not need to sell, and unless they get what they want they won't sell. Other times we have what has been discussed here. The "denial stage" they really believe their house is worth more than it is. They have a different view, and nothing can convince them. Often over time, as you develop a realationship with them, and they see how the market is, they begin to come around.

I always encourage offers from buyers agents. Dave maybe you were the first offer that came in that low, so the response was vehement, but get two more behind it in that ball park, and the seller starts to get the picture.

Believe me if I could get all my sellers to list 2% below what the market price was, my job would be easy. Just as if Dave's buyers all came in with a careless attitude and over flowing pockets to bridge appraisal gaps, then his job would be easy. It's not like you have never had a buyer who paid more for a house than you thought it was worth. I'm sure you advised them as best you could, but I'm also sure you didn't turn down the commission for the "good of the market"

It comes down to two sayings that I like.
1) One's property is only worth what someone is willing to pay them for it.
2) If this was easy, everyone would be doing it.

[David Knudsen]

JD, I haven't blamed sellers agents for the real estate slowdown, but I do think many do bear a fair amount of responsibility for the situation we're in, with the difficulty of making deals. Some agents, for example, never have any price reductions on their listings in the MLS (apart from maybe a token $299,000 from $299,900). Now, I can't believe that if an agent has 12 listings, that all 12 sellers are stubborn and unmoving. I think the more likely culprit is that the listing agent is not regularly communicating about value and price shifts in the market with their sellers.

Look, if you have a property that's overpriced and you know the sellers are firm or not that negotiable, fine. Just tell me that. I may not show the house, but at least we're not wasting anybody's time. But don't hold out this carrot of, "Please just bring me an offer. I think they'll be reasonable," so I waste my time and the time of my clients being a guinea pig.

I don't think its easy being a seller's agent right now, because sellers are in a tizzy. But if a market rate offer comes in (which is what a lot of agents call 'low ball' offers), and its the first offer on a property, it always seems to come as a shock and complete surprise to the sellers.