To Show or Not to Show?

A key factor when working with a buyer is their budget, what do they want to spend? I try to respect my clients' budget wishes, and am pretty upfront when I don't think a budget is sufficient for what they're looking for.

The question I face all the time is how far above that budget, in terms of asking prices, should I go when suggesting houses to see? Generally, I'll look 15% to 20% above a budget range, particularly if that will sweep in some houses that I think that will encompass some properties that the buyers may especially like. But that's risky, because it's a crap shoot as to whether those sellers will do a deal within the buyers' budget range.

Buyers often want to look at houses that are quite a bit above their budget range, believing that in this 'buyers market', sellers will take 60% or 70% of their asking price. But that's not really the case. Over the last three months, the average "bid-ask ratio" (the ratio between the closed sales price to the last asking price) was 90%. Of course, there were sales with lower bid-ask ratios. Of the 71 closed single family sales for the 3 months ending April 30th, one sold at 67% of asking price, and there were another 11 that closed between 70% and 80% of their asking price. That adds up to just 17% of the sales closing at less than 80% of their asking price. 35, or 50% of the total, closed at 90% or more of their asking price. (The average bid/ask ratio has hovered pretty closely to a range of 88% to 92% over the last six months.)

The odds are against a $300,000 buyer getting a house listed at $400,000 for $300,000. Possible? Maybe. Likely? No. A house listed at $349,000 for $300,000? Much more possible.

I seems that sellers pretty consistently set their asking prices about 10% above their "bottom line." If someone lists their house at $349,000, they're probably expecting to get a deal above $314,000. The number in their head may be higher than this, but it's unlikely much lower. If their "bottom line" number was under $300K, they would probably list it at $329,000, not $349,000.

The "90% of asking bottom line" isn't a hard and fast rule. As a buyer, if you end up holding in the counteroffer process at, say, 85% of the seller's asking price, that can be awful tempting to a seller who then faces the decision about whether they drop another 5% or risk waiting for another buyer willing to pay a little more. But holding at 75% pay be a little too far out of that tempt range.

Listing agents are always encouraging me to "please show the house, and if your clients like it, have them make an offer." And I hear over and over "the sellers are motivated." But I think there's often a breakdown in communication between the listing agent and the seller, and such entreaties are often more a function of wishful thinking on the part of the listing agent than any real indication of motivation on the part of the seller. If the seller were truly motivated to accept an offer well below their asking price, they probably would lower that asking price.

Part of the communication breakdown may be in the interpretation of the term "motivated". When I hear it, I think "20% or more." But I think it's often used when the listing agent perceives that the seller might agree to a deal at 10% below their asking price. For me, I see 90% of asking as just the normal course of business to get the deal done, and not any evidence of super-motivation on the part of the seller.

Caught up in the buyers' market psychology, and hearing all the "mnotivated sellers" and "make an offer" comments, I've been pushing the envelope of what I've been showing a bit higher, sometimes 25% or 30% over a client's budget. I've had this attitude that it's worth taking a look and making an offer. But the numbers aren't supporting that, and I'm beginning to question whether it's fair to buyers to set that expectation, even subsconsiously. Because when you see more expensive houses with "better" features, it can be difficult to pull back to more modest properties. So, do I show a $349,000 lake cottage to a buyer who's indicated their budget is $275,000, or a $435,000 renovated farmhouse to a buyer looking in the low $300's? It's a question I don't quite know how to answer.

Comments

[Dan F]

David-

I think you need to use your instincts and interrogation skills to treat every case differently. I don't think there are any rules set in stone but you seem to have a good feel as to what gets a deal done. If a buyer wants to see a home that is way out of his price range, maybe he isn't telling you the whole story. Maybe he really can pay more. Certainly you would not want to waste everyones time if the buyer really cannot afford it but is it really a waste of time ? Maybe after seeing that house he will perhaps discover that what he sees in his range is not such a bad deal after all ? Surely you cannot guess what a seller will settle for but if nothing else, you will go through a discovery process to see how motivated a seller actually is.

[Baysider]

This is the ballgame of today's new price discovery.

I have seen examples of capitulation.
One home listed for 399k in mamakating with 47 acres on Mountain rd. The seller's bottom line is 180K.
The home needs lots of work but it does have 47 acres.

Another guy in Livingston manor on forsalebyowner.com was asking 495k for 56 acres last year.
He is now at 198K asking.

This is the very begining of capitulation. Much more is to come.
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DK comment: The seller's bottom line is $180K, or that's what he/she has reduced the asking price to?

[q]

In a word, no. You have been around this business to know that your spread at best is 6%.

[Rod]

"Last Asking Price" is not the same as "Original Asking Price." And since Original Asking Price is not available to most buyers, the 'same as stocks' logic is suspect, since historical stock pricing is readily available and transparent to anyone interested in looking.

If a house starts at $550,000, slowly moves down to $390,000 over the course of the year, is an offer of $360,000 really "10% off asking", or actually 35% off asking?

I think the barameter is less the asking price of individual sellers, but the market expertise of the agent - certain houses are priced right in this market and 10% may be fair, but for the most part, 35% or more off ORIGINAL asking is where many properties end up.

So, understanding where and when and how much the seller started with is a big factor in whether 10% or 35% is more appropriate.

[jeff]

If it were me, I would have a list of those houses that started at an unrealistic offering price.

Over time, these properties have been sliced and diced in price (downwards) many times so that the seller has now gotten a good case of tough love and a wake up call stonger than a double expresso.

This type of seller has now been "tenderized" - the best kind - so it only applies to older listings not fresh fish.

Jeff

[creech]

Today, it's all about motivation.
Buyers lack it in this depressive market.
Only sellers can do something about that to motivate buyers.
No-one else will.

[David Knudsen]

I agree that the original asking price and the price change history on a listing are important. Along with time on market, they indicate a lot about buyer motivation. If I see a listing that started, at say, $499,000 a year ago, and has one intermittent price reduction to $489,000, it doesn't scream "motivated seller" to me. While another listing that, say, started at $649,000, and has had reductions to $599K, then $549K and now is at $489K indicates a seller who's more motivated to get their house sold. However, that house at $489,000 could still be overpriced — it depends totally on the house, or it could be fairly priced.

I pay attention to the original asking price and the price change history as indicators of motivation. But at the end of the day, it's the deal price as a percentage of the asking price at the time of the deal that's important. That's the number that hovers consistently around 90%.