Monday, November 29, 2010

Lowballing in an unsettled market

By Bryan Tagas

Home sellers—and many real estate agents—hate to even hear the term lowball offer, let alone be the recipient of one. But there’s anecdotal evidence that as buyers have tried to gain an advantage from the dysfunctional nature of the residential real estate market, lowballing has been on the rise.

There are no statistics that confirm this trend, if it exists. That’s because there is no uniform definition of what a lowball offer is. One buyer’s idea of a realistic offer may be a seller’s idea of a lowball. Even among real estate agents, there’s no industry standard. Some maintain that an offer 25% below asking price is lowball, while other professionals set the bar at only 10% or less. More often, however, agents argue that it really depends on the property in question and whether the seller has properly priced it to the market. In a generally declining market such as this one, it’s easier for sellers to unreasonably overvalue their houses, while buyers might at the same time unreasonably assume they can negotiate a big discount from any asking price. Local agents tell me they see both kinds of mistakes made all the time. In a market with a low number of home sales the problem is exacerbated, since there are fewer comparables by which sellers, buyers, and their agents can measure value.

“When the bust first happened,” says one local Windermere agent, “many sellers didn’t recognize it and held onto their prices far too long. This led to a lot of lowballs.” He says he thinks most sellers are wiser now about setting their asking price, “but many buyers still seem to think lowballs make sense.” The reason for this, he says, is that buyers are in no hurry, making the assumptions that interest rates will remain low and that plenty of houses will continue to be available in the market.

Many sellers react to lowballs with anger, however. Some agents caution against “insulting” the seller with an offer that is too much below the asking price, since this may not result in a counteroffer by the seller. If the buyer’s idea is to start a negotiation, lowballing is more dangerous than if the buyer is simply testing to see if the seller is desperate or not. And desperation certainly can lead to a changed attitude on the part of a seller. One agent reports that she received a lowball offer on a house which the seller promptly rejected, refusing to “counter” because he was incensed. Several months later, however, that same seller accepted an even lower offer after having failed to sell his house. This is apparently not an unusual scenario. Many listing agents have personal horror stories of having a seller reject their recommendation to lower the asking price, then suffering the loss of the listing when the house remains unsold, and finally watching as another listing agent sells the house after drastically reducing the asking price. Some sellers simply have to learn by experience, which can sometimes be painful.

In fact, there’s evidence from the local market suggesting that waiting too long to accept “market realities” can be costly. Windermere/Madison Park agent Laura Halliday provided me with an analysis she did based on King County’s September sales for houses listed at $1 million or more. She found that houses that had no price changes before they were sold stayed on the market for an average of only 22 days—and the sold price of these houses was, on average, 93% of the original listing price. These were quick sales for well-priced houses, and this represented 44% of total sales for that market upper-segment. On the other hand, the houses that had one or more listing-price changes before sale (representing the other 56% of sales during the month) spent 214 days on the market, on average, and were sold at an average 78% of the original listing price. Houses that were on the market for 180 days or more sold at only 70% of their original list price.

Halliday notes that particularly in higher-end markets such as Madison Park, there are lots of houses to choose from. “When a seller prices a property too high all they are really doing,” she says, “is helping all the other correctly priced properties sell by making them look like a bargain.” Halliday believes that “the longer a property sits on the market the less the seller will net in the end.” She notes that someone with a home that has gone unsold for many months may become discouraged or “worn out” at some point, willing to accept a lowball offer. So lowballs definitely make sense in certain instances.

Val Ellis of Coldwell Banker agrees, stating that “time on the market” is a major factor for a potential buyer to consider. “A property that has lingered on for some time with numerous price drops will immediately become an invitation to an even lower (lowball) offer.”

Lowballs may make sense in certain other instances as well. One example is where the buyer who is making the lowball provides some advantage to the seller that might not otherwise be available. The ability to pay cash is one such advantage, and several agents report sellers being willing to accept reductions in the sale price of 10% or more simply because cash means an immediate sale and no risk of financing falling through, which might happen with a higher non-cash offer.

Another reason that a lowball offer might be effective is that it can be the opening round of a negotiation with the seller. Some agents advise sellers to make a counteroffer to a lowball even if they are angry. While the lowballer may simply be bottom fishing, he possibly could just be a serious negotiator making an initial gambit. The one way to find out is to keep talking. It’s possible, after all, that the two sides could meet somewhere in the middle. As Windermere’s Halliday notes, “you never know how high a buyer will go or how low a seller with go” until someone initiates a negotiation. Sometimes that begins with a lowball.

On a personal note, I have been involved in lowballs on both the buying and the selling sides of the equation. Many years ago my wife and I made an offer on a beach house which was “ridiculously" lowball--more than 20% below the sellers’ already-reduced asking price. It was the end of summer, the selling season was over on the island, and we expected our lowball to be the starting point for negotiation. To our astonishment and the listing agent’s dismay, the sellers accepted our offer rather than making the anticipated counteroffer.

Later as sellers, however, we learned a different lesson. After buying our house in Madison Park on a no-contingency offer, we still had to sell our house in View Ridge. We received a lowball offer for it, which we promptly rejected. But after several more months of not selling our house (suffering from double mortgage payments in the meantime), that lowball offer suddenly seemed more attractive and even realistic. Our agent asked the lowballer to resubmit his offer, which he did—and which we accepted. At closing, the buyer, a professor of finance in the UW’s Graduate School of Business (my alma mater), gently reminded me that the market sets the value. A good point, and one that buyers and sellers should always be mindful of.

[As noted, statistics are based on September 2010 sales in King County for the $1 million+ market. The lower chart shows that for sold houses in this market segment, only 3% of sellers had maintained their list price for 180 days or more. 54% of sellers, meanwhile, were successful in selling their houses after maintaining their original listing price for 30 days or fewer. Analysis supplied by Linda Halliday of Windermere Real Estate, using data from the Northwest Multiple Listing Service. Click to enlarge charts.]

1 comment:

  1. Very true. That said, I stopped submitting offers for houses that were still overvalued half a year ago after it became clear that the typical reaction was an incensed seller. There's no point in spending energy on putting together the offer if in the end everyone is upset. Sellers will figure out that they can't sell at the price they set by themselves and lower prices, and if they don't, there's no point in reasoning with them at this stage. In half a year, when even the excuse of "winter season" goes away and offers don't materialize, I expect prices to normalize to what the market can actually bear.


Note: Only a member of this blog may post a comment.