Sunday, February 20, 2011

The dance

Early morning downtown Cocoa Beach Feb. 19, 2011

Some random observations about real estate buyer/seller interactions from my man on the street perspective.

Real estate transactions are not a zero sum situation where one participant's gain or loss is exactly balanced by the losses or gains of the other participant(s). In real estate deals buyers and sellers often play a game of classic prisoner's dilemma, where, by not co-operating a participant gambles for the maximum gain (best price) by risking the maximum loss (no deal). In the case of a buyer, maximum loss only means not getting this property. Unless it's unique, she can always move on to another similar property. In a seller's case, maximum loss (no deal) means prolonging the sales process. The usual result (at least for the last five years in our market) is a lower price later, sometimes much lower, much later. Sometimes that gamble pays off and another buyer materializes quickly willing to pay more. I said "sometimes" but meant "once in a blue moon".

When offering to purchase anything for sale at a lower price than a seller is asking, it makes sense to have a strategy for success. Every situation is different and offers need to be tailored to the seller and the specific property. In most cases a buyer can't know all of a property seller's motivations and circumstances but enough can be determined from publicly available information to guide a strategy. Offering an arbitrary X% less than the asking price is not a strategy although, in most cases, all offers should be less than the asking. The exceptions are aggressively-priced or unique properties. In that case, trying to squeeze a few bucks off the price may lose the property to a more aggressive buyer. Your buyer's agent should be finding out everything about your target property and seller before you make your offer and should know what the market is saying about that property's value. An active, good buyer's agent will often know more than is publicly available. And, I can't repeat this enough; know what current market value is. Without that knowledge you may overpay or, just as bad, miss out on a good deal.

I see all kinds of seller reactions to offers. Most are hopeful stabs at getting a price above market value or a particular buyer's ability to pay but some are angry, irrational and counterproductive. Buyers understand that every seller wants to get the highest possible price for their property. They also want, or need, to pay the lowest possible price and in most cases are going to offer below market value. Even with these contrary goals, record numbers of buyer/seller pairs are reaching the middle ground and closing sales.

Three "need to know" points for sellers when fielding offers.

Carrying costs until the sale. If your property is costing $2000 a month to hold, waiting a year hoping to get an extra $24,000 doesn't make sense. Selling for less today might yield more than selling later for a higher price. Do the math and quantify the exposure.

Recent comparable sales and current "for sales". Without a significant difference in your property, you are unlikely to find that mythical buyer willing to pay you above the market. If you don't know the recent sold comparable prices, you won't be able to recognize a fair offer if you get one. What your neighbor sold his for two years ago is not a comp nor is the offer you turned down last summer. Cautionary hint: your listing agent might not know market price either and might not care.

Buyer behavior. Know that you're probably going to get some not-serious lowball offers but also know that every offer you get is going to be less than your asking price unless you have stated in your listing that the price is firm "not a penny less". Conversely, unless the buyer has stated that her offer is "take it or leave it", no matter how low, it is an invitation to begin negotiations. Refusing to counter an offer, no matter how crazy you consider it, is not productive. Unless the buyer said "take it or leave it" she is willing to pay more. If you consider her offer crazy, make a crazy counter but keep her engaged. She may be unrealistic but you lose nothing but time if a deal does not materialize. I have seen bad starts evolve into acceptance. Another consequence of refusing to counter an offer is that it sends a dangerous message. That buyer's agent walks away from a no-counter response with the impression that your asking price is firm. Not a smart message to be sending to buyers' agents who probably represent other buyers, one of whom may be willing to pay more.

Having said all that, there are unreasonable participants on both sides of the transaction fence. For every seller clinging to 2008 prices there is an unreasonable buyer who will never pay fair market value for anything. Be careful not to let your interactions with unreasonable players affect your response to the next one who really wants to get the deal done. Understand that it's a dance and put your best foot forward. Paying more or accepting less may, in retrospect, look like a great move. Do your homework and conduct yourself accordingly.

"When you get the chance to sit it out or dance, I hope you dance."
____sung by Lee Ann Womack (written by others)


  1. Know the current market value is normally great strategy in itself--but with current market conditions,knowing where the market will be in a year from now is something that has to be factored in. I have put in two offers on different property in the last year and a half. My offers were both 20% less than asking price. Since that time one property sold in Dec. for less than I offered 10 months earlier. It was a first floor unit. There was and still is a second floor unit for sale. The price has dropped to what I offered for the first floor property.The other property I offered to buy is now $30k less.Your right on the money when you advise a seller to use his head when trying to hold out for more. In both of my transactions, had they excepted the offer,they would have been close to their asking price after deducting another 10-15 months of costs.I'm thinking of trying again. I will be offering about 10% less than asking on a unit I feel is fairly priced at this time.I have to factor in another 1.5 million units will be going into foreclosure this year and that will flood the market and drop prices further. The one thing that really holds me back is something I have said before.HOA fee's--I can't agree that these should hold steady. Values have dropped and replacement costs have dropped right along with them. Insurance costs need to fall in line with them as well. I feel HOAs have to drop at least 35% at the low end. It makes no sense to me to pay more in HOAs than in a mortgage payment.The insurance industry is taking advantage of owners-current or new. Also maintenance costs should reflect the lower costs of doing business. That would knock off another 10% on HOAs. Add it up--45% drop in fee's would be about fair. I might have to wait forever to buy--but so are a lot of others.

  2. To Snowman:

    Like all condo owners, a drop in my HOA fees would be much appreciated. With that said, it isn't going to happen and you will find that most HOA fees are competitive with owning a personal residence in the same area. Most condo Boards of Directors know HOA fees are a pain to the condo owners and try to keep them as low as possible.

    The insurance industry in Florida OWNS the Florida Legislature and the Florida Office of Insurance Regulation. They get what they want for rate increases. They are still passing on the costs of past storms (mainly the aberration experienced in 2004). They sock it to homeowners and HOA's alike. For a $300,000 coastal home (but not direct oceanfront), expect home owners insurance to be at least $300/month. The HOA for direct ocean condos has a similar monthly expense. Many of the big insurance companies such as State Farm will not insure direct oceanfront properties. In fact, few insurance companies will and many homeowners and HOA's are forced to buy insurance from state sponsored institutions such as Citizen's where the Legislature has ordered them to have rates as high as the three highest private insurance companies. There is little competition in the market to keep rates fair. The only thing that might change that is a prolonged period of 10-20 years where Florida doesn't get hit by a major storm.

    Other than homeowners insurance, condos take a severe beating from the weather and there is deterioration that requires expensive roofing and structural renovation projects every 15-20 years. Reserves must be set aside for these renovations. The condo must be painted every 5-7 years. There is other maintenance on elevators, garage doors, security systems, water pumps, swimming pools, elevators, parking lots/asphalt and the like. These kinds of things add $100-150/month to the HOA fee.

    Then there is water ($15/month), trash removal ($10/month), cable TV feeds ($50/month), common area electricity ($10-15/month), grounds care ($10/month) and a management and maintenance company fee ($20/mo).

    Most of these are the same costs you would have for a personal home.

    I am aware of some older complexes that have lower insurance rates but this is due to the units themselves being smaller. For a 1000 sq ft condo in a large complex, the insurance portion of the HOA fees might only be $150/month whereas for a 2000+ sq ft unit in a small complex, insurance might be as high as $400/month.

    I would expect HOA fees to be between $400 for smaller sq ft units to $750 for the big sq ft units on direct ocean or river complexes.

    Anyway, I would argue you are dreaming on the HOA fees. None of the costs to the HOA are going to go down unless there are large assessments on an almost annual basis (Larry has touched on this previously). If you are holding out for lower HOA fees, you will never be a condo owner.

  3. Snowman with an attitudeFebruary 25, 2011 9:03 AM

    I did say I would probably have to wait forever.I respect your thoughts and you are probably right that nothing will go down. But--when certain areas of the economy are on the DEFLATION side and INFLATION on the commodity side something just is not right. The regulators are taking advantage of the situation at hand and raping the associations. Make no doubt about it we do have inflation and deflation taking place at the same time. Real Estate and everything associated with it are on the deflation side big time. The HOA'S should reflect this.Strength in numbers!! you bet. The associations are just that--associations---they should all be opposing the reckless abandon of the regulators. If they are not--then they themselves are the problem and the owners should show up in droves and force the issue.

  4. About insurance costs: Selling prices of existing condo units may have gone down drastically but it seems unlikely that a condo building could be built for much less in 2011 than in the past. I see units selling for less than their replacement costs but that doesn't mean that in the event of a disaster, some contractor will agree to rebuild them for less than his cost. Insurance must be sufficient to replace the property in the case of loss. We can all wish for lower condo fees but it ain't gonna happen short of voting to stop funding reserves in order to reduce the monthlies. In most cases, that option is exercised to keep from raising fees rather than to reduce them.

  5. Let me count the ways--Units selling for less than half the previous price. New builds at a stand still for the most part--especially Florida. Builders and contractors alike going under like undertows. That's in all the trades-heating/ac,tile,wall board electrical etc. All these good people would love the opportunity to bid down a job just to keep themselves and whatever workers they have left-WORKING. The replacement cost would most certainly mirror the downturn in construction. Property at half the price,Wages cut,gasoline at $4.00,unemployment going higher--real time numbers around 16% not counting those working part time hours. Sorry--the replacement cost numbers are for insurance purposes. Ya gotta shop around and that's what associations should be doing.If thats not being done shame on them. You have the most associations in the country in Florida. Ya think they might have a little buying power in numbers??? Off course they would. The industry has to reflect the rest of the economic picture. If it does not--I have a bridge to sell you in Brooklyn.

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