Bidding in a Market That Buyers Feel 'Should' Be Fearful

Posted by urbandigs

Thu Oct 9th, 2008 10:07 AM

A: Almost all other markets outside NYC are experiencing fierce seller competition where battles take place to be the most aggressively priced property on the open market. The result is asking prices some 20%-30% below peak levels. Yet in Manhattan, this is not the case. This leaves buyers wondering why the Manhattan real estate market is not filled with more fear, considering the events we are facing. It also leaves sellers in a state of 'wishful thinking' and 'hope' as their competition is priced at or near peak levels. This combination is likely to lead to the adjustment phase. Updated at 11:48AM

I can't stress enough the role that hope/anchoring & confidence play in a housing market in times like these. Anchoring affects the sell side while confidence affects the buy side. The combination of these two mental forces lead to real changes. When I say anchoring, I mean the psychology of sellers to anchor themselves to a fixed point (in this case a price, perhaps from a previous higher sale), even though that point has no more relevance in today's marketplace.

Case in point, while this time of year generally sees an uptick in inventory on the open market, the past 6 weeks has seen a dramatic 18% increase of inventory; from a level of 6,950 around in late August to a level of 8,200 or so today (chart below; click for all real-time charts here):

6-month-manhattan-real-estate-chart.jpg

Given the state of the credit markets, the negative wealth effect from equity correction, an upcoming weak bonus season, high paying wall street job insecurity, and a decline in buy side confidence, this noticeable surge in inventory stands out from past seasonal upticks.

Buyers are wondering why asking prices have not softened to levels noticeably lower than peak levels? To answer this you need to go into the mind of the 'boss' in charge of setting the asking price; and that means the seller! Contrary to what many may think, most sellers set their initial asking price based on hope. They hope to get a certain price, and if they do not try then they lose any chance of getting that price! At least that is what goes through their heads. That, and the notion that their home is worth more than comparables because of the lasting memories and good times they experienced there!

One final dynamic that affects sell side psychology comes from interviewing multiple brokers that may possibly represent them to market the property. It is a well known internal fact that a successful sales pitch comes from executing a few things perfectly:

a) Look - a seller broker must appear to be successful. Dress professional. Act professional. And at all times, give the impression that you are busy, closing deals, and active in the marketplace.

b) Marketing Strategy - a seller broker must explain strategy that will be implemented to give the listing maximum exposure. After all, if a seller is going to agree to a 6% commission at closing, they should expect plenty of marketing from the seller broker and their employing brokerage firm

c) Presentation - the seller broker must PRESENT themselves and their sales pitch in confidence. A seller broker that is not confident, at a loss for words, takes time to answer a question, or simply doesn't know how present themself has little chance of getting that exclusive

d) Pricing - the key! The seller broker must NOT scare away the potential seller client with a sales price that they feel is too low, although that may be in line with current market valuations! This is so important and is the key element that dupes so many sellers into choosing their ultimate representation. Sellers will hear things like, "...your property is gorgeous and should not get less than X using my services" or "your property is easily worth X and I'm the guy that will get it for you" when in reality X is known to be significantly ABOVE current market valuations. Sellers want the highest price, and experienced brokers know the key to their hearts; quote a high price, get the listing, and work on price reductions after the first month! Many are fooled without realizing that other brokers are attempting to keep them 'ahead of the curve' by pricing correctly.

I can't tell you how many sales pitches I lost because I quoted a price that was realistic yet lower than competing quotes, and ended up seeing the property on the market with another broker at a price some 15-20% higher than my quote. It doesn't sell at that price, but the winning broker executed the sales pitch properly and the fish bit!

Understanding this, explains a lot about current property pricing. I have colleagues everywhere acknowledging that their listing is overpriced and in need of a reduction. Buyers who are perplexed that asking prices should be lower, need to realize that the price deals are occurring at is what counts; not asking prices. As long as sellers cling to hope and are not scared into pricing aggressively from the outset to move the property in a timely manner, inventory will rise and the setup for fierce sell side competition occurs.

Bidding in a market that the buyer thinks should be fearful is as simple as executing The Probe Bid correctly to gauge the sellers first response:

Assuming the seller is not testing the market and is really looking to sell, it will be the FIRST RESPONSE to your initial bid that will give you the best look at the poker hand the seller is holding.
In this market, I stress patience with the bidding process to maximize negotiating success. This is more of an art than a science, and is all about execution and presentation.

First of all, in today's market the quality of the buyer is absolutely crucial when it comes to negotiating. With the mortgage markets distressed and the seller aware of this, it is vital for the buyer's broker to present the bid properly and in the best light. Giving assurance that the deal will close, financing secured and that a board will approve, means a heck of a lot more today than it did only 6 months ago.

Second, don't be in any rush to respond once the initial bid is submitted and a response returned.

Third, execute the 'back out' at the right time and for the appropriate period of time. You will only know if NO really means NO when the seller is faced with losing the deal.

Finally, understand what the property was valued at near peak levels and what downturn risk should be priced in. I am finding that most buyers expect a 7-10% downturn risk (as explained previously in my July post "Low Ball Bids & Cold Feet") as a premium in their bids:
"At the right price, buyers are there. At the wrong price, buyers are pricing in potential downturn risk via low ball bids. The true motivation of the seller comes out at this time."
This is sacrificed under certain situations including if the buyer finds the perfect property that has unique hard to find features.

The Manhattan housing market is not yet experiencing fierce sell side competition or a complete absence of buyers. How this changes as time goes on is on my radar. Until then, it is up to the buyer to be prudent if they know they are buying, but at the same time realistic in that finding the perfect property that also is distressed and willing to accept 20% below peak levels is going to be very difficult right now.

The turning point could be a few things but the dynamic remains the same; a complete absence of buyers that results in sellers being forced to dramatically lower their price to stimulate a sale. The spark that could lead to some form of this lies in Manhattan pricing reports. When it is showed that a decline has occurred across the board, buyers (even those that are on the sidelines waiting for a 5-10% decline) are likely to back off in a herd like fashion out of fear for catching a falling knife. Time will tell.

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