TRD: "Lowballing Turns Predatory"

Posted by urbandigs

Fri Jan 2nd, 2009 05:24 PM

A: The Real Deal has an article out titled, "Lowballing Turns Predatory", that I would like to address. Now I know Candace Taylor very well, and actually had a lunch-interview together in the past so that we could cover a number of topics regarding Manhattan real estate. So, this is not a hit on Candace, but is more a response to excerpts in the article and the strategy of pricing higher in anticipation of lower bids, that was suggested as a result. My counter arguments are below, so what I want to know is, where do you stand?

For sake of this one discussion I will have to break a few statements down and then offer my comment, as it makes it easier to translate for blog readers:

TRD: "At the dizzying height of New York City's real estate boom, apartment owners commonly put their homes on the market, then watched as the flood of offers — often at or above the asking price — streamed in. Buyers, meanwhile, waited anxiously for the seller's verdict, preparing to heap tens of thousands of dollars on top of the original offer.

Now, the opposite is true, brokers say."

MY COMMENT: Okay, first off, lets acknowledge that in the past few years, Manhattan real estate was booming, wall street was earning, stocks were performing, confidence in the asset was high, and anybody was able to get a loan. As a result, bids came in fast and hard. Buyers MADE the market. Now, the macro fundamentals have completely reversed, and bids are not coming in as fast or as high but one thing has NEVER changed ---> The buyers STILL make the market!


TRD: "Potential buyers are now putting very low offers — often 20 to 40 percent less than the asking price — on multiple properties at the same time, a strategy that was virtually unheard of only a few months ago."

MY COMMENT: The buyers continue to MAKE the market and reflect the changing times. This is the market working just as it should after an unsustainable boom. A home is only worth what someone is willing to pay for it at a given time on the open market. Just like before. Buyers perceive more control in the process of buying a home, pricing in downturn risks, and are bidding accordingly.


TRD: "Sellers, increasingly desperate to unload their property, are countering offers they once would have considered insulting. And as lowball offers become the norm, this back-and-forth seems to be accelerating the downward slide in prices."

MY COMMENT: My translation of this is that sellers are realizing that bids received are not where they hoped or what the broker may have promised, would be submitted. The 'back & forth' occurs in many housing market transactions and reflects the market mechanics until a 'meeting of the minds' occurs, and the deal agreed upon. It works the same way in boom cycles as it does in corrections. This is not the cause of what is accelerating the downward slide in prices. Rather, this is the end result/effect of a decline in buy side confidence due to an unsustainable rise in property prices from easy-credit, speculation & lax lending standards, the severe credit crisis/credit deflation, rising unemployment, deteriorating macro fundamentals, negative wealth effect from plunging equity prices, no more free money, deleveraging, and a general decline in confidence for the asset.


TRD: Even when lowball offers are accepted, many buyers are trigger-shy. Gomes represented the seller of a one-bedroom in Chelsea where a low offer was countered by his client. The potential buyers — a couple looking to purchase an apartment for their daughter — raised their price and the seller accepted, but then the couple backed out.

MY COMMENT: When an illiquid asset is attempting to be sold in an illiquid market (where buy side demand is on the decline), this will occur. Walking away from contracts, low ball bids accepted but later rejected, and bidding on multiple units at once are all actions that reflect a market where buyers FELL LIKE they have more control. The buyer continues to make the market.


TRD: "Whatever the motivation, the practice has become so common that Gomes has taken to listing apartments higher than the estimated sale price in anticipation of lowball offers.

"We've got to price things a little bit higher, because people are going to be looking for a 15 to 20 percent discount off the bat," he said."

MY COMMENT: This strategy does a major disservice to the seller and is counter productive in an illiquid market. As we enter a tough 2009 with deteriorating macro fundamentals for our local economy, this will result in significantly less foot traffic and showing inquiries for the seller. It will immediately put the property BEHIND THE CURVE, and in fact make other comparable listings look more attractive to interested buyers in that specific price point. It will HELP the competition sell unless the product has features that make the property truly unique. The seller will end up chasing a moving target, and if the market deteriorates further and bids are harder to come by in the future, they will likely see even lower bids and potentially miss their chance for a sale that would have come from proper pricing. Also, psychology tends to play a role and although the goal may be to price high so that you can deal with the lower bid, when it comes, the seller may not play ball because of how far it is from asking. A higher price is NOT the magic bullet for a sale, and it may even contribute to lower sales volume and rising inventory that defines most down cycles. A stronger economy, affordability, job security, clarity/confidence in the banking system, and rising confidence is the cure, and market forces will end up dictating both. Right now, as the market is illiquid, having an idea where the property is likely to sell for and advising/marketing around that should be central to any sell side strategy; not pricing high in anticipation of a low ball bid.

Also, by stating this, doesn't that just invite buyers to go ahead and bid 15%-20% below ask?


TRD: "Lowballing or not, buyers' stubborn refusal to pay listing prices appears to be having an impact on the market. "It's really insulting," Gomes said. "But at the same time, it's all about creating a dialogue. Anytime you have someone who's interested, you do the best you can to play nice and negotiate the deal."

MY COMMENT: Buyers are being prudent. Sellers are being stubborn. All until the price is right! Buyers make the market and determine what the property is worth on the open market based on their confidence in the asset, their financial position, how well the product meets their needs, and a solid knowledge of where the market currently is and how to value the property in question. If bids are low, it is because that is where buyers are confident in purchasing the asset. Without buyers, there is no price discovery. As long as jobs are not safe, buyers feel less wealthy, buyers are not confident with the asset, and the media enhances all these emotions, buyers will continue to have an impact on this market! In the early stages of a down cycle & especially when a market becomes illiquid (bids dry up), it is typically the asset holder that is in denial over the 'current value' of their asset.

Right now more then ever, sellers need quality consulting. Now, my business is mostly buy side, always has been and it always will be, so I constantly have a diversified pool of opinions on how confident they are bidding in this current market. Right now, most of them are patient and waiting either for a deal to present itself, more clarity on where Manhattan is right now in the downturn, confidence in the jobs market, clarity in the health of the overall economy, etc.. Those are very real forces driving buy side psychology right now, and until this changes, bids will likely be on the cautious side. Properties whose asking prices reflect this change in buy side confidence, and are 'pricing in' the current uncertainty in the asset class, are the ones ahead of the curve and likely to move first.



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