TRD: "Lowballing Turns Predatory"
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.
Comments (22)
noah
Does Gomes think this is gonna get him new listings. Well , if it does , his client deserve the chase down.
Posted by pablo | January 2, 2009 7:08 PM
Your comments are entirely correct. In this market, most if not all sellers need to sell, unlike in the past where sellers tested the market to see how much they could get. As such, any seller that wants to sell in the market must price their unit low enough to generate interest, and then negotiate from there. The author of the Real Deal piece seems to reflect the false notion that units in Manhattan are intrinsically valuable...they are not. They are worth what a buyer will pay, and in this market, and for the foreseeable future, that will be appreciably less than during the last five years.
On another note, I am adding to and starting positions in companies that have seen their basic ingredients come down in price during the current deflationary cycle (e.g. NWl, and CAG). My theory is that, with consumer and commercial staples such as these, margins will be appreciably higher in 09, thereby offsetting any potential drop in sales volume. Today I was tempted to sell some AA and FCX, but I passed. I don't buy the emerging market recovery in '09, but I just think that I will hold to my current positions until I hit my own goals, and then continue to ad on the dips. Thus far I have been some nice positions where my average basis seems fairly attractive. I did get over eager on BAC, but I also got a nice dividend payment last week. Strange that a company that gets billions in taxpayer money still pays out a generous dividend to its private equity holders...but I am not complaining.
Posted by mh23 | January 2, 2009 8:42 PM
Noah:
I completely agree with you. To me, unemployment numbers will be the most important factor. In the last week GS has come out and said that unemployment should hit around 9%. Even Harvard economist Martin Feldstein is saying the same thing. I have not read any estimate that forecasts anything much below an 8.5% peak in unemployment by the end of 2009, while at the same time you can find estimates of unemployment hitting as high as 10%. This would be a very steep drop of about 2% in unemployment in 1 year. I think we have another year of tough times with the first half being worse than the second half. This will effect the Real estate market in the NYC Metro area greatly. Calculatedrisk also has a recent piece on the Case/Schiller numbers and he has estimates of a steep fall in this area also.
Posted by Brian | January 2, 2009 9:23 PM
thats right, we buyers make the market! Look, I know things are getting worse, and I know many in the financial industry may not have a job next month. So why would I fall for a stupid trick like pricing high to offset my lowball?
sellers are in denial, plain and simple, and now that bids are rare, maybe they will wake up. Sellers who listen to brokers telling them to price higher, are complete morons.
Posted by pf3-buyer | January 2, 2009 9:54 PM
Pablo - You never know. But many brokers have perfected the ART of the sales pitch when it comes to procuring a new listing agreement from a potential seller.
Its usually a 1-2 punch:
1) GET LISTING - promise whatever, your the best at selling, your a bldg expert, you have 5 buyers already, you market to places no broker can, etc...
2) GET PRICE REDUCTION - do what you need to move the property, get paid.
No broker likes an overpriced listing, but you need to get the listing if you are to sell it. This is where I suck as a real estate broker. I dont want to waste time, so I tell sellers honestly where I think the property will move. 9 times out of 10, I dont get listing, and I see it go elsewhere at a much higher price. Nature of this business. Its a sales industry, and brokers only get paid if they get a deal. So, do what you can to get the signed agreement, and work on reduction later
Posted by Noah | January 2, 2009 9:59 PM
As a prospective buyer, I don't care at all about what the 'ask' price is - it is a meaningless concept. I would offer a 20-40% discount to the price of recent comparable transactions, allowing for certain variables such as a high floor, an exceptional view, the condition of the apartment ... You are better off ignoring the 'ask' that a myopic broker puts out there in order to get the listing.
Posted by chris | January 3, 2009 7:40 AM
Buyers think 20-40% below current offers is a good deal?
Ah, those poor buyers, always the suckers.
Posted by essabuyer | January 3, 2009 9:48 AM
Cash-flush sidelines renter agrees 100% with Noah. Patience is definitely a virtue at this time. Thanks for the great post.
Posted by Otto | January 3, 2009 10:34 AM
all great comments guys!
PLEASE, if you are a new commenter, please remember to type in 'nyc' into the keyword/anti spam filter thingy..I found 3 comments in junk folder, and I dont usually check. I want all comments out for all to see.
Thanks all!
Posted by Noah | January 3, 2009 10:36 AM
Noah-
As a current broker at a top firm in Manhattan, I agree 100% with you. In today's challenging market, sellers need to have the foresight and courage to price their property aggressively and at current market pricing. If you over price your property in this market, it's the "kiss of death" and you will be chasing the market for months with price reductions. I've personally walked away from listings where the seller was out of touch with today's market. Continued Success in 2009!!
Posted by Top Producer | January 3, 2009 1:51 PM
Top Producer - Exactly! That statement of "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."....
is outright idiotic! Its counterproductive. It makes absolutely NO sense, and shows the lack of understanding of the current environment. Im not a salesman, which is why I lose many sales pitches to other brokers, so I just cant relate to a statement like this. At some point, sellers will realize the pain of employing a strategy like this.
Posted by Noah | January 3, 2009 2:48 PM
Noah - you keep saying you're not a salesman - I would agree with you that your honest feedback on what a property is worth doesn't serve you well getting new listings in a rapidly rising market. However, I think this (rapidly declining) market is tailor-made to someone with your view on what properties are worth. You should be able to walk in to a sales pitch with a sheet that shows the monthly carrying costs and the monthly decline in the market (1-2% down per month during 2009) - these two amounts added up should be a big incentive for sellers to want a candid view on what their property is worth so they can sell it quickly - or maybe I'm putting too much faith in sellers using logic and not emotion.
Posted by B | January 4, 2009 8:50 AM
B - trust me I do and I try! But in the end, sellers usually go with the better act that explains WHY their place is worth more. When I tell sellers what I think their places is worth, only a fraction agree and those that do really appreciate the honesty and goal of trying to consult to keep them ahead of the curve.
the others usually feel that if they dont try starting at a higher price, then they will never know if hey can get it
Posted by Noah | January 4, 2009 10:49 AM
Noah,
thank you for yet again an excellent article. I have been following your blog for a number of months -- I really like it.
I wholeheartedly agree with the analysis but wonder about the following: real estate is not a commodity product (in the sense that we can agree what an ounce of gold or a barrel of oil costs today delivered in NYC) but is more differentiated in attributes and valued quite subjectively by different potential buyers. As a result, a serious broker should not make a point estimate for the price of an aparment (e.g. $1230 per square foot) but could instead offer a price range (e.g. with 90% certainty this property should sell between $1100 and $1300 per square foot). Offering this range does not only reflect the fact that the broker without a crystal ball is simply incapable of providing an exact number, but more so the fact that different buyers with identical information will value the property differently and bid different prices (presumably mostly within the price range estimated by the broker).
If one accepts that such a range of prices for a given property is also to be expected in a declining market, then the case can be made for sellside brokers pricing close to the upper end of this interval (e.g. at a price where you would expect 80% of offers to come in below and only 20% above the ask price). (This also assumes that while the market is declining it is still sufficiently liquid to attract a number of offers.)
Obviously this point does in no way justify the blatant sellside broker one-two-punch described by Noah, of overpromising and then managing the price down. I just mean to make the point that pricing-to-sell does not imply pricing something at the midpoint of the estimated sell price.
Maybe this is too theoretical a point or brokers (realistic ones) do this implicitly when pricing their sellside client's property.
Posted by Tom | January 4, 2009 12:44 PM
Noah,
A fantastic post. As the Training Director for a large broker in Ohio, your theories and thoughts ring true out here as well. We are still seeing too many Sellers who aren't being realistic about what their home is worth. With absorbtion rates close to 7-8 months the Sellers really need to decide if they want to be "Just Listed" or "Just Sold."
When I was an active agent I never liked the strategy of "list high - reduce later." I felt it was a borderline fraudulent way of doing business. It was always satisfying to get a call from an expired seller saying they should have listened to me in the beginning. Only then, they have already lost 6+ months of marketing time, paid 6+ months of mortgage, utilities, etc. and possibly lost buying power in their next destination.
Don't knock your "sales" ability. A great script for situations like that would be "Mr. Seller, I can level with you now or let you down later. Which would you rather I do?"
Remember...all markets are cyclical and all markets are local. Maybe this downturn will eliminate some of the real estate hobbyists and allow the real estate professionals to show our value.
Good luck in 2009.
Posted by Sean | January 5, 2009 4:38 AM
1000% correct, Noah.
What's going to happen is that a few sellers will start to "break the buck". Normally this concept is used when a money market fund drops below a dollar a share.
Now, something along these lines will happen in Manhattan real estate.
We'll see, for example, a really superior 2BR condo priced at $700,000. Then another and so on.
This will be the way some sellers will get ahead of the raging tsunami.
Brokers will poo poo this as exceptional circumstances, it's not.
We'll see prices in Manhattan at 2001 levels before too long.
As Noah says, all we witnessed over the past several years was as fake as a 2 dollar bill and totally unsustainable.
Posted by Anonymous | January 5, 2009 10:22 AM
I'm one of the sellers who early in the summer while I was FSBO had been told by every 3 out of 4 brokers who courted me that my asking price was way too low- some even called me again early Sept to reiterate that opinion. I'm not a market academic, so knowing whose advice I should have trusted at any given point along the way was difficult to say the least. Several months later with the benefit of brutal hindsight this obviously has become clearer. It pains me to know that my inexperienced instincts were right but I doubted them in light of 'experienced' professional advice.
-and I get it already! Everyone trying to sell in Manhattan is inherently greedy. The best strategy is to end our greedy ways: coddle everyone who comes to view our property, just ask them to name their price (because after all ANY price is the right one in this market), then get on our knees and beg them not to change their mind before going to contract. A smart seller will unload their worthless apartment before crime rockets in the coming months as all of NYC turns into a giant Detroit :)
Now that that's been beaten into my thick head over and over during the past few months, I was hoping as a seller to find some extremely relevant but currently non-existent discussion, as the buyer/seller mentality topics are seemingly one sided right now: if I have an offer, what can I do to ensure the buyer making it will not leave me hanging at closing because their bank decided not to give them the financing? I mean, we are still in the midst of a credit crisis and in this illiquid market I as the seller assume an awful lot of opportunity risk when such a scenario occurs. How should a buyer's qualifications be valued into their offer? Any thoughts?
Posted by Seller | January 5, 2009 11:52 AM
Low balling is becoming so common place, it's ridiculous. But that is the nature of the market right now, so I guess we'd better get used to it.
Sharon Hollas
Posted by Sharon Hollas | January 6, 2009 1:35 PM
My posting seemingly has brought this thread to a screeching halt, which leads me to assume that it's unpopular here to discuss topics for the benefit of sellers right now. Is this a renters only forum? I feel like I've just walked in and crashed a market pooh-pooh party- sorry about that :-/
Since there are a lot of great insights here I was hoping someone might be able to provide some for my question. Anyone?
Posted by Seller | January 7, 2009 10:53 AM
Seller - nah, thats not the reason. Comments are always most when post is near top. As more posts are published, less come down to read comments for older stuff. I need to redo site so that latest comments are in its own box somewhere to revitalize older stuff that is active.
I have to run to conference now, Ill look at your oldeer comment and respond tomorrow.
Posted by Noah | January 7, 2009 12:24 PM
@Seller,
Doesn't it depend on whether they make the offer contingent on financing? And you can try to get a deposit/earnest money or request a "break up" fee.
But if we are in a "buyer's market" you may be unable to extract such concessions from an offeror.
You may be lucky just to get a reasonable offer.
[And yes, older posts scroll down the front page and are less likely to be viewed]
Posted by Thisson | January 7, 2009 3:52 PM
Thisson- yes, as I understand it's standard practice RE deals to have a financing contingency in the contract (if this is not the case, someone please correct me).
I also wouldn't expect a buyer to agree to any kind of break-up fee or similar guarantee in this market.
My question is more about how one should measure opportunity risk due to a particular buyer's likelihood of being denied financing at closing time. It would seem that this is a much larger concern in current conditions than in previous months. -and secondly, are there ways to mitigate this type of risk without getting the buyer to agree to a penalty?
I had a verbal offer from a buyer in early November and was very inclined to accept it. My broker's opinion at the time was that the offer was too low. When I told him I wanted to move forward anyway he said the buyer was a high financing risk with only 20% down and would likely take us down a long road and leave us hanging at the end. I didn't know how to evaluate that risk myself, so I went with his advice and declined.
Posted by Seller | January 7, 2009 4:34 PM