A Kiss is Just a Kiss ... An Ask is Just an Ask
We talk about trends and we generalize in the process of empowering ourselves and our readers with information that’s relevant and real. At end of day, though, a sale occurs when one individual seller and one individual buyer have a meeting of the minds. This means, as is always the case when humans are involved, that markets are not efficient and they are subject to the whims and oscillations of human behavior. As behavior is not always rational or efficient (yes, this point can be argued by die-hard theorists), neither are the real estate markets.
Why this quasi-pedestrian intro? Because it all seems to go out the door in the negotiations process and it all starts with the asking price.
On the buy side:
Though we often advise buyers to consider the “value” of the property as a stand-alone data point, this rarely happens. It’s oh so easy to anchor yourself to the asking price and work from there. Many buyers, encouraged by this buyer’s market, approach properties with a standard 10% or 15% haircut off the top no matter what the ask. This strategy (if we could call it that) neglects the simple fact that all asking prices are not created equal. Some are priced above, some at, and others below market (yes, it happens).
Further, there is the “value” of the property and then there’s the minimum that the seller will actually sell it for … ergo, the difference between seller and buyer expectations that Noah has so eloquently been discussing. (The reason I keep placing “value” in quotation marks is because a property is only worth what a buyer is willing to pay for it, just like any other asset.) The bottom line for the buy side is to treat each property individually to yield the most fruitful negotiations.
On the sell side:
Considering the buyer mentality, what is a seller to do? It’s tough for sellers in this market, because every buyer wants to feel like they’re getting a deal. This is an important distinction: they don’t just want to get a good deal but they want to FEEL like they “won”. As such, sellers have three options:
1. They can price high to test the market and bring the price down later. The negotiation cushion is huge but traffic is very limited and the staleness clock is ticking after the first few weeks.
2. They can price at market and hope that people understand this. Traffic is good but there’s little wiggle room in the price to accommodate those 10-15% automatic discount expectations.
3. They can price below market and hope to god the property gets bid up to the true “value”. Traffic is tremendous, low-ball offers are still made but the smart money prices the property where it should be in the shortest timeframe.
The bottom line for the sell side is that intellectually the third option is the winner, but emotionally it takes quite a leap of faith to go there. Most sellers we’re seeing are just not ready to jump. They’re saying: “but what if someone bites at a higher price? I won’t know unless I try, plus I can stay in the market for a while longer.”
For buyers, asking prices should be relatively meaningless; for sellers, it's everything. Whichever side of the equation you’re on, the buy side or sell side, we’d love to hear your perspective.
Buyers: are you willing to get in a bidding war, as we’ve heard so much about? How are you deriving your offers and how would you react to a seller who will not budge on their asking price at all?
Sellers: what is your reaction to option #3? What drove your decision on where to price and how is it working out?
Posted by Noah
Thu Nov 5th, 2009 10:41 AM
Just an absolutely great and real topic to discuss, especially for this markets.
Many of my buyers over the years have some level of pre-determination how much OFF OF THE ASK they need to get to comfortably go forward with a deal. Mostly this is true for first time buyers and those that just started looking and happen to place a bid in. Rarely do you find a buyer that understands the asking price is meaningless. Usually the buyer says, 'ok, now how do we chop 10% or 15% off this baby' without any regard for how it is priced. Dont get me wrong, some buyers are willing and fine to pay asking or near asking if they know their price point and a deal when they see one - but I find usually the opposite happens, especially early in a new buyers quest for a home.
I actually tell buyers this all day long. For me, I do my own valuation after viewing a property that is of interest to a client. That is why they came to me in the first place. Sometimes the likely trading range I come up with is right near the asking price and sometimes it is not. But the valuation is formulated on actual sales, not comparable properties that are still active on the market. I love it when a broker rationalizes an asking price by comparing to another higher priced unit in the same building; but ignores recent real sales.
For sellers, asking prices are the key to moving property, period. Its everything. I find that sellers feel that they are GIVING AWAY MONEY if they price their unit at or slightly below where it likely should trade given market conditions and comps. The seller response is something like..."well, I know it should sell for around $1.5M, but how will we know if we cant get $1.6M if we dont price near $1.8M"? So, they price at 1.8M, listing gets no traffic, no sense of urgency, gets stale over time, and after 2-3 price cuts every buyer out there knows they can probably approach the seller differently. Pricing high to test the market is usually counterproductive unless we are talking about a property with exceptional features.
Pricing at $1.49M on the other hand, will likely generate a crowd (especially if there are no other comparable units in building and few comparables in nearby area), create a sense of urgency, and all you need is 2 serious and motivated buyers that bid each other out so they don't lose another one!
For buyers, asking price is a starting guide, nothing more. If your budget is 2M, you probably will search up to 2.5M, knowing much on the market is likely overpriced and will eventually have an aggressive cut or two, bringing it closer to your affordability.
For us brokers, its much harder to convince a buyer that a property is priced right, to overpower the emotion on the buy side of desiring a 'deal' - which usually means some preconceived notion of getting for X% below ask. What do buyers say, "oh they were asking 2M, and we got it for 1.6M, yayyyy!". Every buyer wants that. Well, sometimes, not too often, but sometimes a property is priced correctly.
GREAT topic to discuss Ana! Thanks
Posted by Seller78
Thu Nov 5th, 2009 11:20 AM
Great Blog Ana Maria. We now have our apartment off the market. We took a leap of faith and listed it below - 2 bed, 2 bath, gut renovated last year, beautiful, we were prepared to take a 350k loss. Upper East - good street, good schools, we listed at 900k - we got offers at max 750k and so we took it off. We're keeping it and I imagine somewhere in the distant future when things are better we'll list it at 1.2-1.3 where it would have been before the Lehman collapse. The dichotomy between buyer and seller is far too great and I believe we've hit bottom. Fortunately we can afford to keep our place and just hang out. We wanted to move to Florida and retire, but we aren't in a rush and we definitely don't feel we need to give it away. Our friend who is a few blocks north of us went with option #2 - same apartment size as ours but hers isn't gut renovated and needs some updating - definitely not a better street. She got 950k for hers. I don't know what the answer is but I do not agree that option 3 worked out for us at all. Sellers can't disassociate psychologically from wanting to discount. I think we would have been better off listing it at 1.4 and giving it up for 900k so that mentally they felt better. But now, no chance, there's no way I'll even sell it until the market commands 1.2 because I just don't want to deal with sellers in this market. Emotional, yes, but it was an insulting experience.
Posted by Fred
Thu Nov 5th, 2009 11:53 AM
Thx Ana-Maria, it seems that placing a value on the uniqueness of any particular property will always result in some kind of delta between the bid and the ask, except when there isn't and a transaction occurs. One of the issues I feel the market is yet to come to terms with deals with the insistence that for pricing purposes (or could we say value discovery?), the tendency is to compare points in time, rather than moving averages. I am all but spent on the comparison between today and the "peak" in order to emphasize the delta (i.e. the good deal implied by current asking prices). Since real estate is a glacier, not a river, wouldn't it make much more sense to look at 3, 5 and 7 year averages when comparing current asking prices on a per usable square foot basis? 2007 & 2008 were anomalies.
Posted by AA
Thu Nov 5th, 2009 01:33 PM
Hi Anna Maria, enjoyed your post. Your suggestion of option 3 as "intellectually" the correct choice assumes multiple bids for a unit. Even if traffic is good and pricing is great, isn't assuming multiple bids coming in at the same time too much of a leap of faith? That's the problem I have with option number 3. If a bid comes in at the ask price on the first weekend and that's the only one you receive, don't you have to accept it since they're paying the ask?
Posted by Noah
Thu Nov 5th, 2009 02:01 PM
AA - "If a bid comes in at the ask price on the first weekend and that's the only one you receive, don't you have to accept it since they're paying the ask?"
The seller doesnt have to do anything. Nothing is binding. I represented a seller once who was asking 2.2M for a classic 6 in carnegie hill..after 3 months and only low offers in the 1.8s, that werent accepted, we got a buyer that bid against himself all the way up to 2.3M. My clients removed unit from market thinking they mispriced it. Crazy.
It was listed 6 months later for 2.595M at corcoran, I was at citi-hab at the time, and it ultimately sold for 2M.
The point. An early strong bid sometimes makes the seller think they priced wrong! And usually its the best bid they will get. When a solid and motivated buyer loses a place or two that is perfect, when they find the next one, they usually act fast and sometimes sellers make a BIG mistake by mis-interpreting that as a market signal of overall strength or mispricing.
Posted by potential buyer
Thu Nov 5th, 2009 02:27 PM
As a potential buyer, I would not under any circumstances engage in a bidding war in this climate. I may offer above ask for a property that is clearly priced below, but I would walk away if a broker told me that I would have to engage in a bidding war to get the deal done. I would do this whether or not the property is unique. Noah's example of a buyer that bid against himself is exactly the situation that any intelligent buyer would do this best to avoid -- and the one and only way to do this is walk away from a bidding war (whether or not it is real of fictional).
Posted by Jay
Thu Nov 5th, 2009 02:50 PM
Bidding war? Not for the kind of places I'm looking for.
I do use asking price...but as a proxy for seller sanity/reasonableness. If something is priced more than 10% over market, I probably don't even look. If it has had numerous sub-5% cuts, I don't look. Correctly or not, I (and others) assume these people are either out-of-touch or not actually interested in selling.
Posted by Crosby
Thu Nov 5th, 2009 03:03 PM
Jay -
I couldn't agree more.
Posted by Noah
Thu Nov 5th, 2009 03:09 PM
jay, you make a very reasonable point that many buyers will agree with. bidding wars these days is mostly in lower end, sub $500K market...but it has happened to me a bit too in higher end lately.
I did have a recent deal fall through where now I know there are higher bids. Prior to falling through, another bid came in and a highest & best declared by seller broker. this is just under $2m property.
my client, who had accepted offer in diligence phase, decided to walk away for different reasons. I also had a recent 2M+ deal done where there was serious interest in a property that was priced right to begin with. we acted fast, aggressively, knew the quality was a primo product after 8+ months looking, and got what we wanted. i know there were other bids waiting as backup if the deal didnt go through.
Bidding wars are a scary thing for all, in my opinion. You can have 3 buyers in a bidding war and end up losing them all. It must be applied the right way, without scaring anybody away.
People think bidding war and they immediately envision a situation where they are bidding against themselves or way over market value. That does not necessarily have to be the case. If the property is the right one, do your analysis, bid within your means and comfort zone, put it in writing and present yourself the right way, and tell them atty is standing by and with satisfactory diligence a contract will be signed in 3-5 business days. Dont stretch just because there are other interested parties.
Its funny, when some buyers have a verbally agreed upon deal, something inside their heads kind of wants a bid to come in right underneath theirs - some sort of confirmation they are bidding market value and that the place they are bidding on is good enough to draw interest. human emotions are a wild thing.
Posted by Ana Maria
Thu Nov 5th, 2009 03:18 PM
Sorry all - just came back from an appointment. Lots to comment on, so here we go:
Seller78 - I completely heare you. It's funny actually: for many of our sellers, we've recommended pricing at 10-15% above market for these very reasons, while cringing the entire time.
It's so counter-intuitive, really, to tell a seller to price above market; but this is where seller psychology really kicks in and the pricing strategy HAS to fall within the range of an acceptable emotional roller coaster. No matter how great a strategy may be theoretically, it must be something a seller is willing to take on.
Posted by Ana Maria
Thu Nov 5th, 2009 03:23 PM
Fred - You are right; the uniqueness of the property tends to ignore general trends and dampens fact-based rationale based on these trends. My intended perspective is rather than human beings are behind these transactions, and as such, there will always be a uniqueness to the deal and to a getting to a meeting of the minds. Egos, anchoring and other factors play a huge part in where deals get done on both sides. And, yes, it would make MUCH more sense looking at multi-year averages. Unfortunately, many sellers remember all to vividly what they paid, and in many cases that will trump any "standard" analysis of asset values over time.
Posted by Ana Maria
Thu Nov 5th, 2009 03:35 PM
AA - yes, Option 3 is based on the assumption of multiple bids, which to your point, may never come to fruition. What may have been a better choice of words is that Option 3 is "theoretically" the right choice, but tough to swallow. The truth is that there HAVE been bidding wars even in this market. If a property is priced below market, this should occur. But to "potential buyer's" point, some buyers will outright not play that game in this market.
I have been in many situations where the "market value" of the property was almost irrelevant because the buyer didn't feel like they got any discount off the ask, and they walked.
That's what's so tricky about this market; psychology is trumping a lot of otherwise sensible market rules.
Potential buyer - Clearly you should never be told to engage in a bidding war; if this is the case, walk away.
And this brings us to the very predicament I was trying to raise: WHAT happens if a property is priced BELOW market? Because most of what we're now saying in this thread is that sellers should never take that approach (limited sample size on here, but let's go there). Which then implies that buyers can not and do not assess value as completely separate from the asking price.
Is this accurate? When you (buyers) consider a property, do you conduct your own assessment of that value? To your point, Jay, how do you arrive at that "value"?
... and if it's a normal comps process, what reaction would you have if you were to realize that it's priced 10-15% below market?
Posted by Jay
Thu Nov 5th, 2009 04:00 PM
In the 1BR market (where I am looking), anything priced 10%+ below market would easily receive multiple bids. This may not be true for a multi-million $ place. (Even if someone offered me a place that I thought was worth $2M for $1.8M, I do not have the resources to buy it.)
"Value" and "comps" are different. My other post related to comps. I use comps to determine how much I think an apartment will sell for (and, in my market, I've gotten quite good at this). To determine "value" I look at rents, building amenities and things that are more taste specific. Recently, I've not seen anything of "value" to me as rents have come down as much or more than prices.
Posted by Ana Maria
Thu Nov 5th, 2009 04:08 PM
Fair - yes, that is a good distinction to make between value and comps. Comps are one means or tool for deriving value.
I will say I am surprised at your comment that prices have dropped less than have rents. That has not been our experience but that also depends on the price-points we're talking about.
Posted by Julianna
Thu Nov 5th, 2009 06:11 PM
love this topic. and I'm about to place a co-op on the market so I've been really thinking about this.
I've sold twice without a broker before and both times did #3. Both times I sold in a bidding war. Both times I got more than the most recent building/area comps.
But now? Now I think I have to expect the discount. I'm looking at an asking price that is 7% more than what I'd be happy with. Still "reads" pretty low I think but there's some room. But who knows. Who the hell knows.
Posted by Julianna
Thu Nov 5th, 2009 06:15 PM
(meanwhile if anyone wants to talk about listing a property in December, I'm all ears. we've unexpectedly found something to buy and are now looking to list at a terrible time of the year. oy.)
Posted by SRealist
Thu Nov 5th, 2009 06:43 PM
Ana:
Nice article. Noah, nice going finding another commentator with an analytical and informed mind to join Urbandigs.
I don't want to speak for Jay, but I'm assuming that his comments about rents having dropped more than prices refers to the fact that with rents declining, the gap between renting and owning has widened. That gap had already got pretty big during the boom of the 2000s (Jan Hatzius of Goldman Sachs estimated that prices in Manhattan had to decline by approximately 40%-50% to bring the two measures in line with one another; and that analysis was completed with pre-decline rents).
I've been looking at apartments renting at $8,000 to $10,000 per month, and I see some pretty interesting results. A lot of the product out there is clearly from owners that are unable to sell and are looking to rent out their places, hoping for a recovery in prices. That's borne out by the fact that many of the properties are for sale as well. The asking prices are generally in the $3 million range.
Simple math shows the disconnect: a $3 million apartment will generally cost about $20,000 per month to carry (the cost of the mortgage, maintenance and taxes, amortized closing costs, and a reasonable imputed return on the down payment, reduced by the tax benefit).
Faced with these facts, even the most math-illiterate buyers stop and ask themselves why they should buy when they can rent at half the price. The only rational reason would be if there is an expectation of price increases.
And the reality is that there is little likelihood of price increases in the near (or even medium) term. Employment in the region is down substantially, and Goldman excepted, most everyone else in finance will either get a substantial portion of their comp in stock or not get paid at all. Add on tighter credit standards for mortgage qualification, higher down payment requirements (from buyers smarting from losses in their investment portfolios, current rally notwithstanding) and it's a pretty bleak picture.
The analysis above applies to the higher end of the market. The rent/own differential is less at lower prices (driven by the math), so it can be less easy to see, which may be causing lower-end prices to hold up better. The true high-end, the one-of-a-kind gem, which I think prices like art, i.e. without any attempt to determine its value as a financial asset, may well be unaffected as well.
I predict that as prices for the higher-end of the market inevitably decline (dricen by defaults; a lot of those Lehman and Bear SVPs and Managing Directors are out of jobs and aren't getting back to their old comp levels any time soon even if they find new ones), the lower end can't help but be affected. Each buyer that's on the cusp of a price cohort is going to have an incentive to trade up, causing a cascade effect down the price curve.
I think it's time to stop focusing on comps so much, they only reflect what the last person was willing to pay. In a falling market, you have to go back to fundamentals to determine value. Buyers will figure it out pretty quickly; sellers, who clearly won't like the analysis above, have no incentive to do that.
Thanks for the article.
Posted by Fred
Thu Nov 5th, 2009 07:45 PM
SRealist - thank you. you hit the nail smack on the head. another way to put it would be to ask when will affordable, limited doc, jumbo, 90 LTV loans be available again in Manhattan? somewhere between never and never. so, if the capital stack that drove prices way above the long run average is now telling us that you can only buy half of what you could buy 2 years ago, at best there is zero visibility on how far prices can actually drift downwards. i tend to agree that there has to be an impact on the older, lower price points. my gut says that average should be $500 psf for a typical 2 bed on the UWS, pre war. new stuff "feels" right in the $700 psf range. lastly, land is always the first to go up and the last to go down. land prices tripled in Manhattan from 2003 to 2007. on an FAR basis developers were paying $300 psf to $500 psf for land (in some cases up to 50% of the total build cost). it's just not sustainable. land should be at most 30% of the total cost and ideally 20%.
Posted by Ana Maria
Thu Nov 5th, 2009 11:24 PM
Very interesting stuff - I've been sitting here trying to think of the angle to take on the topic of rent vs buy. While the math is what it is (and very simple at that), I find the issue rather complex, actually. Indeed, the math does not make sense from a traditional rent/buy perspective the higher you go in price-points - but when was the last time it made sense in Manhattan? I ask this because I'm at odds with how to perceive it all, frankly.
Here is a question I ask myself at least once a week: is this a better time to buy today than it was three or four years ago? (Full disclosure: I am a renter, having been able to get out of a contract in September '07 due to a construction defect, so I have my own struggles around when I should buy.) I think the answer to the question above is "yes", but that alone is not satisfactory, of course, for the very reasons you cite.
A second question is: is there greater downside risk or upside potential? If we think of a "U", I do believe we're somewhere in the curved part of a U (a very wide U) - that's all we could ask for in terms of being able to "time" the market, no?
For me, I've long stopped trying to rationalize the anomalous aspect of the Manhattan real estate market, or what others would call the "insane" buyer's proposition (it was driving me insane). AND I'm never going to try to convert people from thinking the buy/rent equation doesn't make sense into buyers.
BUT, there are buyers out there who are looking at this market in relative, not absolute, terms. There are buyers who place understandable value in owning the home in which they live. Further (and somewhat tangentially) tons of cash is on the sidelines waiting for, hunting for and seeking distressed property, and that money is still sitting pretty. There are fewer such properties on the market than one would think or wish.
I (as a natural bear, versus my partner who is a natural bull) am waiting for the other economic shoe to drop and could see a double dip scenario unfolding. Yet, while the top of the market has not bottomed, I do see a stabilization in the lower part of the market. If it sticks and no shoe drops, there's only so much further that the top of the market can fall before the stabilization spreads upwards.
... just some lingering thoughts as we approach the midnight hour :)
Posted by commercial property to let
Fri Nov 6th, 2009 03:54 AM
For a smart investment, it is important that you understand your need well. For instance, if you plan to live in the property that you are planning to buy, it is wise to buy a house with multiple units. Such properties help you lower down cost of living and utilize rents obtained from other parts of the property to pay mortgaged loans, if any. In case, if you are looking at buying a property that is already on rent, make it a point to assess the records of the tenants before finalizing the purchase.
Posted by SRealist
Fri Nov 6th, 2009 09:16 AM
Ana:
You make a very good point. I agree that buyers factor in many things in making the decision to buy, and some of the drivers in their decision are non-quantifiable. I just wanted to point out that the rent/buy gap is now substantially higher than the "normal" differential. I believe that will put downward pressure on prices - the gap is just too large and obvious for now.
I agree that there is a lot of cash sitting on the sidelines, but I suspect that a lot of that is institutional money, looking for distressed assets. That universe of investors is likely to price based on yield (i.e. on rental income). If that is the case, it's another source of downward pressure, rather than support.
I hear you on the stabilization in the lower-end of the market. I don't want to sound condescending, but I wonder if that doesn't result from the relative lack of financial sophistication of the lower-end buyer. It will be interesting to see if investors in the higher-end (who I assume are more sophisticated, although that may not be true; I've watched the Real Housewives show) are also driven by relative value.
Thanks for the thoughtful analysis and the follow up. I'm really looking forward to seeing more of your commentary, especially on rent vs. buy, if you decide to tackle that subject. And to working with you when I see sellers becoming more despondent. Regards.
Posted by SRealist
Fri Nov 6th, 2009 09:16 AM
Ana:
You make a very good point. I agree that buyers factor in many things in making the decision to buy, and some of the drivers in their decision are non-quantifiable. I just wanted to point out that the rent/buy gap is now substantially higher than the "normal" differential. I believe that will put downward pressure on prices - the gap is just too large and obvious for now.
I agree that there is a lot of cash sitting on the sidelines, but I suspect that a lot of that is institutional money, looking for distressed assets. That universe of investors is likely to price based on yield (i.e. on rental income). If that is the case, it's another source of downward pressure, rather than support.
I hear you on the stabilization in the lower-end of the market. I don't want to sound condescending, but I wonder if that doesn't result from the relative lack of financial sophistication of the lower-end buyer. It will be interesting to see if investors in the higher-end (who I assume are more sophisticated, although that may not be true; I've watched the Real Housewives show) are also driven by relative value.
Thanks for the thoughtful analysis and the follow up. I'm really looking forward to seeing more of your commentary, especially on rent vs. buy, if you decide to tackle that subject. And to working with you when I see sellers becoming more despondent. Regards.
Posted by Ana Maria
Fri Nov 6th, 2009 09:45 AM
Thanks for your support, SRealist. Much appreciated.
Because most of the deals we are seeing are in the sub $2MM category, I have actually seen the gap narrow, as most rents have dropped 9-12% or so, whereas the properties themselves have dropped 15-20% versus peak.
With respect to sideline cash, I see it as exsting across the board. Yes, institutional money but also many, many individuals. Just like everyone during the peak was a developer, now they've all turned distressed/opportunistic vultures (and this doesn't include your regular buyers who are dying for those "great deals").
The sophistication comment is an interesting one - since 40%+ of buyers are first time homeowners, your argument has legs. Is that a materially different percentage, though, than over the last few years? Not sure.
Posted by Fred
Fri Nov 6th, 2009 10:10 AM
Thx to both for an interesting conversation. Two thoughts: First, on the relative basis issue, a buyer today only has to look back two years to compare how much they could have financed with the same equity. That amount was basically double. So, the lingering issue for buyers is on a total cost basis, the market is more expensive OR there is a sacrifice to be made with size and quality. Neither option is very compelling. Second, those who actually have cash to spend have compelling alternatives to locking it up in real estate. This is compounded by the fact that the markets in general are blanketed with a short term mentality. The sense that Armageddon could be around the corner has diminished, but it's still there. Those fears make cash think twice about where to go.
The issue isn't so much whether the numbers work when comparing rent vs buy (although I think they speak for themselves), but that because of the overall mood, potential buyers are much more attuned to the issue of value. Think about all the wall streeters who got into the pre-sale game in 2005, assuming they'd flip before closing for tidy little profit. What happened in Florida was going on here as well. It will take time to see what the normalized market is like post-boom, absent all that frothy financial engineering.....
Posted by mike
Fri Nov 6th, 2009 10:53 AM
if i was a seller, i'd probably irrationally go with #2, but it also depends on your timeframe to sell and ability to wait.
As a buyer, i can point to dozens of apartments that i really liked, but didn't even bother to look at, since the asking price made the seller look irrational. for some of those, its possible that i would have ultimately put in a bid, but they took themselves out of the running by indicating an unrealistic price expectation.
More importantly, i've also seen a few (not as many as i would like) apartments clearly priced below market. For each one of these, i quickly contacted the broker to see the place in order to place a bid. In all of those circumstances, i found that there were already multiple bids at or above ask.
Posted by Ana Maria
Fri Nov 6th, 2009 11:08 AM
Mike - so to Potential Buyer's point, did that make you not want to get involved in the process at all even though it may have ultimately led to an "at-market" price?
Posted by htyen1
Fri Nov 6th, 2009 11:55 AM
as a value investor i totally understand the idea of using rent (earnings) as a way to value a piece of property or any investment (DCF).
i have been doing this for about 10 years now and own a few rental properties.
however for myself i typically use rent as the most fundamental/objective way of valuing a piece of property. I use it to give me an idea of what this piece of property should be value at comparing to varies other types of investment.
but i think one needs to take into account another very important factor when it comes to real estate.
buying a place is not ALWAYS purely for investment purposes. MOST people buy it to live in.
there is the factor of ownership pride, american dream etc etc in owning a place, this comes into play when you are talking about buying place to live. Now i would never take these factor into account when i buy a multi family rental building.
when was the last time a house in the suburb was bought because of rental income?
buying a place to live is not always so clear cut, unlike buying it as an investment.
Posted by Jim
Fri Nov 6th, 2009 12:19 PM
I put my 2-bedroom apt on the market in mid-August and chose option #2.
I chose to price the apt. "at the market", which I knew was approx. 25% below the peak.
I immediately received a bid from a qualified buyer--the bid was 15% below my asking price. I explained to the seller (through my broker) that I had priced the apt. at market and had very little room to negotiate. After a bit of back and forth, we struck a deal at 4% below my asking price.
This was a case where both the buyer and the seller were rational and understood where the market is.
Posted by anonymous
Fri Nov 6th, 2009 03:47 PM
hyten1, your points make sense. I still think that Manhattan owners place a ridiculous premium on the pride of ownership. In fact, I still think most people don't even realize the financial implications of renting v. owning and have no idea what ownership is really costing them. I still hear people talk about renting as "throwing money away" as if ownership is costless and all mortgage payments are credited toward equity (which is not even close to the actual case, especially in Manhattan).
Posted by Sharon Marcus
Fri Nov 6th, 2009 05:20 PM
Just got into contract and got board approved for a place where we initially offered $900K on a place priced at $999K and after two rounds of negotiation ended at $925K. We would NOT have gotten into a bidding war -- market doesn't seem to justify it yet. We did however go to the very top of our budget.
On the buyer side: When the market was really hot, we sold two properties for well above asking by pricing enough below then-market value to generate a bidding war. But in this market I would assume that a place priced low might very well not sell above that price -- but it would sell, and pretty quickly.
Posted by mike
Fri Nov 6th, 2009 07:01 PM
Ana -
Although, i'd hopefully drop out when it turned into a "bidding war", i don't see any issue competing with other buyers if I think they are also bidding rationally and the asking price started out below where i see fair value.
Posted by John
Sun Nov 8th, 2009 10:18 AM
The conversation buy vs rent is totally hypothetical so far. What I would like to see is facts.
Here is mine: I own a 2-bed apt on the UWS, a couple of blocks away from the MNH and the park (btwn Colombus & Amsterdam). It is a coop unit and I bought my place with a 50% down payment a two weeks before Lehmann. It is a full floor brownstone unit.
My mortgage and maintenance come out to $2,900/mo and the exact SAME apartment, SAME floor unit, which is adjacent to mine next door is renting for $3,500/mo.
In other words, I am saving $600/mo had I rented my apartment and I also get the tax benefit, which is pretty substantial.
That's a fact - thanks.
Posted by Noah
Sun Nov 8th, 2009 11:07 AM
except your missing the opportunity cost of owning. what did you buy it for? what would that money be earning if it were not invested in the asset?
most people do not put 50% down so if you use your example, of course the buy vs rent will be different if you exclude opp cost of the money that is now at work in your home and not elsewhere.
Posted by jax33
Sun Nov 8th, 2009 01:21 PM
"what would that money be earning if it were not invested in the asset?" Noah - had his money not been tied up in his real estate there's a good chance he would have gone to zero after the Lehman collapse, I don't really get your point. Would he have put his money to work well had it not been tied up in a mortgage - who knows. Once he lost it, would he have gained it back in the market, probably not, he probably would have gotten much more conservative in his portfolio like most individual investors after taking losses and would just in small increments start to build it back - but by no means would any individual that isn't a sophisticated investor/institution have not come out of this unscathed. I think he's better off tying it up in his real estate, he has somewhere to live and can wait it out. The world isn't ending and the peaks and valleys are always temporary. In 2 years you'll all be babbling about wow, prices skyrocketing, who knew, because none of us knows period.
Posted by Noah
Sun Nov 8th, 2009 01:26 PM
so cherry pick the most fierce plunge in equities in the past decade and use that as a rational argument to avoid opportunity cost in a buy vs rent discussion?
on the same token, I can say that since he bought two weeks before Lehman, chances are the asset itself is probably trading 15-20% lower in todays market - a hit to equity a renter would not have suffered if they happen to be sitting in treasury bonds, gold, cash, or cash equivalents. Not everyone is ALL IN stocks without being diversified. Sure many got hit but many also got cautious and flew to safety with writing on wall well before lehman...you cant just take out opp cost in a rent vs buy discussion.
Posted by jt
Sun Nov 8th, 2009 03:22 PM
to John:
"My mortgage and maintenance come out to $2,900/mo and the exact SAME apartment, SAME floor unit, which is adjacent to mine next door is renting for $3,500/mo.
In other words, I am saving $600/mo had I rented my apartment and I also get the tax benefit, which is pretty substantial."
I beg to differ. Say you purchased your apartment for a million dollars. You put half down, so that's 500K that's not earning anything on another investment. If you invested and got a modest 4% interest, compounded for say, just five years, it comes to over $121,000 in missed interest. That's over $1800 per month that you'd be earning if you were renting for $3,500. Subtracting, you see it might just be better to rent.
That's the baseline scenario. Buying just before lehman's collapse, you might have lost 25% of the value on that apartment. That'd be another $250,000, which divided over 5 years, comes to another $4160 per month that it's costing you to own. That's a lot of money.
Caveat: I'm not counting tax breaks on mortgage interest (I don't think you were either) or maintenance payments (I don't think you were either?). On the other hand, I'm not amortizing closing costs or the nyc or nys mortgage tax. You might stay longer than five years, apartment prices could go up substantially (or down), etc... there's no certain calculation to do.
Now, I think it's a perfectly fine idea to own an apartment, but it's expensive (worth it to some, not worth it to others). But the over-simplified own versus rent computation just isn't honest.
Posted by justin
Sun Nov 8th, 2009 05:40 PM
a kiss isnt just a kiss if you know who's been kissing who in the past. just like past sales data shows, if a place was bought any time from 2007 to mid 2008 this was the peak of the market, why should anyone in todays market pay more than a place sold for during this time? im in the market for a place on the uws and i often see places listed higher than the past sales price, why would a seller not think a buyer is going to know this? why wouldnt i offer 15% to 20% off what was paid in 2007-08? if the market truly is down 15% to 20% then you would be crazy to buy at what i see as often listed prices.
my take is, rent for now especially if its cheaper, but be sure to measure the total cost of ownership. reality has not set in for any buyer that bought during the 2007-08 time frame. where are the jobs that people are going to need to pay for these places? until these jobs start coming back there's no chance of things getting back to the way it was. we are in a deflationary environment and it may take years for that steam to leak out. call me a bear but i just dont see it until someone creates some financially engineered product that allows all the lehman guys to get back to where they were. get to work you!
Posted by Fred
Sun Nov 8th, 2009 08:52 PM
Noah - I think another question might be what KIND of mortgage did "John" take out 2 weeks before Lehman collapsed? Secondly, that $3,500 / monthly unit *next door* isn't going to be renting for $3,500 when that lease rolls; and that's a guarantee - think more like $2,700 at best. If the guy paid $725,000 for what I assume to be 1,000 SF, he's already competing with full service bldgs that are asking $800 PSF in the same zip code. Brownstones are headed back to sub-$500 PSF, no way around it. BTW, nice little data point on that Blackrock apartment bldg sale on W. 74 st last week - $469,000 / unit (81 units); renting for $3,500 to $5,000 / unit. They wrote off $7mm and had previously valued it at $680,000 / unit. How now brown cow?
Posted by karen brewer
Sun Nov 8th, 2009 09:11 PM
Im in a small town in CT and believe that the artificial pricing of sellers is actually logjamming the market. New sellers see comparable properties on the market for more money and they think THATS where they should price too. It doesnt seem to matter that the homes are not selling.No one wants to pull the string on the sweater thinking they will unravel the market.Until sellers get real we're stuck.
Posted by anonymous
Mon Nov 9th, 2009 09:28 AM
John's rant just bolstered my point, many people just don't understand what the true cost of ownership despite their strong opinions on what is a financiall better deal.
Posted by John
Mon Nov 9th, 2009 11:43 AM
Noah,
What diversification, what investing are we talking about in a highly unstable stock market after Lehman's collapse. A friend of mine had invested all his money with Bernie. Your comment is amateur at best - come on, you are better than that.
You argue about my opportunity cost while at the same time you fail to take into account the "timing" factor. Even though buying 2 weeks before Lehman was pure luck, it proved to be very wise. I did not buy at the peak of the market and I avoided the market collapse and credit freeze that came after Lehman. I put my money on an asset, which, as you very well said, has currently lost its value but it will appreciate in the long run.
By the way, do you have any idea how much I would have to pay Uncle Sam if I did not have my mortgage and all the tax benefits associated with ownership?
Inflation will eventually hit us and I do not see another alternative - it is only real estate or the commodities market. This is just my point of view. Maybe I am wrong, but same can be said for you as well. Nobody has a crystal ball. Had I known the future, I would have been a billionaire. I took a position after assessing my risks at the time.
Besides, I do not view my apartment as pure investment only. I bought because I was tired of moving from one place to the next every year or two, because I wanted to have the kitchen that I like, to paint the walls the color that I like, to have the bathrooms and fixtures that I like. I plan to live in my apartment for at least a decade and why not, pass it down to my kids, mortgage free.
ps1: my mortgage is a 7/1 ARM 5.25% zero points and I can pay it off at anytime with no penalty.
ps2: the lease for my next door neighbor was signed on Sept 09. So either my neighbor is stupid or the landlord is smart: your pick.
ps3: Arguing that Manhattan real estate in prime areas below 96th street will go down to $500 per sq ft and this number will be a reference point for future sales is pathetic. I read Urban Digs on a daily basis and I vividly recall what Fred and other anonymous commenters were writing when the market collapsed: it is the end of the world, the economy will never recover, the wild days of the 80s are back, etc.
REALITY CHECK: It is NOT the end of the world and the economy IS recovering....
ps5: my previous email is not a rant, anon. It is my point of view based on facts. I respect your opinion but I beg to differ - maybe it is you who do not understand the true cost of ownership and all the benefits associated with it.
Posted by anonymous
Mon Nov 9th, 2009 12:25 PM
"What diversification, what investing are we talking about in a highly unstable stock market after Lehman's collapse. A friend of mine had invested all his money with Bernie. Your comment is amateur at best - come on, you are better than that."
Not sure what you meant or why you think your one friend is a representative example of all investors (like you believe your apartment is a representative example of all apartments). I think Noah's point was that most people wouldn't have all of their money in stocks but would be diversified in other asset classes that may have performed much better. BTW, no finanical decision is made disregarding the cost of capital. Ignoring it is like saying that spending $1000 to save $1000 per month is equivalent to spending $500,000 to save $1000 per month. The return is only meaningful relative to the investment.
Also, the economy is recovering, but unemployment in NY is going up, so I wouldn't us that as a case for strong real estate values.
Finally, "It is my point of view based on facts." You need to drop the last 's'. You cite just one fact, or data point, which is almost meaningless.
Posted by John
Mon Nov 9th, 2009 12:33 PM
You are great in philosophies anon - in theory everything is how you present it...
My facts are conveniently meaningless to you anon if you do not want to consider them...You did not like them huh? Feeling uncomfortable that it is not the end of the world?
Posted by john
Mon Nov 9th, 2009 12:34 PM
You are great in philosophies anon - in theory everything is how you present it...
My facts are conveniently meaningless to you anon if you do not want to consider them...You did not like them huh? Feeling uncomfortable that it is not the end of the world?
Posted by anonymous
Mon Nov 9th, 2009 12:59 PM
I think your facts are fine. In fact, they do little to bolster your case as I think putting 50% down to save about 1,500 a month is not a great deal. I just meant that generalizing based on an isolated fact distorts reality. A more comprehensive data set would be more useful.
I don't think the world is ending, never did. In fact I went heavy into financial stocks when everyone else did. Bought Goldman and JP Morgan and made a good return. I just happen to beleive that buying v. renting for financial reasons only makes very little sense. If you don't want to move ever again or like the feel of owning something or being part of a specific building, then that's a personal decision. However, financially the numbers don't work out well.
Posted by Noah
Mon Nov 9th, 2009 01:01 PM
First off, why do you keep talking about the end of the world? Because I discussed the severity of the credit crisis since mid 2007 and why it would end up hitting Manhattan real estate markets?
I keep it real. Nothing more. I am not a perma bull or perma bear. I am bullish when there is reason to be bullish, and bearish when there is reason to be bearish. period. I have stated multiple times why I am signifcantly less bearish now that process started and how this market has improved since early 2009. That is proof in itself. Your end of the world statements are meaningless to me.
You brought up a buy vs rent comment and used your own example that had two main flaws.
1. You put 50% down and then use your monthly payments as proof that you made the right decision and refuse to look at the opportunity cost of what that money would have been earning if it were not used for the purchase. That is a flaw.
2. You cherry pick timing to support your argument and look in hindsight how right you were. That is a flaw. If the purchase was 8 months later, you would have bought the asset likely at a 15%+ discount than pre-lehman trades, and if that money had exposure to equities at that time, would have been good for 30%+ returns even in safest large multinationals or mutual funds. You also assume that someone that chose to rent, had all their money fully invested in highly risky equities (sure possible, but also very unlikely) which would have lost value over the next 8+ months. Assuming they were fully invested, assuming they rode the wave all the way down to march lows, assuming they sold at lows, assuming they didnt catch 60% move back up..lots of assumptions there that I dont make for these types of buy vs rent discussions.
You can rant all you want, I really dont care. I would say the same thing for anybody. Do you really think most people put down 50% for their purchase? You did, great, good for you. Im happy you did, really. But more assumptions that are just not applicable to the real world. Most would put down 20% or 25%, and have a higher payment thereby skewing the buy vs rent formula right there.
And yes I see the tax benefits and understand, but also know that you are TAXED to OWN in the first place! Its nice to have deductions for interest and re tax, but the latter is a tax just for owning. What about closing costs?
I would ask you:
1. When did you sign the contract for the unit?
2. What are details? Size, renovated, light, view of the unit?
3. What did you pay for the asset?
If its a pre-lehman sale, chances are the asset took a hit and is worth less today than when you bought it.
Buying is very personal and clearly was the right move for YOU, but my argument is not with YOU or your willingness to put 50% down and get a lower monthly payment than a comparable rental. Its with the flaws that I see in your formula to come to that conclusion.
Posted by Noah
Mon Nov 9th, 2009 01:12 PM
John,
Here is a great example of what I did for my own analysis in late 2006
http://www.urbandigs.com/2006/11/my_buy_vs_rent.html
Clearly you can see that I took into account
1. opportunity cost of buying
2. transaction costs to buy vs sell (if your comparing to renting than you need to clear the transaction and the costs to do so - buying & selling is a costly thing, whereas renting doesn't have exposure to transaction fees like owning does)
3. how much money I spent to live in the place I own vs the rental - usually its much higher to own, and in my analysis you can see - Most people dont put down 50%, so you have to account for others, not just you.
4. Rental savings money I make in interest over the own period
5. Monies leftover after the sale to clear the transaction so I can look back and decide whether it was wise to RENT or OWN!
etc..
In my case, it made sense to rent and I publicly discussed the insecurity of my employment situation, transaction fees to both buy and sell, and my short timeline to own because I would grow out of the apt with a growing family!
Im just being consistent and doing the same analysis for your statement. Your saying, no ignore this and ignore that, and look how my monthly payment is less than a comparable rental. That to me is highly flawed thinking.
Posted by htyen1
Mon Nov 9th, 2009 02:16 PM
wow this is getting heated.
to johns credit i think the point of opportunity cost is very important. i understand its easy to use 4% as what you might of made on your money, that might be true for some people. but many people made less or even lost money, i think that is what john is trying to say.
if you put your money now in a safe high earning savings account you'll get approx 1.5%. If you look at the stock market its negative return for the last 10 years. i am sure someone will use the long term avg of stocks at 7% to 8%.
Here is a very simpl example:
$800k cost of apt (coop 2br 2bth appt)
no mortgage (100% down)
money sit in bank earning 1.5% if not use to buy property
Rent (comparable place)
- $3200/mo
- Interest earn (1.5% * 800k)/12 = 1,200 per month, now this is pre tax, tax is prob 50% so you are left with $600 per month
- (3200)+600 = (2600) - cost you $2600 per month
Buy
- maint $1200 per month
- no interest earn (all money use to by the place)
- (1200) = (1200) - cost $1200 per month
i understand there are closing cost (buying is less especially coop with no financing), just a simple calculation.
this means for this scenario you will be better off at the tune of $1400 per month.
of course this changes when interests rate earn changes.
Posted by Noah
Mon Nov 9th, 2009 02:44 PM
it didnt have to get heated. I understand this point completely, but its a hindsight phenomenon that is hard to quantify for a buy vs rent decision.
I mean, he bought 2 weeks before lehman, I interpret that as closed 2 weeks before lehman, and likely signed contract maybe 2 months earlier. If that is true, which I asked him to clarify, how much less is the asset worth today? Cant think that way, but to use his logic you would have to. A renter would not have taken a hit to equity.
What if a renter felt a strong need to put a good portion of assets into treasuries and gold? Then he would have done quite well. Again, cant do this. Figure a conservative estimate for opp cost, but stick it in there!
And yes, I totally agree, it will change as rates change. What if his timeline to own is 5 years, and in 2 years time you can get 4-5% on CD rates again? Who knows? You never know when rates might jump to a new higher level - a shock I discuss here quite often as an unintended consequence that is on the horizon years out.
just be consistent. Yes, coop closing costs are less of a hit on buy side and more of a hit on sell side. When you sell, you are looking at 5% or so commission to broker, transfer taxes, processing fees, move out fees, atty fees, etc..It can easily add up to 7-8% of the sales price. Lets say it was 1M sale, so you got 70-80K in closing costs to sell it - approximately. That could end up equaling 2 years of rent right there on sell side transaction costs alone.
buy vs rent is always a heated discussion. owners think they are right, renters think they are right and its a fight to the death. Nothing wrong with conversations here, even if it means a disagreement. All mean well!
Posted by John
Mon Nov 9th, 2009 02:46 PM
Noah,
You speak in general and I draw an example from my personal experience - I am sorry you took it the wrong way. As I already stated, there is no right or wrong decision on the buy vs. rent arguments: everybody takes a position that suits his/her individual needs.
I am just stating my point of view which is based on my decision to buy: I cannot speak for the market or for other people. I can speak about me only and what I was looking for was some honest arguments from other buyers or renters that have been faced with that decision. Obviously, it works better for you to rent and that is fine and it is understood. For me it is better to own.
The end of the world statement was not meant to you - it was to Fred and some other anon commenters, who used to say it a lot last year.
Rgds,
Posted by Fred
Mon Nov 9th, 2009 03:21 PM
John - Check streeteasy, went end avenue pre-war doormans are in the $800 psf range. you are in a brownstone co-op. why can't brownstones go to sub $500 psf? real estate is just like any other asset class, just slower and sometimes uglier because of the lingering pain when you lock into something that declines in value. as for the rental comp, the landlord apparently was smart but all i can tell you is that rents across the board are off 15%+. granted maybe that comp is so unique that it will get a premium but then again, to borrow from your logic, it's all theoretical. the fact is you don't have to rent it and you can make your debt service just fine so chances are you sit in your unit for 10 years and you don't lose money - that's a good thing. but to argue that waiting isn't going to pay off for those who want to buy right, is a very different argument. btw, assuming you've got $350,000 or so in equity tied up in your unit, your $600 per month is a 3% return on equity. if you want to double that because of your interest deduction, fine, make it a 6%. here's the rub, you can own corporates that yield better than a 6% and they are liquid and safer than real estate. when the market tanked in March, you could buy the same security at a 10% yield. if you had half a brain, you could buy any number of current yielding assets well into the 15%+ range. so for those who sit on investible cash and look at real estate as a luxury - versus a necessity - we got some great buys earlier this year. i can tell you exactly what our money has made post-Lehman and i can tell you exactly where we stand in relation to the Oct 2007 peak. folks who bought real estate into the peak, can't say the same. it sucks but that's the nature of real estate.
Noah - re: closing costs, i wonder what effect stripping out closing expense would do to the long run averages since in an up market they have a compounding effect. wouldn't they have the same effect in a down market but in the other direction? If I am a buyer in an up market, the fees are less of an mental obstacle but in a down market, they eat into a buyer's willingness to close.
Posted by SRealist
Mon Nov 9th, 2009 06:49 PM
Noah, Ana:
I guess I stirred up a (small) hornet's nest introducing the rent vs. buy topic. I wanted to generate rational commentary/thoughts on the subject. Seems like some of the comments got a little adversarial. Noah, thanks for (politely) listing the elements that factor into the economic analysis of rent vs. buy. It's instructive to see some of the less sophisticated analysis offered up. Ana, reinforces your point that the decision to buy is often based on non-quantifiable factors and lack of economic sophistication. Regards.
Posted by htyen1
Mon Nov 9th, 2009 09:43 PM
i think its very naive to think one can get 15% return on an annualized bases (without hindsight). sure some people can but most don't (if you can make annualize 15% return year in and year out you should be running a large hedge fund and should be very wealthy by now)
even warrne buffett only annualize around 22% a yr and this is warren buffett we are talking about.
also its naive to think one can time the markets perfectly. to say you could of bought X and made 5% or bought y and made 10% is a big simplistic.
at the end of the day the important question to ask yourself is "What can i get in return on a consistent, realistic basses" and that is what you should use for your opportunity cost. not i could of made X if i bought that.
here are the facts:
- most mutual funds dont beat the market (that doesn't mean you can't, some do)
- the stock market return on avg 7 to 8% per ya (this is average, average can be misleading)
- in the past decade the return has been negative for the stock market.
Remember i am talking about the general public, of course you can do better then the average, just that most people don't.
"What can i get in return on a consistent, realistic basses with preservation of capital"
Posted by Fred
Mon Nov 9th, 2009 10:25 PM
htyen1 - my reference was to earlier this year when many high yield debt instruments were yielding in excess of 10% and i wasn't talking what-ifs. in fact you could buy many bank preferreds at one point for much higher yields which have of course now come way down - but if you hold a bank preferred that was purchased in march or april for 5 years, you will in fact be getting pretty close to a 15% annualized. so to your point, yes you can time the market so to speak; lots of folks did it earlier this year. i never said 15% annualized over time buying whatever - my comment was on the quality of yield that was available earlier this year versus having your equity locked up in real estate. finally, i would not classify real estate as a sure fired approach to preservation of capital - ask any pension fund what they now think about the so-called uncorrelated alpha returns of real estate and alternatives.
Posted by jax33
Fri Nov 13th, 2009 10:27 AM
PREACH! Thank you hyten1 for making sense!!!