Archive

Archive for the ‘Supply and Demand’ Category

The Risks of Killer Negotiation

I’ve written before on this subject and this may or may not be my final word on the topic of negotiation (you never know what’s going to pop into my addled, old brain at any moment.) It covers the subject of why it may be in your own best interest not to approach a home negotiation with the tactics of your character in Mafia Wars.

What is KILLER NEGOTIATION?

In a nutshell it means putting the other party in a vice until they crack. Pushing them to do what you want not by vigorous “give and take haggling” to make the best deal you can, but by testing the limits at which they will “break” and bend to your will.

This can apply to either side – the buyer or the seller.  In a depreciating (buyer’s) market the seller will typically be the target and in an appreciating (seller’s) market it will most often be the buyer.  Not always – it is sometimes about the market and sometimes it’s just about exploiting the other party’s sense of desperation.

KEEP YOUR EYE ON THE GOAL.

I’m in no way urging that you should pay more or take less for a house than the market or your individual situation dictates.  This isn’t about the results of bargaining – it’s about the tactics. Remember what your objective is and why you put yourself into this position in the first place.  The goal is the same for each side: To make the best financial transaction you can in the best time frame with the least amount of risk.

The part of that statement that everyone always zooms in on is the first part – the price!  The goal, however has more than just that.  It’s about your optimum time frame and minimizing your risk.

RISK?? WHATCHOO TALKIN ABOUT?

I JUST WANT TO BUY (SELL) A HOUSE!

BUYER RISK

Unless you are paying cash for a house and are not selling another house, there are pieces of the transaction that you simply have no control over.

Most moves are part of a chain.  The number of links in the chain can vary. If you must complete the sale of your own home in order complete your purchase then you must rely on the success of your buyer.  If that buyer is also selling something then you must rely on the success of your buyer’s buyer.  And so on. The more links the more places something can go wrong.

The old adage about a chain only being as strong as its weakest link doesn’t have a better example than in a chain of home sales that rely on each other.

In addition, if you are acquiring a mortgage for your purchase there are a million things that can go wrong between the time you and the seller agree on transaction terms and the closing. The work flow of a mortgage is dependent on a number of laws that have specific intervals between critical dates as well as being dependent on the speed, work-ethic and efficiency of any number of employees and third party vendors that the bank may employ.

SELLER RISK

Unless you are selling your home with the idea of renting your next home, staying in a hotel while you travel for a while, or moving in with relatives and you do not need the net proceeds from the sale for living expenses, there are parts of the transaction that you have no control over.

The chain affects you as well – on both ends. In order to close successfully you are dependent on your buyer’s success and his buyer’s success. And so on.  In addition, if you are purchasing another home where  you plan to live, you cannot complete that transaction unless the people you are buying from close successfully – and they are dependent on the people they are buying from. And so on.

THE ULTIMATE DYSFUNCTIONAL FAMILY

Sellers, buyers, downstream buyers and upstream sellers are interdependent on each other for a successful move.   You start out as adversaries and then you all need each other to be successful. I’m not a mathematician so I can’t calculate the degree of risk but let’s just say that the more links in the chain the higher the odds that it will break somewhere along the line.

You cannot control anything that happens upstream or downstream.  You can’t even control much that happens with the two closest links, who are your buyer and your seller.  There is one thing that you can do to lessen some of the risk – at least at the closest point to you. You can control the level of goodwill between you and your buyer or seller.

SOME EXAMPLES

Work with your Realtor and come up with a price range that falls in within market value. Negotiate by making offers and counter offers. Try and learn what you can about the other parties sense of urgency and stick to numbers that you think will be accepted.  Wait them out if you have to.  Don’t go to a number that you don’t think is acceptable.  Go as many rounds as you have to, working with your Realtor’s guidance.

The key is to do it with respect.  (The following items are true – names changed to protect innocent).

  • Unless there is a valid reason – don’t tell your Realtor to inform the other party that if they don’t respond to a counter offer within a few hours, you are pulling out.
  • If you are the buyer and in your initial offer you ask for some item that was not in the listing – don’t press the issue if the seller replies that it’s an important item to them and they need to take it when they move.
  • If you are the seller and you settle on price around the time of a holiday weekend and the buyer can’t get an inspector to come out within 3 or 5 days as detailed in the offer – don’t inform him that his inspection contingency is gone
  • If you’ve gone through several rounds of offer/counter offer and you are now $800 apart on a $400,000 home, and the other party offers to move another $400 if you’ll do the same  – do it! Don’t come back and say you’ll do $350 if he’ll do $450

You certainly have the right to do any or all of the above.  As a Realtor, my job is to advise, but ultimately present any and all offers and demands my client makes.

The odds are, whatever side you are on, there is going to be SOMETHING you’ll need from the other party after the negotiation before the closing (These are all true)

  • A buyer is going to ask the seller to extend the mortgage commitment date in the contract by a week
  • A seller is going to ask a buyer if they can rent the house back after closing for 48 hour
  • Either side might need an extra day to execute the sales contract because their attorney was sick

There are a dozen other examples but you get the idea.  The bottom line is that if you put the other party in a box and squeeze the life out of him at the beginning of a transaction – I can assure you that he will remember.

As with most of things I write or talk to clients about – the operative phrase is “Accurate Expectations”.

The funny part of it is, very few strong arm tactics actually change the outcome of your transaction.  It’s almost never about the original goal (see above). It’s about winning.  As I’ve said before a truly successful negotiation doesn’t have to have a winner and a loser.

How Much Should Rising Interest Rates Influence Home Buyers?

Some of the most common questions that get asked of most Realtors are

  • Will Housing Prices continue to go down?
  • Will the appraised value of my house continue to fall?
  • Are interest rates going to stay low?

Fact is, none of us know if appraised values of houses will continue to fall or if interest rates will go up or if the market has bottomed out.

In today’s NY Times, Nelson Schwartz (no relation) did a column entitled  “Consumers in U.S. Face the End of an Era of Cheap Credit. He talks about how we as American have spent the last 30 years or so watching interest rates basically trend downward. While there certainly have been fluctuations, let’s face it, rates, in all areas of credit have significantly lower than they were in the 1970s

I can remember buying my first home in 1979.  We had a variable rate mortgage that started out at 10.5% and had the potential to go up as much as a point per year.  The lender magnanimously capped the loan so that it would never exceed 17%.   We sold that house a few years later – the rate had climbed to around 13%.

This was the norm and we didn’t really think of it as a bad thing – it was just the way it was.

Today – we’re in a huge crisis, part of which is based on the fact that some variable loans have climbed from 5%  ALL THE WAY UP to 9% or so.

Needless to say, our attitudes about interest rates have changed. Mr. Schwartz indicates that many economists are saying these days are over.   Rates have “nowhere to go but up.”

For the last 3 years mortgage rates have gone up and down between the low 5% and the mid 4% range.   At the same time home buyers have been hesitating to buy homes because they are waiting for home prices to “bottom out”.

As of right now, in most markets, home prices are still dropping a bit, so this “wait and see ” attitude is still prevalent among potential buyers.   As a Realtor, I have a number of clients who have been looking at homes with me for more than a year – or more than two years.

Here’s the thing – if you “do the math”  rising interest rates might offset any continued drop in prices.  Here’s an example.

If you were to buy a home today for $250,000 and put $25,000 down you’d be borrowing $225,000. If that loan is for 30 years at current rates of around 5% your principal an interest payments will be $1207 per month.

If you hesitate on your purchase and wait 9 months, the house might indeed go down in price.  Let’s say it drops another 5% and the you can buy the house for $237,500.   If you put the same $25,000  down, your loan would be for $212,500.   If rates go up by just 1 point – to around 6%, your monthly principal and interest will be $1308.

So – in the end, you be buying at a lower price, but paying $100 more per month – and that additional amount is not adding to your equity – it’s all in interest.

Add to that the fact that if you wait and you also have a house to sell, your home will also likely drop another 5% in price.

So – in the end, you will not only not save money by waiting – you’ll actually be paying more – maybe considerably more.

Now – no one really knows what’s going to happen.  Prices could stabilize and interest rates could drop.  It’s all about educating your self on the market conditions and making the best decision you can.

Rick Schwartz,   REALTOR

Homes for sale in Danbury, Bethel, Brookfield, Newtown, New Fairfield, New Milford, Ridgefield and Redding CT.

Should you make a verbal offer when buying a house?

January 18, 2010 Leave a comment

This, as most of my posts, originates from conversations with real clients.  This one comes up with some degree of regularity.

We’re going to start with my favorite, fictitious, $100,000 house.

You’ve been looking for a while and have settled on this house is your first choice – or it would be your first choice except that you can’t or won’t pay the asking price – or anywhere near it.

You and your significant other have decided that you would love to purchase this house IF you can buy it for $80,000.

So you talk to your Realtor and he says “OK, let’s make the offer.”

You reply  –“Well, we were thinking that  since it’s pretty low, perhaps you could just do a verbal offer – you know, just ask if the seller would be willing to sell for that amount before we go through all the trouble of doing paperwork, etc.”

My advice to clients at this point is simply that if you want to make an offer, we should do it formally in writing since a verbal offer isn’t really an offer.

A verbal offer is not an offer – it’s an inquiry.

A written offer is a statement: Mr Seller, I would like to buy your house. Here’s what I’m willing to pay. Here’s my signature. I’ve given my Realtor a good faith deposit, which he is holding.

A verbal offer is a question:  Mr Seller, would you be willing to accept an offer for this price?

A written offer tells the seller that you actually want to buy the house.  A verbal inquiry tells the seller that you might consider buying the house. Which do you think holds more weight?

When you proffer an inquiry, you are putting the seller in the following position. By saying yes, he knows that you might then come back and offer an even lower price, in order to test his “bottom line”.  So while it is possible that he’d be wiling to take the $80,000 offer, he has no reason whatsoever to let you know that when you haven’t made any commitment.

Making a commitment gets you a better price

Suppose you were having a yard sale. One item is an armchair which is in good shape but it has torn upholstery.  You put a price tag on it for $30.

Harry comes up to you at the sale and says “Would you take $25?” I just have to drive home and get my check book.  I’ll be back in 30 minutes.

Joe comes up and says “I’ll give you $20”.  He pulls out a 10 and two fives.

Who are you going go sell to?

You know darn well than Harry hasn’t really made a commitment.  If he does come back at all, he’d be foolish not to try an even lower price, like $15 or $20.  He already knows you’ll take $25, so why wouldn’t he want to try for an even better deal?

Pretty simple when you think about it.

MORAL: If you want to make an offer – make an offer.

A Real Estate Carol: Ghosts of Prices Past, Present and Yet May Be!

January 1, 2010 1 comment

THE FOLLOWING IS BASICALLY TRUE, EXCEPT FOR THE PART THAT DIDN’T HAPPEN YET

THE NAMES HAVE BEEN CHANGED

THE NUMBERS ARE ALL ACCURATE

REALITY

John and Mary decided in the fall of 2006 to move.  The house they were in was old, and had too many steps for John’s aging knees.  They did some fixin’ up and put the place on the market in early 2007.

One of their neighbors who had a similar house two doors down had sold in the summer of 2006 and received $430K.

Their Realtor told them that prices had dropped a little in their market and they should list it at $425 and be prepared to come down a bit.  Mary and John were concerned by this.  They felt that their house was at least as nice as the neighbor’s and that they did not think they should take “a loss”.

The Realtor, who knew that they had bought the house about 10 years earlier for $325, didn’t seem to agree that if they sold for $420 it should be counted as a loss.  In fact, she said, if you sold for $420, you’d be making a considerable profit.

Mary said “But if we had sold last summer we would have gotten more!”

The Realtor said “But you didn’t sell last summer?”

Mary: “Well, should we wait until prices come back up?”

Realtor: “I can only answer that if you can tell me when they will go up?”

Mary and John:  “HMMMmmmmmm

So Mary and John listed the house for $425 and in about 45 days sold it for $415.

They bought a new house in a different town about 20 miles away.  It was actually a bigger place but because it was a little farther out from the big city, the market was priced lower.  They bought it for $375.

With only a very small mortgage left on their original house, they were able to put $300 down on the new house and mortgage $75

As we move into 2010, home prices have NOT rebounded, in fact, they’ve continued to drop.  The home they bought in 2007 is now valued at $300 based on recent sales in their new neighborhood.

———–

ALTERNATE REALITY

Mary said “But if we had sold last summer we would have gotten more!”

The Realtor said “But you didn’t sell last summer?”

Mary: “Well, should we wait until prices come back up?”

Realtor: “I can only answer that if you can tell me when they will go up?”

Mary and John: “HMMMmmmmmm”

So Mary and John held on to their house, waiting until the market came back.  As of the beginning of 2010 it had not, in fact, prices continued to drop.

In January of 2010 John had had it with the stairs.  He told Mary they needed to sell now – even if they had to give the place away.

So they called their Realtor who, after doing a Market Analysis, told them that their home should bring between $330 and $340.

They listed it at $349 and after 45 days sold it for $340

After looking around they found a new home in another town (the same home in the first part of the story).  They purchased it for $305.

Since they had a very small mortgage on the house they sold, they were able to put $235 down and had a mortgage of $70.

——————————

So – if you put aside unimportant things like sale price and market value – at the end of the day,  in both scenarios John and Mary leveraged the equity in their home to buy another home that they liked better – and they ended up with virtually the same situation – with one exception. In the second scenario, they stayed in the house they didn’t like for three additional years.

WHAT IF…….

The whole thing was just starting now.

  • What if you have a home that no longer fits your needs?
  • What if you decide not to sell it because you are waiting for prices to come back up?
  • What if prices don’t rise, and you stay where you are for years?
  • What if, after that time, you make a move and end up with essentially the same financial situation?

Of course, as in any good space-time continuum story, the future is unwritten. Just ask good old Ebeneezer and he’ll tell you  The Ghost of What Will Be, is actually The Ghost of What MAY Be. Prices could go up or down dramatically in the next three years.

The point, I guess, of my little fable is that if prices go up or down on the house you want to sell, they will likely go up or down proportionately on the house you want to buy – so if you want to make a move, what is it you gain by waiting?

Just some food for thought.

God Bless Us Everyone!

Realtor Expectations – Part Two: THE BUYER’S AGENT

Again, this article is built on the premise that the number of Realtors to choose from is staggering.  Most people have one or more acquaintances that are “in the business” – or they know someone who has a sibling, spouse or parent who sells Real Estate.  It’s great to know the Realtor’s name, but what else does your friend or relative know about them?  A name and a business card don’t tell you all that you need to know.

No matter how you come across the name of a Realtor, you owe it to yourself to do your due diligence and learn about their business practices before choosing one.  Here are some of the things that you should expect from a Realtor when they are acting as your Buyer’s agent.

A Buyer’s agent is a Realtor who you choose to represent you in your search for a new home.  In most states you will likely have to sign an agreement with that agent in order for him to represent you.   This is known as “Buyer Agency”.  While it is an overstatement to say that you’ll be “stuck” with the agent once your engage them (there are always ways to get out of most agreements), remember that you are making a commitment to work with that Realtor throughout the entire process of your home search – so choose carefully.

So – what are the things that a Buyer’s agent should be doing to make your search and transaction a great experience?

BUYER COUNSELING:   Your first meeting with your Realtor should include more than just looking at houses. This first meeting, must include you getting a clear understanding of the entire home buying process and your Realtor should be learning as much as he can about your specific needs and plans.

SEARCHING FOR LISTINGS:  There are dozens, maybe hundreds of sources to search for listings. Every day these resources are becoming more and more elegant ant sophisticated.  On my own website I offer three separate options.  The fact that there are so many resources available can make it difficult to decide which one to use.  After getting to know you, your Realtor should be able to recommend certain avenues for listing searches that will fit your needs and your style.

  • Search on your own: Some home shoppers prefer to spend a great deal of time on the internet and seek out matching listings themselves.  I have one client who has logged into a particular search site 2015 times since I set up his account last fall.  He communicates with me about things that pique his interest and I dig for further data to help him make a decision about whether to look at the home.
  • Realtor searches for you:  Some home shoppers don’t even own computers – or they have neither the time nor the inclination to use their computer to search for home. If this is you, then you need a Realtor who will spend time and get a very clear profile of what you want, pull listings and provide you with the details in whatever format you want.

Most folks fall somewhere in between those two extremes.  Make sure that you choose a Realtor who is comfortable and competent working the way you want to work.

QUALIFYING LISTINGS:  This is the next step after you have found prospective homes that fall within your stated search parameters. The information in a Real Estate listing can only tell you so much.

One example:

A listing, for example might say “Great access to highway”.

That might be a  plus to some buyers but it might not matter to you – however – you might be very concerned with the noise level in the neighborhood.  If noise is a very important factor for you then you probably want to know if having great highway access also means that you are going to hear traffic noise.  It might not – but you aren’t going to find out from the listing. So, your agent can research it for you.  Perhaps he knows the street already and can tell you off the bat – or perhaps he needs to call the other Realtor or take a drive by the house and check it out.

There are lots of other examples. The point here is that simply finding the listing may or may not tell you about all the things that are crucial to you.  Once your Realtor knows your likes and dislikes he can dig deeper and give you the additional information before you waste your time looking at places that aren’t going to work for you.

NEGOTIATING: I covered a lot about this in a previous post – the key here is to make sure that you are in sync with the Realtor – there should be no surprises.

Once you find a house, the Realtor should pull “comps” and go over them with you so you can have an idea if the listing price is somewhat in range of market value or if it is overpriced.

Well before you reach this point, your Realtor should sit with you and map out various scenarios and explain the options.  A few examples:

  • What if a house is significantly overpriced?  Do you make a single bid that is at market value and stand with it, or are you going to make an offer well below, which may be perceived as a “lowball” by the seller?
  • What if your opening bid is very reasonable and the seller refuses to make a counter offer?  Are you going to make a second offer?
  • What if you go through several rounds of bidding then find that you and the seller are deadlocked a few thousand dollars apart?

It isn’t necessary that you make firm decisions on these and other scenarios in advance – but your Realtor should have laid the possibilities out for you early in the game so you can consider your options. In the heat of a negotiation you should be executing your well thought out strategy – not developing one.

POST SALE: Once you make a successful bid on a house, you will be dealing with lots of other people:  Home Inspector, Septic Inspector, Attorney, Loan Originator, and Loan Processor – to name some of them.  Your Realtor’s “official” role is ending.  Having said that, however he can and should assume the role of “expeditor”, staying in touch with everyone and keeping track of who is where in the process so that you have an advocate should there be an unexpected wrinkle.

SUMMARY: Generally speaking, you should choose someone you feel comfortable with but that comfort should come from you knowing that your Realtor has a plan to work with you from beginning to end at your pace; following your style and helping you make the most of your home shopping experience.

Waiting for the bottom?

May 2, 2009 1 comment

A lot of people shopping for houses today are moving very cautiously towards making a purchase as they keep their eye on the depreciating prices of houses.  Everyone wants to buy at the “bottom” of the market – which is a natural feeling – who wants to buy something today and have it be worth less in 6 months.

One of the challenge with this is that we are not going to know when the bottom hits until we can look back and point at it in our rear-view mirrors.  Once prices start to rise at some point, we will know, for sure, when the bottom was. Until then, we’re all just guessing – and gambling.

The second thing to consider is really a math exercise.  If, for example, there is a home that you like that you can currently buy for, let’s say,  $250,000.  If you wait 3 more months, the price might drop to, let’s say $230,000 giving you a “savings” of $20,000.

Let’s look closer at that $20,000. You have to consider what it is costing you NOT to buy for another 3 months.  If you are a first time buyer and you are currently renting, that means that you’ll be paying rent for 3 more months and not enjoying a tax deduction on the interest you’ll be paying in your new mortgage. The earlier in the year you make a purchase, the bigger your deduction will be on April 15, 2010.

If you currently own a home, compare your current interest rate to what you would be paying if you made a move sooner than later.  If you’re current rate is, let’s say,  7% and you can get a mortgage on your new home for 5%, how much will you be saving on your monthly payment.

Everyone’s situation is going to be a unique but you should take the time and do the math to figure out how much it will cost you to wait for “the bottom.”  You might be surprised.

How to Hire a Remodeling Contractor

Don’t forget when you are hiring a contractor that the very word “Contract” is in his title.  You should not hire anyone to remodel your home – whether it’s a big or small job – with having some form of written agreement.  Unless, of course, you are hiring your brother or sister to do the work and I’m sure there are those of you who would attest that a written agreement might be even more important in that case.  🙂

The National Association of the Remodeling industry has some tips which you can read at www.nari.org

The gist of it is that the more you spell out, the less chance there is for misunderstanding or disappointment later on. Some of the more vital points, in my opinion are that you should get the contractor’s full name, contact info, license and some evidence of his being insured.  In addition spell out as specifically as possible what the job will entail, what materials will be purchased, the approximate start and completion dates as well as the financial terms – including how much is expected up front and what, if any, intermediary payments will be due.

As is true with most people in most industries, the vast majority are honest, hard working and will put forth every effort to provide you with top quality service. I think you’ll find that most post-completion unhappiness on either side could have been avoided by clear communication at the outset.