ODDS AND PERCENTAGES

So there we sat, five o’clock in the afternoon, 11 offers spread out before us.

Two were cash, six others with 20% or more down, three were bringing in 10% or less.  The top offer (with escalators) was $21,000 over list price.  Both of our 5% down offers were more than $15,000 over list, but neither removed their appraisal clause, so we felt tethered by what the appraisal might come back at.

“Where do we start?”, said my seller, a bit overwhelmed by the 40+ showings her sub-$300k home had received over a long weekend.  “Who gives us the best chance to get this home sold for top dollar?”

And therein lies the question that is the reason low down payment buyers (or anyone with limited means) are up against such a wall in the Denver market today.

When I work with sellers, I have two primary objectives:  get my seller the most money possible, ethically, and mitigate risk.  Very often, cash wins that debate.

“The cash buyer isn’t quite as high as our top financed offers,” I said.  “But the benefit here is that there is no appraisal, and I don’t think there’s any way your home can appraise $21,000 over where we listed it.  We could take a financed offer for a million dollars, if we had one, but if the buyer doesn’t have resources beyond their down payment, the appraisal is going to determine how high that buyer can actually go.”

There were other considerations on the table.  Personally written notes, lender letters, bank statements.  Because I have been on the other side of this madness so many times, I wanted to make sure each offer was given fair consideration.

But, fact is, when you have 11 offers, there is an overwhelm factor.  And dealing with the potential of a low appraisal is just another piece of overwhelm which most sellers just aren’t interested in, if they can avoid it.

“This cash buyer wrote a personal note,” I said, “and I think it’s legit.  She wants to be closer to her grandkids, who live in the area.  She knows this street and this neighborhood.  It makes me feel like she knows what she’s getting into.”

The home itself was a beautiful little brick ranch, built in the 1940s, on an oversized lot with large trees, plenty of lawn and gardens of flowering perennials that blossom all spring and summer.  It was small, only two bedrooms, and that was my only concern about its marketability.  But location trumped utility, and buyers were swinging hard for the opportunity to own it.

“At least seven of these offers are really good offers,” I said.  “Large down payments, experienced agents, reputable lenders.  I don’t think we’re going to go wrong no matter which way we go.”

“Do you think there’s a chance it could appraise for the top number?” my seller asked, again.

“Highly unlikely,” I replied.  “When we comp’d it out, we landed close to our original list price.  The difference between where we listed it and where we are is driven by the emotion and frenzy that exists in the market today.  Appraisers don’t often award value for emotion and frenzy.”

Truth is, all eleven of these offers might have worked, and four years ago, even the bottom offer would have been strong enough to work with.  But this isn’t four years ago.

“It’s your call,” I told my seller.  “My job is to make sure you have all the data, offer advice when asked, and do everything in my power to get us to closing in one piece.  Which one do you like?”

After some discussion, my seller wanted to go with one of the cash buyers.

“It feels like it would be easier,” she said.  “And this process has already been stressful enough.”

We looked at our cash buyers and decided which one was stronger.  Not just on qualification, but on motivation.  We went with the buyer who had grandkids around the corner.

“She’s tethered to the neighborhood and this makes a lot of sense for her,” my seller said.  “Plus it matters to me who lives in the house.  We’ve worked really hard to take care of it and I’d love to see someone out in the yard, enjoying her grandkids.”

We then talked about what it would take to get the deal done. 

This buyer had included an escalator clause in her offer, which would have driven her offer up to beat our highest offer by $1,000.  Because of the bidding war, that number was now a really big number for the neighborhood.  And it was likely well over what an appraiser would say the home is worth, even though the cash buyer had waived her appraisal clause.

“Whenever possible, I like to keep some goodwill in the deal,” I said.  “A lot of buyers are feeling flat out abused in this market, and I understand that.  When you have to outbid 10 other buyers, you start to question if you have really ‘won’ anything at all.”

I do believe goodwill matters in a transaction, and wherever possible, I want it be a win-win for both sides.  Too many buyers come out of this negotiation process feeling like they have been mugged, which often results in very nasty inspection negotiations as they try to get some of their money back.  That’s why a higher number of contracts than ever are falling out during the inspection process.

“It’s your call to make,” I said to my seller, “but I’d like to figure a way to make her feel good about this.  Whether it’s throwing in some patio furniture, offering to have the windows washed and the home deep cleaned, or shaving a little money off the top offer price, I think it’s important that we make her feel like she won.  What do you think about that?”

After some discussion, my seller and I came up with a plan.  And we presented that plan, along with our decision, to the buyer’s agent.  Within hours, a revised contract was signed and we were under contract.

For ten other agents, the news was not so good.  Many of them had very well-qualified buyers.  Most had given up some or all of their weekend, working with buyers in a sellers’ market.  All had put hours of labor and significant emotional energy into trying to put yet another deal together, only to lose out again.

I am no fan of this market and the way it is working.  I wrote over 50 “failed” contracts of my own last year, often letting portions of the earnest money go hard upon acceptance, waiving appraisal contingencies or agreeing to take homes “as is”.  Doing whatever it takes to get strong consideration.

Sometimes these strategies have worked.  Sometimes they haven’t.  All you can do is compete. 

I believe everything in real estate (and life) comes down to odds and percentages.  There are no absolutes.  There are things you can do that increase the chances of writing a successful offer, having a good relationship with your kids or living to be 100 years old.  You strive to find strategies and activities that move the odds in your favor, but there are no guarantees.

For buyers today, this market is very hard to navigate.  For financed buyers, it’s even worse.  Emotional exhaustion is all around, and working with cash buyers feels easy for sellers overwhelmed with showings and offers. 

It may not be fair, but that’s how it is.  In the hierarchy of offers, it’s very hard to be easier than cash.

WHEN GREED RUNS A MARKET

In April, I got a call from a past client.

“I was working in my yard,” he said, “and the neighbor behind us said he was thinking about selling his house.  I told him he should talk to you.”

At the time, I had a buyer client with serious interest in this same neighborhood and so I took the initiative, first writing a letter introducing myself and then following up by dropping a comprehensive marketing package on his front porch a few days later. 

“I may have a buyer with serious interest in your home,” I wrote.  “But whether it’s the right fit for my client or not, I would be happy to sit down and help you assess your options.”

That weekend, I ended up getting together with this prospective seller, and we spent nearly two hours talking through the market, the process of preparing a home for sale, and how his home matched up with others in the neighborhood. 

“I have a lot of stuff and don’t really want to go through all the work of getting my home ready for market,” he said.  “I would be interested in selling to your buyer if the terms were right, and if he would give me time to get moved out after closing.”

We talked about a potential sales price of $290k - $293k, which was an honest interpretation of market value.  In fact, it was a generous interpretation of market value, because in my preparations for the meeting, I had discovered that the seller took out a new loan for $218,400 just four months earlier. 

Using basic math skills, I reverse-engineered that number and determined that his home had likely appraised for $273k at the time, since $218,400 is 80% of that number.  I asked him if that was the case, and he confirmed for me that the home had appraised for $273,000.

“So if I could get you $20,000 more than your home appraised for four months ago, you would consider that fair?”, I asked.  He nodded and said yes.

Every piece of real estate is different, and there is always a subjective component to value.  Truth is, this was a very middle of the road house in terms of condition.  While it had good square footage, the shag carpet was from the 80s, the paint was from the 90s the last time it was deep cleaned was around the turn of the century. 

The seller was a bachelor, which was part of the reason he was ready to downsize into something that required less maintenance. 

I brought my clients through to see it a few days later, and while they liked the location and the square footage, they also saw it needed updating. 

“We would have to spend $20k just to get the kitchen updated,” they said.  “It’s a nice house, but we just can’t pay $290k for it.”

With that, the negotiations broke down, and my buyers went back to pounding the pavement and the seller pulled back to assess his options.

Not long ago, that home finally showed up on the market with another agent… listed at $310,000.  That’s 13% over an appraisal which is less than six months old.  That’s 6% over my ceiling for the home from 30 days ago.  In short, it’s not a supportable price.  No appraiser will be able to get there, and anyone who offers that much is simply not doing their homework.

Stories like this are a bit demoralizing, not only because I worked hard to try and fairly piece a deal together, but because I hate it when greed becomes the focal point in pricing a home.    

His home isn’t worth $310,000, and the agent who listed it knows it. 

Yet I see more and more of this all the time, homes priced at numbers that are just not realistic.  Yes, if you have a spectacular home in a great neighborhood in impeccable condition, you can break through the neighborhood’s value ceiling and get a shelf-topping offer. 

But when people offer ordinary homes at top shelf prices, eventually buyers figure it out.  And they vote with their feet as they walk right back out the front door and mentally erase your home from their mind.

When this market slows down – and it will slow down – it won’t be because we ran out of buyers or because the economy turned.  It will be because sellers (and agents) let greed get the best of them.