Del Mar Renter asked,
I’m a little confused about your comment in the other related posting on this topic:
“REOs will sell for retail”.
What does that mean? Isn’t the whole point that we don’t know what “retail” really is? Maybe I’m missing something.
The reason I say that is because banks and servicers use the retail method for price discovery.
The asset managers vacate the properties, and spend some money to get them in selling condition. They compare the appraisal(s) to the listing agent’s BPO and come up with an attractive list price. Then they make sure the property has been on the MLS for 5-7 days to ensure that potential buyers had ample time to see the property.
If there is an offer, they counter to see if the buyers will come up. If there are multiple offers, they request that all submit their highest and best offer, and hopefully they’ll pick one.
Occasionally they won’t, and instead try to work one of the buyer up even higher. This just happened yesterday on the Harvard property, where two cash offers submitted their H&B and both were just over list price. The asset manager countered again for an extra $2,000, one of the buyers agreed, and then the AM made them cough up an extra $200!
How do we know that this is retail?
When every buyer has a fair chance to participate, the retail value is defined by the price that a ready, willing, and able buyer is willing to pay.
The process enables the maximum participation, and thus, ensures top dollar.
The best chance for any homeowner to get top dollar is early on in the listing, when the urgency is highest. Almost all elective sellers IGNORE this advice, and insist on pricing high, and then chase the market down later.
How do I know that a seller won’t get lucky, later? It is possible, but highly unlikely in a soft market. It is much more likely that their high price will cause lower-priced homes to sell, creating a downward trend. Lucky sales happen more in an rising market – so if you selling and want to hold out 2-4 months, ask yourself, “are we in a rising market?”
How do I know this is the best way to achieve top dollar?
Anyone who is in this market full time will realize within weeks that buyers are well-educated on values (usually better than the realtors), and the motivated (read: frustrated) buyers are scanning the new inventory every hour, hoping to find the perfect house and buy it before anyone else beats them to the punch.
It should be common sense that urgency matters, and sellers should take advantage of it, like the banks do. But it isn’t that obvious, especially to realtors who are happy to take listings priced way too high (saw one last week that listed for $1,000,000 higher than my recommendation!) and hope they get lucky or can work the sellers down on price later.
It’s funny how people react to trends in a market. Buyers love to chase prices up in a rising market, sellers love to chase prices down in a falling market. People always think prices will eventually will reverse in their favor and prices generally do reverse in their favor but even when they do they fail to act on it.
Price is determined at the margin so it just takes one motivated buyer and one motivated seller to agree on a price and establish the next benchmark.
And that’s why I read this blog. Thanks Jim!
“How do we know that this is retail?
When every buyer has a fair chance to participate, the retail value is defined by the price that a ready, willing, and able buyer is willing to pay.”
JTR – I think the most important part of a purchase is understanding the motivation of the Seller as that is exponentially more important than ‘the market’.
If you have a strong owner who doesn’t need to sell then you will never get a deal, regardless of ‘market value’.
Finding a weak, distressed seller is where you need to put 90% of your efforts and exploit that situation.
I believe that everyone thought that the bank meltdown would run similar to the last crisis when the RTC came in and acted like a distressed seller/liquidator. Thus the discounted deals.
Today, with government backing, cheap capital, etc banks are NOT DISTRESSED SELLERS like everyone perceives them to be.
Right or wrong, this is the fact on the street.
Moral of the story, if you want a significant deal, only look for truly distressed sellers who are able to make a deal.
@clearfund
“Moral of the story, if you want a significant deal, only look for truly distressed sellers who are able to make a deal”
What do you define as a truly distressed seller?
Life events as simple, and unfortunate, as Divorce, Death, Disease, Downsize, Relocation.
Likely on the market for 90-120 days, just did their 3rd price reduction. Trick is to catch them after they’ve been beaten down and are prepared to capitulate and accept that the market has won, and their original expectations were off base.
Lots of luck, and the right place right time. Otherwise, just pay retail and enjoy the home.
@clearfund
Thanks for the response. Unfortunately, any home in the Carlsbad area that has been on the market for that long (90 – 120 days) usually means that it is radioactive.
I also had dreams of getting an REO at a bargain basement price, but then the gov’t stepped in and screwed up the natural economic cycle in housing.
Then I did what clearfund is suggesting…I found a downsizing relocating distressed seller who was tired of having their house on the market. We bought at an late 2001/early 2002 price.
@Jeeman
how did you find this particular distressed seller? Luck? Research? I just want to get my first house at a reasonable price, but there are considerable forces working against me.