Ready for a cheap escape

Anguish… mass confusion

Panic Song — Green Day

Link to Music Video

When I am preparing posts, I scan Redfin for properties. When I first started doing this in the spring, rollbacks were hard to find, and most sellers were still trying to make a profit or at least cover their commissions on a sale. As spring gave way to summer, I began finding more and more rollbacks, and foreclosures and short sales were becoming more common. As the summer progressed, I began finding more REOs and deeper rollbacks. It was a relatively quick (for a real estate market) transition from a bull market to a bear market. However, recently I have noticed a more significant change.

In August when the credit market seized up, sales — which were already low — almost completely stopped. This credit event and the problems it has created has been widely covered by the mainstream media which has brought it to full public awareness. Over the last few weeks, I have really noticed a change in the market I was not expecting until the winter: fear is gripping the market.

In the post Houses Should Not Be a Commodity I described the stages of a bubble market in great detail. IMO, the developments in the credit market have prematurely jolted the consciousness of the market from denial into fear. A change in market consciousness is a gradual transition as each of the markets participants has a different psychological makeup, but the behavior of many homeowners in the market is evidence that this transition has begun.

Back in mid-July, before the big credit market meltdown in early August, I profiled a series of properties in Oak Creek. There were a few rollbacks, but there wasn’t that much inventory, and no real signs of fear or panic. In the last few weeks, there have been several listings of condos and entry-level housing appearing on the market.

Notice the density of green house symbols in certain neighborhoods. In particular the northernmost neighborhood has shown a dramatic increase in the number of listings, and many of these are rollbacks. This is fear in action.

Another neighborhood showing increased listings and more racing to find the bottom is Northwood II.

Like all the new neighborhoods in Irvine, this one is populated by specuvestors who are starting to realize they made a terrible mistake. The homes priced in the $750K to $950K range, so these are not the small condos we are seeing struggle everywhere else. This is the first sign of fear spreading from the low-end of the market to the move-up SFD market.

Another neighborhood showing and increase in listings and a decrease in pricing is Northpark.

In particular, the neighbhorhoods adjacent to the 261 are showing fear transitioning to panic. There have been a large number of foreclosures there, and new listings are popping up to try to get out before the tsunami of REOs washes away whatever equity these owners have left.

Of course, we have our neighborhoods where fear and panic have already set in…

Westpark condos above and Orangetree below…

Quail hill (not shown) is also showing distress. I invite you to go to Redfin and check out the market for yourself.

Fear in the market is not something that can be quantified; however, evidence of fear can be inferred from the behavior of market participants. An increase in listings and lower asking prices is fearful behavior. When the race to the bottom becomes more feverish and sellers start aggressively lowering prices to get out of the market, you will know fear has taken hold and capitulation is right around the corner.

One of the most poignant songs about the frustration and disappointment of unrequited love is Bonnie Raitt’s “I Can’t Make You Love Me.” With a little retooling of the lyrics, it could be equally expressive of the frustration and disappointment of failing to sell a home.

Bonnie Raitt on Video

Bring down the price, bring down the rent

Just help me close, please qualify — please qualify for me

Cause I can’t make you buy me if you don’t

I’ll go way down on price, I’ll re-tile the shower

but you won’t, no you won’t

Cause I can’t make you buy me if you don’t

I’ll close my eyes, then I won’t see

And I will give up this fight

Cause I can’t make you buy me if you don’t

Cause I can’t make you buy me if you don’t

I Can’t Make You Buy Me — IrvineRenter

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When the market turned up in the late 1990’s the balance of power in the market shifted. During the last decline, the buyers had an advantage. During the bubble the advantage went to the sellers. The seller’s market went on for so long and became so feverish that people have forgotten (or may never have known) what it was like to see buyers in control of the action. The purpose of this post is to re-educate buyers on how to behave in a buyer’s market.

Buyers have the Power

As a buyer, you must remember you are the one in control. You are the scarce commodity in the marketplace. The seller is one of many for you to chose from, and they are all desperate. They need you. You don’t need them. No matter who you buy from, you are going to leave all the other sellers disappointed because they are going to continue to be trapped in their homedebtor’s prison. You can’t please everyone, so focus on pleasing yourself.

Screw the Sellers

Don’t become concerned with the sellers needs, wants and problems. Does it matter to you if this house is their entire savings for retirement? Do you care if a sale below a certain price puts the seller into bankruptcy? If these issues matter to you, ask yourself this, “Would you give them money if you were not buying their home?” Unless you are running a charity, you should not care about the consequences of someone else’s financial decisions. They created their own problems, it is not your responsibility to solve it by overpaying for a house.

Pay the Lowest Possible Price

This may sound like common sense, but the behavior of knife catchers over the last couple of years shows otherwise. Don’t ask for or take any incentives, and pay your own closing costs. You are paying for this stuff, it is just buried in your loan. You will be paying interest on this purchase for the next 30 years, and you will be paying a 1% property tax on these costs for as long as you own the house. You are far, far better off lowering the price and foregoing the incentives and paying your own closing costs.

Use a Buyer’s Brokerage Like Redfin

Redfin and other buyers brokerage typically kick back 2% to you at closing. Work out a deal with them in advance where they will agree to take a 1% commission at the closing so you can lower the price by 2%. Again, you are paying taxes on the purchase price, so you want to make this as low as possible.

Your First Offer is Your Best Offer

This is the most counter-intuitive part of buying in a buyers market. Ordinarily sellers, or more accurately the seller’s realtor, try to create a sense of urgency to buy the house. They want you to think other people are looking, there is going to be a bidding war, you need to get your offer in today, etc. Remember, in a buyer’s market these ploys are all lies. You are the only buyer, and you can take as long as you want to buy the house. Your task in negotiating is to create a sense of urgency and panic in the seller. This is why you make your first offer your best offer.

Start with a bid at least 10% below asking price; however, it can be less if the most you are willing to pay is less. Lower your bid as follows:

• If you are actively bidding on the property, make your offers expire in 5 days. If you are still interested in the property resubmit a fractionally-lower offer after 7 days (make them sweat for 2 days.) Don’t make is so much lower as to lose consideration, but make it enough lower that the seller gets the message that they need to come to your price before it gets any lower.
• If the seller makes a counter offer, retract your offer and resubmit a lower one. Works the same as the time decay offer above. After you have lowered your offer a few times, the seller may panic and take your offer before it goes any lower. This is what you are after.
• Lower your offer $500 each time you speak with the seller’s realtor. Every time they communicate with you, they will pressure you to buy. Lower your bid each time they speak with you to send a message that their pressure is not working, and it is, in fact, hurting their client.
• Lower your offer $2,000 if the realtor uses one of the standard lies I mentioned above.
• If the realtor tells you there is another bidder on the property, immediately withdraw your offer and tell them to call you if it falls out of escrow with the other buyer. Since this statement from the realtor is almost certainly a lie, it will cause them to have to explain to their client why the only buyer around has pulled their offer.

Don’t Close the Gap

When the seller starts to counter-offer, it is very tempting to agree to their price to close the deal, particularly if they are below your original offer. Don’t do it. In a buyer’s market, the seller will come to you. You have the power. However, if they are below your original offer, and if you really, really want the house, you may raise your offer one time, but do not get closer than 1% to their counter-offer. The selling broker makes a 3% commission, and the realtor you have been dealing with probably makes 1.5%. By getting to within 1% of the seller’s counter-offer, the realtor can choose to give up part of their commission to make the deal. Since they are desperate as well, you should go ahead and squeeze them. A 1/2% commission is better than no commission.

After you have agreed on price

Just because you have reached agreement on the sales price does not mean you are finished making this deal the best it can be. Go through your inspection sheet and establish holdbacks for all repairs. Make the holdback amount 150% of the lowest qualified bid. Say you are doing this as an incentive for the owner to get this work done before move-in. Also, if there are decorative items you do not care for, use the same holdback procedure for these items. The time to get your granite tops is before you move in.

If you are really tough

For those of you with nerves of steel (and a desire to abuse your power,) I have a few additional suggestions for you:

• A week before closing, tell the seller or realtor you are considering pulling out of the deal because you have found another property you like. See if they offer you an additional discount.
• Three days before the closing, withdraw your offer and say you want an additional $1,000 off. Offer no explanation: You are only doing it because you can.
• Ask the seller to write you an emotional letter thanking you for purchasing their home. Send back the first one they give you saying they did not praise you enough.

Conclusion

Not everyone has what it takes to implement all of these price-busting techniques. However, the more of these you put into practice, the lower the price you will pay for the home you want. You will never see the seller or the seller’s realtor ever again. It does not matter if you offend them. In the end, they will be relieved you bought the house even if you made their lives hell in the process.

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As a buyer, it is time to be upbeat. There is a song that uniquely captures the joy of finding what makes you happy: Sade’s “Your Love is King.” If reworked, it also captures the joy of buyers in a buyer’s market.

Sade on Video

Your cash is king,

round and round and round my head.

Wiping all the debt from me.

I’m crying out for more.

Your cash is king,

Your cash is king.

I’m spending more, I’m spending.

You’re making me rich, inside.

Your cash is king,

I’m crying out for more.

Wiping all the debt from me.

Your cash is king.

This is no bad debt

your cash is real… gotta keep you in my bank,

never, never need to part,

you’re making me rich…

Your Cash is King — IrvineRenter