There are thousands of how-to and tips articles related to homebuying. Most of them are crap written by realtors as the one post on their website before they give up blogging. Most of the advice in these articles is useless generalities that waste everyone’s time. Back in 2007, I wrote my tongue-in-cheek Buying and Selling During a Decline with tips for buying in a buyer’s market. Unfortunately, those days have come and gone:
The First Offer is the Best Offer
This is the most counter-intuitive part of buying in a buyer’s market. Ordinarily sellers, or more accurately the seller’s realtor, try to create a sense of urgency to buy the house. They want the buyer to think other people are looking, there is going to be a bidding war, and the buyer needs to get an offer in today. Realtors thrive by creating fear in buyers. They will use lines like:
- It is a good time to buy!
- Hurry. This one won’t last.
- Don’t throw away your money on rent.
- If you are serious, you had better buy now or you might be priced out of the market.
- They are not making land anymore.
- If you see a property you love, you really need to make an offer.
- The more earnest money you put down, the more seriously your offer is taken.
- Things have been a bit slower than last year, but the last two weeks we have seen a lot more traffic.
- Rates are at all time lows and buyers have more choice than ever!
- Rates are creeping up, so you better get in now.
- If you wait until the bottom, you will miss out on getting a property that you really like.
- This property is priced at below market value.
- Incentives this good won’t be available after…
- Don’t worry about the asking price: just offer what you’re willing to pay.
- Don’t worry. You can afford this house.
- I will show my client the offer, but I just want to let you know that we have another offer for more coming in this afternoon.
- Trust me.
- It’s not just the commission. I really care about you.
In a buyer’s market these ploys are all lies (the truthfulness of these statements is questionable in all market conditions). Generally, the buyer is the only prospective buyer, and they can take as long as they want to buy the house. The buyer’s task in negotiating is to create a sense of urgency and panic in the seller. This is why buyers should make their first offer their best offer.
There are many properties priced over market in a buyer’s market. Sellers resist the realities of the market environment. Asking prices that are much too high do not warrant buyer consideration. Most sellers will not reduce their asking prices more than 15% to consummate a transaction, so “lowballing” a seller with an offer 25% from their asking price is a waste of everyone’s time. If the asking price is not within 15% of the price a buyer is willing to pay, the buyer should not even instigate a negotiation. If the asking price is within range, buyers should start with a bid at least 10% below asking price. This is the best offer. The buyer should lower the opening bid as follows:
- If actively bidding on the property, the buyer should make all offers expire in 3 days, and these offers should be delivered on a Tuesday. The buyer should not allow the seller to think about things over the weekend. If the buyer is still interested in the property after the offer expires, resubmit a fractionally-lower offer (1% is a good rule) on the following Tuesday (make them sweat over the weekend). The new offer should not be so much lower as to lose consideration, but it should be enough lower so that the seller gets the message they need to accept the offer before it drops further.
- If the seller makes a counter offer, the buyer should retract the offer and resubmit a lower one. This works the same as the time decay offer above. After the buyer has lowered an offer a few times, the seller may panic and take the offer before it goes any lower. This is what buyers are after.
- Buyers should lower their offers 1% each time they speak with the seller’s realtor. Every time the seller’s realtor communicates with the buyer, the realtor will pressure the buyer to increase their offer. If the buyer lowers their bid each time the realtor speaks, the buyer sends a message that the realtor pressure is not working, and it is, in fact, hurting the deal. Buyers should lower their offer 2% if the realtor uses one of the standard lies mentioned above.
- If the realtor tells the buyer there is another bidder on the property, the buyer should immediately withdraw their offer and tell the realtor to call if the deal 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.
These practices won’t work today (not that they ever did). They were useful for making desperate loan owners angry and venting against the injustice of the bubble, but if you want to obtain a property, some more useful tips might be in order. I came across a recent article in Time Magazine that was actually pretty good.
The Best Times to Buy or Sell a House
By Mark Di Vincenzo | October 10, 2012
The housing market, a reliable bellwether of the economy, seems to be bouncing back.
Many of the nation’s largest home builders surprised analysts by reporting a profit in the quarter that just ended. Home sales continue to rise nationwide, compared with 2011, and home prices also are up. Prices rose 4.6% in August compared with a year ago — the largest year-over-year increase in more than six years.
All of this good news has been widely reported, so many Americans are thinking more about wading back into the real estate market, both as buyers and as sellers. But how many people know there are best times to buy and sell houses?
Here are some timing tips from real estate agents that can save home buyers and sellers a lot of money:
The best month to make an offer on a house is January. Fewer buyers are willing to house-hunt during cold, nasty weather, so there’s less competition and few, if any, bidding wars. Sellers also tend to be more motivated than they will be in the spring, when there are more buyers. Why? They may have just received their credit card bills that reflect Christmas spending and may be feeling financially insecure. And their decision to try to sell their houses in the winter means they’re willing to risk listing during a time of the year when properties tend not show particularly well.
I have written many times about buying in the fall and winter to get the best deals. Many buyers who have worked with Shevy and his team are loyal readers of this blog who know the next several months are the best time of the year to shop. This year will be somewhat different due to the lack of inventory, but if the inventory does not return next spring, this fall and winter may still represent the best time of the year to shop.
The best day of the month to make an offer on a house is the first Tuesday. Why early in the month? Because the homeowner just wrote a mortgage check for a house he no longer wants – or needs to sell — and he doesn’t want to write another one. Why Tuesday? Because by Tuesday he’s starting to worry that he won’t get any offers from house hunters who saw the house the weekend before.
Interesting idea. It’s probably valid.
The best time of the year to sell a house is the spring. Buyers come out of the woodwork during the spring, and with tax refund checks in the bank, spring buyers more often pay full price. In fact, sales peak in the spring, helping to explain why about 60% of those who move do so in the summer. Tip within a tip: Don’t price your house with a zero at the end. Studies show that people perceive a precise price, such as $282,284, as lower than rounded ones, such as $280,000, even when the rounded prices are actually lower. Real-life sales show that one zero at the end of an asking price lowers the final sale price by .72% and two zeros lower it by .73%. That may not sound like much, but it can add up to thousands of dollars.
Spring is certainly the best time to sell. There are generally competing buyers, and despite the increased number of other listings, the demand is so much higher that the spring has consistently proven to be the best time to list a house for sale.
The best day of the week to list your house for sale is Thursday. This is more true during a sellers market, but if you list your house for sale on a Thursday, it will be available right away for weekend showings and by Saturday — the most important day of the real-estate week — your house will have shown only two days. That’s important because the fewer days on market, the better chance the home will attract a full-price offer. Even if your house doesn’t sell by the next Saturday, it will still show only nine days on market, benefiting from the psychological advantage of a single-digit number.
I don’t know how true that is, but it’s another interesting idea.
The best time to stop renting and buy a house is when it costs less to buy than to rent. Makes sense, but how do you figure that out? Find two similar houses – one for sale and one for rent – and divide the asking price by the annual rent. The difference is called the rent ratio. During the 1970s, 1980s and 1990s, the nationwide rent ratio stayed between 10 and 14, then rose to nearly 19 in 2006, when the housing market topped out. (The rent ratio neared 35 in San Francisco and San Jose in 2006.) A rent ratio of 20 or more usually means that it costs considerably more to own than rent after you factor in the mortgage, taxes, insurance, repairs and other expenses. It makes financial sense to buy when the rent ratio is a lot closer to 10 than to 20.
There is a much easier way to determine when the cost of ownership is less than the cost of a rental. I provide this information every day with properties on the blog, and Shevy produces Fundamental Value reports for clients on any property they bid on. Providing an accurate cost of ownership is more complex than the formula he presents above, and finding good comparables requires local market knowledge.
I have long been a proponent of buying when houses are below rental parity. Now that prices are that low, it’s very frustrating to have so little available for sale. I wish I could see that changing soon, but right now, it looks like low inventory is the new normal.
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Proprietary Irvine Housing News home purchase analysis
245 TANGELO #363 Irvine, CA 92618
$230,000 …….. Asking Price
$396,000 ………. Purchase Price
6/16/2006 ………. Purchase Date
($166,000) ………. Gross Gain (Loss)
($31,680) ………… Commissions and Costs at 8%
============================================
($197,680) ………. Net Gain (Loss)
============================================
-41.9% ………. Gross Percent Change
-49.9% ………. Net Percent Change
-8.3% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$230,000 …….. Asking Price
$8,050 ………… 3.5% Down FHA Financing
3.46% …………. Mortgage Interest Rate
30 ……………… Number of Years
$221,950 …….. Mortgage
$68,119 ………. Income Requirement
$992 ………… Monthly Mortgage Payment
$199 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$58 ………… Homeowners Insurance at 0.3%
$231 ………… Private Mortgage Insurance
$280 ………… Homeowners Association Fees
============================================
$1,760 ………. Monthly Cash Outlays
($147) ………. Tax Savings
($352) ………. Equity Hidden in Payment
$9 ………….. Lost Income to Down Payment
$49 ………….. Maintenance and Replacement Reserves
============================================
$1,319 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$3,800 ………… Furnishing and Move In at 1% + $1,500
$3,800 ………… Closing Costs at 1% + $1,500
$2,220 ………… Interest Points
$8,050 ………… Down Payment
============================================
$17,870 ………. Total Cash Costs
$20,200 ………. Emergency Cash Reserves
============================================
$38,070 ………. Total Savings Needed
The property above is available for sale on the MLS.
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Cost of Ownership Analysis
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Finally, someone in the MSM acknowledges the real reason homebuilding is getting better. Hint: it’s not increasing demand.
Shrinking Supply of Distressed Homes Makes Room for Homebuilding
A steady drop in distressed home sales may spell a better future for builders, Capital Economics analyst and property economist Paul Diggle says.
In a US Housing Market Update released by the firm, Diggle notes that while “a substantial overhang of properties still in the shadow inventory” will keep distressed sellers in the market, the peak in distressed supply appears to be well behind us, giving homebuilders more room to grow with less competition from discounted existing homes.
“The continued drop in the supply of distressed homes on the market is encouraging homebuilders to break ground on more sites,” Diggle said.
Distressed sales made up 22 percent of all sales in September, down from 33 percent at the start of 2012, the update says. Furthermore, September’s share of distressed sales is the lowest reading in the five-year history of the data.
Meanwhile, starts shot up in September by 15 percent, hitting a four-year high of 872,000 annualized.
Diggle notes that a shift in distressed sales has also been helpful for builders. Short sales—typically sold at a smaller discount than foreclosures—have been gaining traction as foreclosure sales drop, creating “less of a depressing influence on the new-build market.”
While the shadow inventory may threaten the balance currently forming, the impact isn’t expected to be severe.
“Even after the signing of the foreclosure agreement, foreclosure timelines are still measured in years rather than months, and banks are showing little appetite to swamp the market with repossessed homes,” Diggle said. “So it seems unlikely that the shadow inventory is going to drive a large enough surge in supply to seriously dent housing starts.”
In addition, tightening supply in the new homes market has created a foothold for growth, Diggle remarks. September saw a 4.5 months’ supply of unsold new homes on the market, down from the long-run average of more than 6 months. While the current tight supply “has been a necessary corollary of the overbuilding in the boom years,” it provides a boosts for starts as demand improves.
While a resumption of normal homebuilding volume—in the region of two million yearly starts—looks unlikely in the near future, Diggle expressed confidence that the homebuilding recovery will continue to gain strength over the next few years.
“Our forecast for 750,000 housing starts during 2012 as a whole, first made in 2011, looks broadly on track. But our current forecast, for 850,000 starts in 2013 growing to 950,000 in 2014, may now be on the low side,” Diggle concluded.