Negotiating the price of your house?

In My Humble Opinion
1

Arghhh! I’ve spent my summer on a home shopping odyssey, and I’m quite frustrated.

What I’m wondering about are bidding strategies.

The first place I bid on was a 30 year old townhome that had been a high end place when it was built, 30 years ago. So, it just doesn’t have what a lot of new construction has in the way of current amenities, but it does have some plusses. It’s two blocks from work, and has one of my criteria, a pool. A three story job, the second floor (living room, dining room and kitchen) were gorgeously redone in recent years, but the 1st and 3rd floors are in bad shape, the pool needs replastering immediately, and we suspect that major replumbing is in order.

These days you can research market histories rather easily, and this place has been vacant and on the market for a long time. Armed with the knowledge that most sales are between 93-97% of asking price, for places that are basically in good order, I bid 85%, thinking that I might go as high as 89% and go with it even if the inspection revealed that I might have to replumb (highly suspected) the place, along with the work that I already know must be done.

Well, that didn’t work. It just pissed the guy off and his counteroffer was 100% of the asking price. I put in an 87% counter-counteroffer, but I suspect that’s a dead horse.

I can’t imagine what people are thinking, other than that they’ve heard that the housing market is hot, so go for it. If the owner of that property has even been in it recently, he must know it has major fixin’ to be done.

So, lesson learned and we move on. I looked at what seemed like an interesting prospect this weekend: local high-end architect designed townhome with a pool. Interesting design, with some oddities.

Nice neighborhhod, and possibly a nice place, but it too needs work. Not the potentially systemic work the previous place mentioned probably needs. But what struck me is that they didn’t even clean it up for sale, but are still asking a high end price. The pool is not fit for human visitation, and is in fact kind of scary lookin’.

It’s pretty obviously been a rental since the owner bought it (trashy condition plus it’s been on the market 7 times since he acquired it in 2001 - IOW, almost continuously).

He bought it in January of 2001 and put it on the market five months later at 135% of his price. Since then he’s steadily dropped it to the current asking price of 111.4% of his acquisition price, and it doesn’t appear to need the systemic work the other place probably does, but it does need work to even come up to code, I thought I might bid around 93% of asking, with a max-out at 95%. He is described by his agent as a motivated seller.

What think y’all?

2

I think you’re trying to mathmatically deal with something and leaving out the emotion. You’re also starting 10% lower than the upper end of what most sales end at. I know if I were in his position, I’d be pissed and wait for the next buyer. (Oh wait, I WAS!)

From the seller’s perspective, the negotiated sales price is LESS than what they end up with, after negotiating any problems found in the inspections, and other ‘perks’ the buyer may come up with along the way. If I knocked off 10% (that’s FIFTEEN GRAND) off my last house’s asking price, you’re damn well skippy I’d be unfriendly towards anyone looking for the ‘shopping kill’.

Don’t forget, that vast majority of folks are selling their house to move on to the next one, they have every bit as much motivation in getting as big a down payment on the next house as you are in getting a lower price on THIS house. This is not a middle-eastern market, where the prices are pumped up by 200% with the expectation of a lot of negotiation.

3

You should offer what you think the house is worth and well within your range of affordability. If you love love love it, or need to move NOW(!!!) then it is worth the asking price. If you don’t fall into an imperative category, and can risk losing it, write a lower offer. I am 24 days into my new place, and I probably should’ve offered less for it than I did, I’m finding out. I had someone offer to sell me a 150000 dollar house for 185000. I turned it down. They went on, and on, and on and eventually sold it for 150000 to someone else. The current owners always think their house is better than it is and the buyers always take into account the worn carpet and the ugly paint and the small holes in the wall that the sellers have been overlooking since they moved in.

4

I agree that you can’t just use the asking price as your starting point and choose some fixed percentage. The guy with the townhouse undoubtedly set his asking price knowing that two floors needed some work, so you can’t assume that you get more “off” the asking price because of that.

Are you working with a realtor, or by yourself? Your best bet for figuring out how much to bid on a house is probably the recent sales (not offers) in the same neighborhood, but it can be a little difficult to come up with good matches, and the data is harder to get. Picking a percentage of the asking price is not a great strategy for a buyer, though.

No one who doesn’t bother to clean the pool is a “motivated seller.” He made a poor pick of a place to flip, and now he’s suffering, but he’s not “motivated.”

5

I guess I was wondering about two separate issues.

With the first place, I suspected there might be major replumbing and moisture/mold remediation to be dealt with in addition to the known required fixes, so I bid anticipating that, and was rebuffed. Perhaps I should have bid something closer to his market expectation and then waited for the inspections to renegotiate.

The second place still mystifies me. It doesn’t need as much work as the first, but it’s a pricey home and I suspect the owner hasn’t set foot in it in years. It’d be great if it had been kept up, but it hasn’t been. And, once again, who the hell expects to sell a house at a premium with trashed out rooms and a scary pool?

My impression is that new home sales are booming at least partially because existing property owners are a little too impressed with reports of the hot market and want to cash in with properties that don’t really compete in value with new construction.

Still, though, location, location, location…

6

I think another problem you are having is your approach.

You probably should have told the first guy that the price was a bit out of your range (true or not) and politely told him you could only afford $___ and told him to consider you if he doesn’t get any better offers in the next month or two. That way, he could have saved face and at least thought he was giving a guy a break, instead of feeling he was being strong armed into a cheaper price.

Same with the next house. Tell them you have calculated that it will cost yadayada to fix everything up, so you can really only afford to pay (whatever you are offering) in order to do the house justice. Again, this at least makes the seller understand you are not trying to screw him (which, actually, you are) but you are approaching him with a serious offer considering the money it is going to take to make the repairs.

I might be wrong, but everybody looks at their home like it is a palace…ignoring all the warts. And just like you don’t want anybody mentioning your sister is fat and ugly, you don’t want anyone to disparage your castle. Try kissing ass instead of kicking ass with the next seller. Can’t hurt.

7

I’m not thrilled with your percentage based strategy. I would generally go with a comparables based strategy instead. How do the listing prices of these townhomes compare to similar townhomes that have closed in the same area? That is how you determine if their list price is higher than market.

Let’s say the average 2br TH in decent condition goes for $100K. If the first one needs $15K of work to become “decent”, bid $85K. Your realtor can point to comparable sales at $100, and the $15K of improvements that are needed as justification, letting his realtor try and convince him it’s a good price.

Your percentage based strategy assumes that trashed homes will list for the same price as well kept homes, I don’t think that is generally the case. Generally, fixer uppers list for less than typical market prices, so you don’t have any leverage in negotiations by saying it’s broken down. They already know that and incorporated it in their price.

Also note that sometimes you just get an ornery seller who won’t negotiate reasonably at all.

8

I like Cheesesteak’s approach, but I still play the percentages. I’ve negotiated prices on 5 houses in the last 4 years (two for my little sister, one for my mom, my older sister, and myself (the first one, but I had to back out when the economy tanked in 2001). Also, I work with the chief procurement officer of my company. The most important factor in my decision making is what Cheesesteak alluded to: do the homes in the area all sell the same regardless of upkeep? That is, is the neighborhood more important than the house. My sister’s last place in Orange County was exactly like that. The next factor is how long the house has been on the market. The longer the time, the more advantage to the buyer, generally. If it is a hot market with a hot neighborhood, I still start at 6% less (never had any one of us in my family paid 100%). IME, people put too much emotion into the buying/selling/price. You have the right attitude, it seems, be willing to walk, stay within your comfort means.

The first house offer sounds about right. If the guy is a dick, I would offered even less (~80%) for wasting my time seeing a broke down place at that price point. I wouldn’t have countered offered at all if he balked at my initial offer. He should counter your offer first . If there is silence, ask him how much he thinks the house is worth, or what price he’s looking for. If he sticks to the list price, act offended and walk. I would not make another offer until he countered your offer and re-stating his initial list price is not a valid counter-offer; it’s a deal breaker.

For your second place, I think we would have ended up at the same price, though our motivations behind price is probably different. Without knowing more about your neighborhood or the builder, it sounds like a reasonable offer. The only problem is that this is rental property and I’m not sure how financially saavy the seller is. Most people will not be willing to take a loss (even though it could work out for them in the long run). To justify your price, you’re going to have to really emphasize the stuff that needs work and how put off you are by those repairs.

Hope this helps.

9

It’s not like this is an unreasonable thing to think. My coworker just sold her house. It went like this: day one, put the house on the market for what they considered a reasonable price, that was about 30% higher than they paid for it. Day two: overwhelmed by the response, they bump the asking price by about 10%. Day three: house sells for slightly higher than that asking price.

10

If the seller returns with no movement on his price, walk away. The house isn’t worth it, he isn’t prepared to face reality, and some other sucker can overpay for a broken-down house - unless you’re in a market that is super-hot and you’re going to end up overpaying anyway, because there simply isn’t anything else available. If you’ve been doing your homework and you know what different types of houses are selling for in your neighbourhood, you know a good deal and a bad deal; don’t fall for a bad deal because the seller is out of touch. There will be another house and a better deal. In other words, you’ve been doing it right so far.

11

I took the percentages approach because I initially didn’t want to use real dollar numbers, but after a bit of reflection, I don’t think the distinction is truly that important.

I have looked at both of these places’ histories.

The first place was acquired in 2002 for $296K and the asking price is $360K. Suspecting that major replumbing was in order, and knowing that the pool needs replastering and the 1st and 3rd floors need some serious rehabilitation, I figured I could make it work for $320K. The taxes on this place are high, but it’s never (built in 1975) had a claim, so insurance is OK. So I offered $306K, got his original offering price of $360K as a response and replied with an offer of $313K. I’m not holding my breath.

The entire street was developed at the same time (1975) by the same developer. The place next door was originally listed for $350K and they (eventually) closed at $275K. These are what were high-end townhomes 30 years ago, but are showing their age.

On to the second place. It was an original design by a local hotsy-totsy architect (for whom my niece, low on the totem pole junior architect, works) and it is (or was) a nice place in a nice neighborhood.

It was acquired by the owner (a doctor) in January of 2001 for $370K and put on the market by him, initially, in June of that same year for $498K (rather high hopes, I think). It’s been on the market almost continuously since then, and the asking price has steadily dropped while evidence that it has been a rental has accumulated.

Now they’re asking $413K for a neat design with the pool that I want for a place that has been abused. The really nice looking in the photos hardwood floors in reality appear to have been where buffalo were given square dancing lessons. While it doesn’t appear to have the systemic plumbing problems of the first place, everything’s chipped and dinged, the appliances are old (1979) and the pool looks downright lethal. No cleanup has been involved at all, and I’m sure it’s been a rental.

So, if I can make it make sense for ~$385K, I have to figure out how to approach the current owner.

12

I think a firm stance is indicated, with the understanding that you are indeed willing to walk away from both properties. I wouldn’t have re-offered on the first place; the owner told you that he isn’t willing to deal with his, well, refusal to deal. I would give him your name and number and tell him to give you a call when he gets hungrier.

As for the second one, again, offer what you think it’s worth, and walk if they don’t deal. You can’t convince anyone to sell their houses if they’re still stuck on a certain number. Again, leave your name and number and let him come to you if he wants to deal in the future.

Another thought - these owners don’t seem very motivated, and they likely won’t deal. I’d move on if I were you, or be prepared to pay what they’re asking.

13

Actually, I might include a letter with the offer explaining your reasoning. If the current owner hasn’t really looked at the place (and he may not have, if he bought it to flip and has never lived there himself), he may be misled by a property management company and/or realtor about the state of the place. A letter that says, “comps in the neighborhood are $x, repairing it to the state of the comps would cost $y, I’m offering $x-y+delta” should get through to an investor type.

14

ENugent, excellent idea! I’m meeting with the agent in the morning and I’ll suggest this. Thanks!

15

That had not occurred to me - that someone would be trying to sell a place that they hadn’t looked at recently. People are strange.

16

My husband, a financial advisor, told me recently that 40% of housing purchases in the last year were made by investors. That number should give all house hunters pause. It’s not a great time to be buying a home. People in California and Arizona have been bidding OVER the asking price in recent years because the market has spiraled out of control. I wouldn’t buy a home in one of these hot areas any more than I’d buy Yahoo at 110. It’s too damn risky. Because it can and will turn.

You’ve already bid well over what the seller paid 3 years ago. If you increase your bid significantly, you are taking a real risk that the real estate bubble will collapse. Then you’d be holding a property that is worth less than what you paid for it.

The NYC real estate market went through a collapse in the late 80’s/early 90’. Friends of ours were stuck holding a loft that was worth 30-40% LESS than what they paid for it. You do NOT want to end up in this situation.

It is my belief, and the belief of many other actual pundits (I just pretend to be one) that the real estate bubble will collapse soon. This economy simply cannot sustain 20-40% increases in housing prices year after year, especially with oil inching towards $75/barrel. Real estate is a commodity, just like oil. Prices can go up. And prices can go down. Don’t be suckered into buying at the top.

So here’s my advice. Be patient. A house is only worth what a seller is willing to sell for intersected with what a buyer is willing to buy it for. Prices are out of control now, but it won’t last. If this buyer isn’t willing to accept a reasonable profit for his property, then walk away. If you let your emotions enter the equation, you may end up holding the real estate equivalent of Yahoo at 110*.

*In January, 2000, Yahoo traded for $110. In January, 2001, after the tech bubble burst, it traded for $15.

17

So, they think the real estate bubble will burst soon, do they? Are we talking next 10 years soon, or next two years soon? Cause we’re two years into a five year plan to fix this place up and sell it; we didn’t pay hugely for it, so we can just live here if the bubble bursts, but we really would like to make a little profit on it.