In the current market climate, buyers and sellers seek wisdom and experience. Buyers, seeing the decline in market values since Q42005, are fearful of settling on a purchase to find values diminishing further. Sellers, on the other hand, have been reluctant to meet market expectations and continue to price homes, on average, about 8% over the final selling price.

It is important for parties to understand pricing strategy and how offers are received by sellers. Why? Making an offer that is clearly below market value and well below the listing price can result in a failed negotiation. 

Perhaps the most important skill possessed by a qualified real estate professional is the ability to determine market pricing. For agents representing sellers, pricing near market value results in more qualified buyer interest early in the selling process, while retaining some “room for negotiation”. And for the buyer, a near market offer ensures the most success for beginning the process of a successful transaction where the needs of the seller and desires of the buyer are fulfilled.

What is “near market” value? 

Market Value is defined as the price which is agreed to between a knowledgeable and willing buyer and seller. It does not come from a computer program (and especially from any search engine or AVM … automated valuation model). True market “valuation” is determined in the appraisal process by a licensed, experienced and local-market-savvy appraiser by conducting an on-site inspections of the subject property and comparable properties … not someone in a building thousands of miles away who has no knowledge of the local market and neighborhood. 

Some real estate agents are competent at gauging market values; many are not; and no one can precisely predict market trends. As evidence, in the summer of 2005, many real estate experts and economists were discussing the rapid growth in real property appreciation and cautioned of a “soft landing” or correction of the market.  Values in the Sacramento region had increased 50% in just two years.  It became obvious that such growth could not continue. Real estate markets are cyclical and they will continue to be so. Historically, while we are seeing the lowest selling prices in several years, it is also important to realize the “highs” of every preceding market were followed by corrections … and each subsequent period of appreciation exceeded those former high values. Real estate is a long term investment.

Win-Win for Buyer and Seller. 

Over the past few years, studies in the Sacramento area show that the final price paid is dependant on several factors, including the property status being “convention sale” (not a short sale or bank owned REO/repo), “short sale” or “bank REO/repo” (real estate owned). By examining the initial price at the time of listing and the final price that is paid, we can gain insight to where offers and acceptance are favorable. Offers too low may result in the seller denial. Offers too high can result in lender denial of the buyer’s loan following appraisal.

The average time “on market” for a short sale is between 60-160 days before an offer is accepted. It then requires another 60 to 180 days (or longer!) for negotiation between lenders before approval of the settlement with the seller. Finally, once the lenders have approved a short sale, the transaction can move quickly and most often escrow period is 30 days or less. (There are exceptions, not many.) At any time during this period, the senior lien holder (lender of the 1^st loan) may exercise “preforeclosure” activity by recording a “Notice of Default” or initiate a trustee sale under the provision of the Deed of Trust and terms of the loan. About 70-80% of short sales ultimately fall into this preforeclosure activity and even transactions in escrow can fail; the buying process starts over again.  In most cases, the senior lender takes possession of the property as a foreclosure and then re-markets the property at a later date (about 2-3 months) as a “bank REO” or “bank repo”.  In both “short sales” and “bank repos”, the properties are purchased “as-is” … very rarely are buyer’s requests for repairs accepted. 

During the past several months, short sales and bank repos have been selling at 99-101% of listing price. The marketing time for bank repos has fallen to 20-60 days with escrow periods of 10-30 days. Multiple offers or other concessions will drive the price upward, thus the actual selling price can exceed 100% of the listing price.

Contrary to the short sales and bank repos, conventional sales (where the seller is either the occupant or landlord and not in threat of foreclosure), selling times are based on accurate pricing at the time the property is first offered. Our studies show that most homes are priced at 8-9% above their final selling price. Further, sincere buyer activity does not begin until downward price adjustments are made to bring the “listing price” to within 2-3% of the “market price” or the price paid. 

This is important statistical data for buyers and sellers. If sellers price above market, they are likely to be on market for many weeks and perhaps months. By failing to sell, prospect buyers (and agents) may feel there are issues with the property beyond price, such as deferred maintenance, so the property sits until the price is reduced to a point where it may be below market value.

The important factor for buyers to understand is that making “low ball” offers may result in an angry response by the sellers who feel “offended”. Most often, this is an emotional response. But it can kill the opportunity. National media and opinion by well-intentioned folks is often in error; local market conditions vary in any region. For example, Folsom has faired better in retained market compared to El Dorado Hills, Elk Grove and West Roseville where the number of short sales and bank repos has reached levels of 75% of homes sold.

Best Advice for Buyers. 

·        Be “pre-approved” by at least one direct lender before shopping for your home. Pre-approval consists of income verification and review of your current financial situation to ensure you are comfortable with the type of loan and terms before making a commitment. Further, the seller is going to require this pre-approval as a condition of your offer.

·        Choose your agent wisely. Be sure she/he demonstrates market knowledge and negotiating skills and has the experience to offer solid guidance not a convincing sales pitch.

·        Evaluate market dynamics and property condition. Your agent should be prepared to articulate values, attributes and amenities of any property or neighborhood. They should carefully inspect the property and advise you of potential problems for their visual inspection (deferred maintenance, potential pest issues, water damage, evidence construction deficiencies like cracked interior surfaces, etc.) BEFORE you make an offer.

·        Be reasonable. Yes, you deserve to purchase the most value for your dollar. However, in an effort to “low ball” your offer, the chances are good that you will offend the seller and create a feeling of mistrust. Remember, only your appraisal can be viewed as the value of the property. If the appraisal is below the agreed purchase, you can choose to negotiate a reduction of the purchase price, call for a second appraisal or cancel the purchase agreement. 

·        Never select an agent who promises lower commissions or the highest price.

·        “Testing the market” will cost you time and money. The tendency is to overprice and you’ll question why you do not have interest from buyers.

·        Link to “10 Best Ways to Sell Now”