Arm wrestling. A zero-sum game where you have to beat your opponent in order to win. There are times when I need to take this approach to get the best deal for my clients. But in this case, there was a different opportunity.
This wasn't the first offer during our search. We'd made an offer on a townhome in San Mateo knowing that the chances of getting that property were really pretty low. This was a two-year-old development in an up-and-coming part of the downtown area. It was a cross between San Francisco warehouse lofts, each with wide-open spaces, and an opulent hotel, complete with luxurious appliances, plush carpeting, and high-quality fixtures.
My client hadn't asked yet but I anticipated a couple concerns about crime in the area, which were quickly allayed with some research and a call to the local police station --- they yielded nothing out of the ordinary. My real concern for my client, though, was the three lockboxes in this townhome's oven.
I want to make sure they're getting a good deal going in and can sell at a quality price later on. It's the part of being a Silicon Valley buyer's agent that's more important than making the deal itself, but it involves a lot more research than just taking the asking price and knocking 5% off it.
When the Asking Price Doesn't Matter to Buyer's Agents
Three lockboxes. That was just the tip of the iceberg. Added to the two outside there were five. I didn't expect to find anything on the MLS but I actually found five listings there too. It was interesting that properties in the same building were listed in both Redwood City and San Mateo. That would be a pretty big building.
Three of the MLS listings I couldn't match to lockboxes, so that meant that out of 50 units in the complex, at least eight were available in this two-year-old new development. Probably more after speaking with some of the people living there.
Why do I do all this? To figure out what the right price is. Because the seller sure isn't going to tell you. (The agent might tell another agent. Maybe, maybe not. But buyer-to-seller, even if the seller told you the truth as to what price they wanted, would you believe them or would you think they're bargaining? Therein lies the Catch-22 of living life outside a Saturn dealership.)
There are even times when the asking price doesn't matter at all. Here are a few:
1/ Recent Comparable Sale. The last sale price of Silicon Valley real estate that's reasonably similar to the one we're looking at trumps the list price because it's the new "market value."
2/ Excess Inventory. While some developers try to artificially reduce inventory, the fact remains that for a period of time, anyone trying to sell in that complex will have to compete with a national corporation and their brand new units --- and that corporation doesn't have to make money on every deal.
3/ Emotionally-Attached Seller. This happens a lot with for-sale-by-owner (FSBO) properties. Owners sometimes overprice based on good memories or how they believe everyone will love the way they've done the wallpaper. While these quirks may be valuable to the owner, a buyer's agent shouldn't encourage a client to pay for them.
4/ Over-Improved Property. Would you pay extra for a lobster at McDonald's? Right there, sitting next to the McNuggets on the value menu? Probably not --- you're probably wondering how good of a lobster can end up next to the Filet-o-Fish. It's the same with houses. The neighborhood and condition of the houses in it dictate the upper-bound on pricing a house.
5/ When My Clients Don't Want To Pay That Price. If the price is justified, I'll happily make the argument to my clients. But if it has features that other people will pay for but aren't valuable to my clients, then why try to waste their money?
In this case, the developer wasn't a mega-corporation but a Silicon Valley business owner and the property was wildly-overpriced for all of the above reasons.
We were okay with making a low offer because I could rattle off the list of comparables from a similarly-featured complex nearby, plus illustrate the amount of inventory they had leftover. There was no downside for my buyer: if we waited or were rejected, there'd still be plenty of units left. And do you think they'd tell us never to come back again after we were serious enough to write paper for them?
Getting to Win-Win
It takes some extra effort as a buyer's agent but I like to go over properties that have been on the market a long time (ones that have racked up lots of days-on-market, DOM). There is a lot of background work involved in due diligence, phone calls, researching comparables, and checking facts. It's actually quite challenging because there is a lot of asynchronous communication required.
There are a number of reasons why properties sit for a while, some of which are dealbreakers. Some are just "bad luck" and can benefit my buyer.
Reasons Why Properties Have High DOM Numbers
1/ Pricing. It's so important that I have several articles on the topic. This problem is correctable, but not always easily.
2/ Physical Condition. Sometimes there really is something wrong with the property. I toured a property in San Carlos where the floor of the house was parallel with the slope of the hill it was on! It was like walking into an M.C. Escher cartoon. The price of the property included the house, but, really, the price should have been the land minus demolition costs.
3/ Location. The average DOM for East Palo Alto in March 2007 was 114. The average DOM for Palo Alto was 40.
4/ Difficult Showings. I understand that everyone in Silicon Valley has their own needs and schedules but I got this response the other day, "The owner will only show the property on Thursday and Friday before 5pm and Saturday 1-4, but no open houses." That effectively limited anyone with a job to three hours per week of viewing. How would a store owner do if those were the shop's hours?
5/ Back on the Market. This is the rest of our story.
Closing in on Good Real Estate
When a contract falls through for a property, the seller loses not only time but momentum. Properties newly listed on the MLS generate email alerts, become topics of conversation and get real estate agent tours. After they go pending with an accepted offer, they disappear off a lot of radar screens.
If that sale doesn't go through, there's usually no fanfare when it comes back. All the eyeballs have gone elsewhere.
In this case, the property was priced for an "auction." It really is just like eBay where you set the price low and then hope for so many offers that the price goes over what you expected. With no fanfare to call buyers back, the auction wouldn't go as high. It's like the second bounce after hitting a tennis ball.
That's one reason why I recommended this property to my client.
I read the disclosures closely for him. The worst thing on the inspection report was some cracking in the caulk in the guest shower. The HOA was strong and well-funded. The termite report came back blank, which wasn't surprising. There was a little trouble with one of the switches on the oven, but we could get a credit for that easily. This was a clean property, unlike others that have bad news in their disclosures.
What happened was the previous buyers had to pull out for reasons I won't go into here. And they had to forfeit their deposit. Another client asked me whether I felt bad for them. My responsibility to my clients is no burden at all, but I'm not Atlas, and the weight of the entire world is more than I can carry alone. Cheesy? Yes, but true also.
We got the house minus a discount for the deposit money the sellers already received. The sellers got their price because the total money was the same.
My client's savings? $25,000.
Actually, I only saved my client $24,000 because we set out to beat other competing bids by just enough --- there ended up being several.
My client thought it was the best $1,000 he's ever spent. And to celebrate, I completely surprised him with a new $1,000 refrigerator.