Toto, we’re not in Kansas anymore. The tornado blew through and now we are on the other side of a tumultuous real estate storm. Now that you’ve landed, it’s time to orient yourself with current market conditions. Here is some advice to navigate through what is unchartered territory for some.
Understand the buyer’s leverage
Circumstances can be vastly different depending on a home’s offer status and/or days on market. You’ve had plenty of time to acquaint yourself with the handling of multiple offers. Those circumstances still exist but are becoming increasingly rare. So, what’s a buyer to do when a home has been on the market for a week or <gasp!> more?
The first thing to consider is that your buyer client might have leverage over the seller. I say might because every situation is different, meaning days on market (amongst other factors) means more to some than others. A seller who is living in the home may be less motivated to sell than one sitting on a vacant property and racking up non-recoverable expenses with each passing day. The seller faced with the latter is more likely than the former to unload the home at a discount. It’s your job to figure out at what cost they are willing to do so.
Writing your offer
Absent competing offers, don’t be afraid to offer less than list price. There’s a delicate balance, however, between finding a number that gets the conversation started and offending the homeowner. Calling the listing agent in order to glean what information you can is a good first step. You should also look for clues while showing the home.
Have they started boxing up belongings? Is there food in the refrigerator and clothes in the closets? Search for the seller on the auditor’s website to determine if they have recently purchased another home. All of these could be indicators about a seller’s motivation and perhaps willingness to let the home go for less than advertised. In addition, non-competitive situations certainly shouldn’t require waiving contract rights or offering to cover an appraisal gap.
You can also use public resources (Realist by clicking on the parcel number in the MLS or the Recorder’s website for instance) to determine how much equity that seller has in the home. Sellers with large amounts of equity could allow them to move farther from the list price than someone who is clearing little to nothing at closing.
Dealing with interest rates
Rates remain high and this eats into buyers’ affordability. There are strategies a buyer can employ to mitigate the cost of borrowing during times like these and your relationships with reputable lenders who offer a wide range of products can be beneficial to the client. There are products such as rate buydowns and adjustable rate mortgages (ARMs). These types of loans shift some of the risk from the lender to the borrower which lowers the cost of the money they borrow.
Closing costs credits paid by the seller can be a valuable negotiating point. While you’re probably used to clients using this money to pay closing costs, they can also use these credits to lower their interest rate. Keep in mind a few factors before offering this solution to a buyer: 1.) When sellers credit a buyer it lessens their net by that amount, so offer accordingly. 2.) There are limits to how much a seller can provide and you should verify that amount with the buyer’s selected lender. 3.) While not always the case, the general rule of thumb is that each point a lowers the interest rate by an eighth of a percent and a point costs about one percent of the loan amount (NOT the purchase price).
Expect a counteroffer
We are finally returning to more normal market conditions where it can take a day, or even days, to negotiate a contract. If you receive a counter to the original offer and there hasn’t been activity from other prospective buyers, consider advising your client to submit a second counter. Be aware, though, that the longer you draw the process out, the better the chance becomes for things to turn competitive.
Know when to stop pushing and seal the deal
ALWAYS remember that the client is in control and your role is to provide timely advice along the way. Gauge reactions from the listing agent to determine when enough is enough and it turns time to put ink to paper (or fingers to mouse). Don’t risk losing an opportunity to meet the client’s wants and needs because negotiations go too far. This is an emotional process for sellers (and buyers of course). Be respectful that they are selling more than their house. They are leaving the place where they spent part of their lives and undoubtedly have lasting memories in the home. This is an art, and not a science.