More and more, buyers are realizing that the mounting inventory of housing equates to killer deals on better homes. Take, for example, my clients who recently purchased their dream home.
This couple was pre-approved with a 20% down loan, had no home sale contingency, could close in less than 30 days, and was including $10,000 in earnest money along with their offer to purchase. They realized they were ideal prospective buyers. They were well aware of the current state of market. And they knew an awesome deal could be found.
My opportunistic clients began their adventure about four weeks ago, confining their search to the South Meadows area. They were looking at homes priced in the $350K – $450K range. During this time, we embarked upon four outings where we visited nine to eleven homes per outing for a total of forty houses. Yes, forty houses! Considering that the South Meadows presently has well over 200 active listings, viewing forty homes in a short time frame is certainly feasible.
My buyers sincerely wanted to buy a home. However, they also didn’t want to lock into a price that they would watch decline for the remainder of the year. So, they set out to negotiate aggressively until they found their killer deal.
I’ll spare you the details of the forty homes we visited. But I will say that, at the end of every outing, my buyers submitted an offer on their favorite home that day. Each offer was then countered by the seller and accompanied with the verbiage “do not counter the counter” (in other words, the seller indicated this was as low as he or she would go). If the counter-offered price was not satisfactory to my buyers, they would simply walk.
What follows is a summary of our adventure.
Outing #1
Home listed for: $416,800
My buyers offered: $350,000
Seller countered: $399,900 ($173 / Sq Ft)
Outcome: My buyers walked
Outing #2
Home listed for: $465,000
My buyers offered: $380,000
Seller countered with: $445,000 ($188 / Sq Ft)
Outcome: My buyers walked
Outing #3
Home listed for: $510,000
My buyers offered: $440,000
Seller countered with: $485,000 ($157 / Sq Ft)
Outcome: My buyers walked
For the record, in each of these instances, my buyers instructed me as to what price to offer. I must admit that I was somewhat uncomfortable with these offers. I felt that they were borderline embarrassingly lowball and that my buyers risked not getting a counter offer at all. However, my buyers knew what they wanted; they had a strategy, and they planned to continue to search until they achieved their goal.
Up until now, we had viewed only homes on the resale market. But, because many of the floor plans we viewed were also being offered by area builders as standing inventory or new construction, we decided to investigate these.
We learned of one builder who had recently decreased prices on all models by nearly 20%! We chose to start there. My buyers fell in love with a particular model. It was attractively priced. In fact, this model was priced well below a year-old resale unit with the same floor plan down the street that is listed on the MLS. The builder was including upgrades and other incentives such as paid HOA fees and transfer taxes. The upgrades totaled thousands of dollars and made the homes offered by the builder even greater values than the resales.
My buyers were very excited about this home and were fully prepared to purchase it at its listed price of $437,000–they wanted the house and they liked the price. However, the wife suggested we try to negotiate a lower price with the builder. The husband responded with, “Honey, let’s just pay what they’re asking. You can’t negotiate with builders anyway. The price is set, and that’s it.” The wife rebutted with, “That’s not true–you can negotiate anything.” At this point they both looked at me for guidance. I responded that there was no harm in asking and queried, “What do you have in mind?”
The wife asked me to try to get the price down to $420,000. I replied, “I’ll see what I can do.” The next day I met with the builder. I presented a profile of my buyers, emphasizing their ability to close quickly and the fact that no home sale contingency was needed. This carried considerable leverage, as the builder is understandably eager to clear the remaining homes from his inventory.
Next, I stated the listed price was more than my buyers wanted to pay. I then asked, “How close to $416,000 can you get the sales price?” My thought was that, if some haggling over the price were to ensue, I’d have a bit of a cushion. I was very pleasantly surprised when, after making a couple phone calls, the builder responded with, “You’ve got yourself a deal!”
Outing #4
New construction listed for: $437,000
My buyers offered: $416,000
Builder accepts offer. ($149 / Sq Ft).
Outcome: My buyers purchase their new dream home at an incredible value.
My buyers were extremely pleased with the news when I phoned them. The builder clearly stoked to have one less home in inventory. And I was happy the builder was cooperating with agents. Win-win-win.
I would also like to add that, thanks to my clients’ hard bargaining, I learned a couple things from this experience. As noted above, initially, I was not entirely comfortable with some of the very low offers we were making. But not once were we rejected out of hand. Each of our offers was met with a counter offer; sometimes substantially lower than the listed price. By the time I was asked to negotiate with the builder, I presented an offer feeling fairly certain that a discount off the current list price could be had. And it was. I am now excited to find another killer deal for my next buyers.
Green NV
Guy,
A great story and a great outcome for your client. Thanks for all the numbers – they make me giddy!
A few observations:
– There is nothing more attractive in this market than a buyer who has their financial bases covered.
– Their initial offers were on average 20% under asking, and no one even met them half way. I think they are spot on on asking vs. value in the market right now.
– The resale market doesn’t have a clue right now. The corporate/developer seller has a huge advantage. They bought in really low land wise, built cheap with huge contracts, and can easily cut their profit margin from 40% to 5%, and still add to the corporate bottom line.
– Interesting $/SF down there. Although you still have to live down there in East Jesus.
– Big balls negotiating with the builder UNDER your client’s offering price. THAT is how Realtors earn their keep. Good work.
– Glad you listened and LEARNED from these new additions to the Truckee Meadows. They really seem to have done it right, and I hope they live long and prosper.
E
Lindie
Interesting story Guy.
Perhaps we ought to reconvene 18 months from today and see if your buyers continue to be delighted with their “killer deal”. I think you should have started lower than $416,000. Hell, the builder took it, after a couple of calls to the janitor, without even a counter. What if in a month, once the world knows what your buyers paid, somebody else comes along and offers the builder $412,000 for a similar house? Think the builder will say no?
All your buyers have done is lower the floor in a falling market.
What do you say, Guy, can we reconvene on September 30, 2008, and compare what they paid now, $416K, with the then current appraisal?
Allow me a prediction: 18 months from today, this house is worth less than your buyers paid for it. I’m willing to go on record with my prediction. Are you, Guy?
Reno Ignoramus
I think all the bubble-sitters in Reno ought to send a bouquet of flowers to Guy’s clients. You know, as thanks for helping take prices down. Somewhere in Reno there is neighborhood where the comps just took a sizeable hit.
It’s sort of ironic, isn’t it? Just yesterday Diane posts some graphs ostensibly for the purpose of showing prices are stabilizing, and today Guy tells us a story about how his clients just drove the prices down in the neighborhood.
As I have said before, the only way prices go down is through sales. Like this one.
Scrapguy
You get the builder to take less than 5% off the sticker, and you regard this as a “killer deal”??
Oh, I know. The builder will throw in the usual upgrades, pay HOA fees for a while and the RPTT. Yada yada yada. If the builder had dropped the price an equivalent amount, it may have been a better deal.
The builders still have huge margins in their product, because they are building on land purchased years ago. 5% “reductions” will become commonplace from here on out.
By the end of 2008, or sooner, your buyers won’t be so happy.
MikeZ
Many of those reluctant sellers should be much more pliable in the next 6-12 mos after sitting though 2007.
It’s absoluetly *dead* out there and in spite of whatever charts Diane saw, I’ve seen no indication at all of a turnaround anywhere in sight.
I think your buyers got a good deal, not a great deal.
BanteringBear
Builders are really starting to sweat right now, and I bet they would’ve taken $375k. In this market, offers should be well below what you think they would accept. Why worry? All they can say is no. Then you walk. They’ll call back, guaranteed. These builders are getting desperate, and know that they need to get these homes sold yesterday. At a certain point, they’ll even sell at a loss. They understand the the severity of the situation. At $375k, they’re still making money off that house.
Jennifer
I agree that it’s a good deal not a great deal, and I too would have gone in lower to start…but nevertheless, good job getting over the hurdle of negotiating with home builder.
With that said, people, come on…these folks aren’t single handedly bringing down prices in a neighborhood!! This is basic market fundementals of supply and demand at work. Reno doesn’t have the underlying industry to support the increase they’ve seen in the last 3 years. I don’t think prices will go as low as they were 5 years ago, but there is a new floor…that is much lower than now but still higher than 5 years ago. These buyers are one of many who, along with so many other factors will bring prices back in line.
Move to Reno?
No matter how you want to spin it, $147 a sq.ft. (assuming no basement in that calculation), sounds like a great deal to me, especially since the buyers got new construction, location and model that they wanted. The people who are unhappy are those who bought at much higher prices.
I’ll be waiting for resale to go for $147 or lower a sq ft. It will take some time for that segment to wake up and smell the coffee. At the present moment it looks like new construction is the way to go.
Green NV
I’ve been debating all day if I should take Lindie up on her bet. This buyer bought at 5% under asking AFTER a 20% price cut. At 15% $/SF below the average counter offers on the resale stock. If you run the numbers, they are about = on rent/own. Like any housing purchase, they took a risk, but I think they have a pretty big cushion if things continue their downward trend, and might be well place to “appreciate” (haven’t used that word in a while) if things stabilize.
I can’t commend Guy more highly on the way he dealt with the developer. Going too lowball shreds any credibility he and his buyer might have. Had the offer been $400, the counter would most likely have been above the sale price.
Developers are a different sort of critter from the reseller. They are dispassionate (not their house). They know when to duck-and-cover or cut-and-run. They answer to boards of directors and shareholders. In a market such as this one, you can USE all of this against them to better your deal. (Mea culpa – Lennar is one of my major clients, but not up here). As a development or even a phase of development comes to a close, the cost of marketing and running that sales office gets pretty high. That’s why they offer incentives or cut costs at this phase. They want out. Opportunity for you. Most of these builders are publicly traded and report income quarterly. USE that – close prior to a corporate quarterly report and it is worth a percent or two to you if you work it.
So back to the main issue – do I take the bet? I think we have another 20% downward hit to take, but the buyer has built this in to the deal. Is this buyer going to be better off financially in 18 months based on their home purchase? Even this curmudgeon can recognize a good deal.
BET ON! All the wings you can eat. And Diane will comp the Kook-Ade.
MikeZ
“If you run the numbers, they are about = on rent/own.”
About equal? Show your math, please.
My coworker had trouble renting his $280K home of Seventh Avenue for $1100/mo.
He ended up with 2 rentless months last year and a cleaning bill after they moved out that was almost another month’s rent.
Even ignoring the 2 vacant months and the lost month’s rent for the cleaning bill, $1100/mo is only about half the cost of owning that home.
Insider
There is an old saying on Wall ST “don’t try to catch a falling knife” Applies to real-estate just like stocks.
Green NV
insider,
Sorry if I didn’t go far enough in the post to expain myself. Rent a sort of equal house in the South Meadows will cost you about $1500 a month. Loan/taxes/insurance on this place will run about $2500 a month, but the tax offset is about $1000 a month.
Buy this as a rental, and you are dead (per your example). Buy this as a residence. and you are pretty well covered.
Insider
Also sorry if I was not clear Green NV. When a stock is in a free-fall, you don’t want to buy. It’s like trying to catch a falling knife. You will get hurt. You can’t predict the bottom. That’s like real-estate right now. A falling knife. Have you seen the inventory numbers lately? http://www.housingtracker.net/old_housingtracker/location/Nevada/Reno/ Getting worse by the day. See you at the bottom in ’09.
Move to Reno?
Some us still like to pay cash for a house so mortgage interest deductions don’t mean a whole lot in figuring value.
Green NV
I’m ready to churl at all the “catching a falling knife” references ripped off from other blogs. If you have good hand-eye coordination, you grab the handle. If you have good real estate sense, you grab the deal. It you have neither, you bleed out on the kitchen floor before your foreclosure.
Inventory is about 15% over last year per the reference. Not a landswell in my book, especially with the added amount of housing stock we have added out here.
A cash buy of a proprty is certainly a buyer’s choice to consider. I was recently forced to do it. But I have never, ever, recalled seeing a financial professional recommending this course of action.
We each have our goals and limits, and maybe this was the best course in your financial milieu, but probably not the norm for the buyers out there today. But gimme all cash today, 30 day, and you have deal!
Move to Reno?
I’m sure the financial pros don’t recommend it because they can’t add in the warm and fuzzy feeling of living in a house that is all paid for.
The whole housing market is geared to paying a mortgage and so housing become just another payment. Notice that the Reno housing market has gone from 18% of income to 31%, and that is with very low mortgage interest rates. Soner or later those rates will increase to the point that the prices of homes will be totally out of sync with the ability of people to afford them. That will be the time that people with cash can get some “killer deals.”
Frankly, a lot of the homes being built today on slabs and 2×4’s are cheaply built, even with their pretty kitchen cabinets and granite counter tops. I would only buy one if it were new and I had a 10 year warranty with a well established builder. Older slab houses can be a real pain in the butt to repair.
The reason there not not more cash buyers out there is because the mentality of most people today is to consume and not to save. Just look at all those people who have used their home’s equity as an ATM.
Cincinnati Homes
Doom and gloom, Green NV… you sound like all the agents in my office who sit around the office all day waiting for the phone to ring…that because everyone is saying what a slow market it is, that justifies no business.
I had my most productive 6 months span during the highest inventory numbers in our market. Find buyers, price your houses better than competing properties in the area, and you will not be in the bottom in 09.