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East Bay Real Estate Focus

Providing Definitive Information for the East Bay Area

By Carl Medford | Agent in Fremont, CA

Artificially Low List Prices Are Wreaking Market Havoc: 6 MAJOR Emerging Problems

I actually still run into people who think they can lowball foreclosed homes (REOs) at the lower end of the market in the San Francisco Bay Area. Once common practice, lowball offers have been exiled, at least for the time being, to the dark side of the “used-to-be-planet” Pluto. A new tactic has emerged, and it’s proving to be VERY destructive to the current real estate landscape.

 

REO listing agents are listing properties at lowball prices.

 

Before getting excited, read on. Instead of listing their properties at reasonable levels, many REO listing agents are placing homes on the MLS at ridiculous prices. And I mean RIDICULOUS (read “insanely low”). This tactic is causing buyers to swarm like mosquitoes to a nudist colony. And here’s where it gets ugly: instead of cooperating with buyer agents and providing critical information, REO agents simply state, “highest and best.” In fact, in most cases, it’s impossible to contact REO agents. They refuse to answer phones and frequently won’t even answer emails.

 

The effect of this practice is simple: offers come flooding in, list prices are driven WAY above market value and new listings are off the market in a few short days. In the words of the irascible Yogi Berra, “This is déjà vu all over again.”

Only this time around, it’s worse. WAY worse. Let me explain.

 

In the “good-ole-days” just a few short years ago, agents cooperated when multiple offers came in on a specific property. Let’s say six offers came in with different prices and terms. The listing agent would take the offers, pool the best ingredients of each and build a multiple counter offer that they’d then send back to the top couple of offers. This multiple counter would typically include the maximum price offered by the best offer and the best terms from the others. You could usually be assured that the multiple counter offer your buyers received had the highest price, but no more. If you wanted to counter back and “sweeten” the pot a bit, you could.

 

Unfortunately, banks refuse to provide what used to be common courtesy.

They insist on a policy of “highest and best.” This policy is actually robbing buyer agents of their ability to function in their buyer’s best interests. As an example, I called an REO agent after receiving a “highest and best” email in response to my offer (which was an all cash offer already $100,000.00 over asking price). I asked how my offer stacked up in relationship to the others. We wanted to be able to respond effectively. He stated that he couldn’t discuss it with me.
The key word here is “couldn’t.” In fact, he could have. “Wouldn’t” would be the correct choice of words.

 

There’s a common misconception that listing agents cannot discuss offer details with other agents. That is simply not true. In fact, the C.A.R. form, Disclosure And Consent For Representation of More Than One Buyer or Seller states the following:

 

“Buyer is advised that Seller or Listing Agent may disclose the existence, terms, or conditions of Buyer’s offer unless all parties and their agent have signed a written confidentiality agreement.”

 

As a listing agent, it is actually in my seller’s best interest to discuss offer details with all interested parties so as to generate the best possible offers for my sellers. I also don’t want to waste the time of those who might want to write an offer that could best be categorized as “silly.” Nor my time, for that matter.

 

Not so with the banks and their agents. In most cases, they refuse to provide counter offers that would provide effective offer guidelines. They are seemingly taking the “high road” to make things as easy for them as possible and slanted entirely in their favor.

 

They have removed the human element and we are ALL losers as a result.


One local Realtor, Peter Fletcher of Windermere, states, “This entire process is building tremendous resentment between buyer agents, the banks and their representatives. In many ways it’s becoming like a civil war. And just like our nation’s civil war, it’s doing tremendous damage to the real estate industry and will ultimately require some significant healing once the current onslaught of REOs has been removed from the landscape.”




I couldn't agree more. MUCH damage is being done.

In my opinion, here are 6 SIGNIFICANT things wrong with these tactics:

 

1.    Buyers are developing champagne tastes on beer budgets.

They see great properties at low prices and think they actually have a chance to get a comparable home at that price point. They’re being deceived about true market values and seemingly no amount of education by their agents will convince them otherwise. Consequently, many buyers are spending all their time looking at homes that will be driven far above the amounts for which they’re approved.

 

2.    Realtors are wasting untold hours driving buyers to see homes they’ve no chance of obtaining.

They’re also frittering away countless hours writing offers that will never be accepted. It’s building a tidal wave of frustration and, dare I say, anger in buyer’s agents.

 

3.    Buyer’s agents are being robbed of their ability to respond in a fiduciary manner.

Since listing agents refuse to provide critical information, buyer agents have to guess. Since they want to land the deal, most are guessing as high as possible.

 

4.    An artificial spike in market values is being produced by the resulting high offering prices.

We recently submitted an offer on a home listed at $140,000.00 which should’ve sold at $200,000.00. Our offer of $240,000.00 was rejected in favor of higher offers.

 

5.    Home prices are escalating so quickly appraisers can’t keep pace.

Many homes are failing to appraise, causing banks to insist on offers being written with the appraisal contingency removed. This is VERY bad news for buyers and a violation of common sense.

 

6.    FHA loans are getting the short end of the stick.

Yes, FHA loans are difficult to process. But, for many buyers, it’s their only shot. And new PMI requirements in California have just bumped a huge number of conventional buyers into the FHA category. Listing agents take the offers that come in divide them into three categories: cash, conventional and … FHA. At the back of the bus. In the “also ran” category. As in, “not likely to succeed.” It’s not uncommon to tap out buyer reserves with every offer. Unfortunately, the vast majority of these offers are getting blown out of the water by conventional or all cash offers.

 

Bottom line: this is leaving a very bad taste in everyone’s mouth. It’s a poor practice at best and totally deceptive at worst. And, quite frankly, we believe it should stop. Unfortunately, I don’t see any end in sight in the near future. And as long as banks continue to be in control of the market AND continue to slowly meter out new listings at a controlled pace, this could go on for a long time.

 

In the meantime, here are 2 guidelines for buyers:

 

1.    Take the time to understand what is happening in the market.

This is a VERY unique market and we might be here a while – it is a seller’s market with all that entails. Be a student of the market and understand what is happening.

 

2.    Set your expectations at reasonable levels.

Recently, a nice, detached single family home in Union City went on the market at approximately $380,000.00. It garnered 70 offers and sold close to $450,000.00. Guess where the market is now? Not at $380,000.00. Yet buyers continue to believe that comparable homes offered at the same price will actually be available close to that price. Simply won’t happen. Truth is, you might be better off looking at townhouses. I know that’s not the popular choice, but faced with the chances of losing out on every multiple offer situation or owning a town home, guess which one I’d take? I want the option that actually puts a roof over my head with an option to upgrade in the future.

 

With the market rising, if you don’t act wisely now, your actions may be made for you as you get priced out of the market altogether. And that would take what is already a sad market for buyers and turn it into a personal tragedy ... with your name on it.

 

 

Comments

By Pacita Dimacali,  Sun Jul 19 2009, 19:13
AMEN!

Thanks for posting, Carl. Educating clients is a critical part of our jobs as realtors. Now, it looks like REO listing agents have to learn, too. If they receive 70 (I heard of one property that received 80!) offers, that means the property was priced unrealistically low. They only create work for themselves and for buyers agents who have to explain why their offer of $100k over list price still didn't get accepted.

>SIGH
By John Juarez,  Mon Jul 20 2009, 19:11
The current practice of pricing properties ridiculously low in order to generate many offers is incredibly aggravating.

My client wanted to write on offer on an attractive property that was being offered as a “short sale” for $290,000. She believed me when I told her that a property that nice would garner multiple offers so she decided to make a full price offer, naively believing that her offer would be accepted or, at least, she would receive a counter offer. She did not believe me when I pointed out there were three recent closed transactions of similar units in the same complex, the least of which sold for $325,000. I told her she needed to offer at least that amount or she was wasting her time (not to mention my time). Well, you know what happened. The offer was not accepted and there was no counter offer. I had to make three phone calls to find out that the offer was not accepted because the listing agent could not be bothered to return my calls or acknowledge by email that she received my offer as I had requested.

Carl, you are right. Do not expect any counter offer from the seller in a short sale or REO transaction. If there are multiple offers, be they 2 or 20, the demand (not to be confused with a counter offer) will be for “highest and best”. So…I tell my clients to write their highest and best right from the beginning…but until they have experienced the loss of the house that they wanted—often more than once—they do not believe that they have to do that.
By Al,  Thu Jul 30 2009, 13:28
I agree with Carl about a "little skin in the game."

However, I disagree with that we should settle for a townhome or condo. At this time the market is being influenced by several artificial factors, the banks are in complete control of the real estate market. If buyers wait, a huge cloud of forclosures will eventually flood the market again and prices will continue to drop well into next year. To me the $8000 tax rebate is a gimiick to create this false sense of urgency among home buyers. Amercians need to realize that the economy is still in decline, unemployment is still high, and a minority of people actually have the liquidity to make full cash offers on homes. Eventually banks have to release assetts or their investors will start getting real uneasy.
By Al,  Thu Jul 30 2009, 13:32
@Juarez, I agree that is poor manners by the lsiting agent.

Still who is to blame? Many realtors are still very lousy and honestly it only takes a few bad apples to give realtors a bad name. I don't trust real estate agents, listing agents or otherwise. Most of them don't even have a bachelors degree, and very few actually know the market well enough to understand what is going on. The agent I have now has a Masters from USC and is a professor and even he states it's a very trick time right now.
By gypsy,  Thu Jul 22 2010, 02:24
Good article. Would be interesting to revisit these conditions a year since this article was published and see what is going on. Hopefully it has stabilized. Last year I stopped paying attention to lowball offers in Oakland, they were more hassle then they were worth. It felt much like conditions three years ago, and we all know how that's ending.

I've seen the shadow inventory figures, and I believe that home prices nationally still have 15% downside potential. But real estate is local, and from a Bay Area perspective home prices probably have a better chance of holding their value with a dynamic high tech work force. Even if the U.S. economy double-dips into recession, other countries still need our technology, software, and hardware.
By Carl Medford,  Thu Aug 12 2010, 09:13
Gypsy:

With the market slowing after the tax credit, banks are starting to price REOs more in keeping with market values. There are simply not as many buyers out there right now to drive prices back up as high as they used to.

The REAL problem right now, however, is that short sale listing agents have picked up where REOs left off – there are some RIDICULOUS short sale prices out there right now – and buyers actually think they can get the house for that amount.

It’s simply silly.
.
By Craig Bosse,  Tue Aug 17 2010, 22:59
You're right Carl. The short sale listing agents are picking up on that game. It's an odd conversation to have with your buyers.

Buyer - "You mean if I offer what its listed for I can't have it???"
Agent - "Yes. That is a bait to pick up buyer leads and/or create a bidding war."
Buyer - "Isn't that fraud ?"

I have had this conversation more than I ever wanted to!

On a positive note I know of several agents in my office who price the properties at market value and have a very high success rate closing them.
 
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