Ah, the famous 20% solution!
It might be practical to try another famous percentage solution:
A 7% solution! Iâ€™ll get to that later.
When I run searches through the MLS I occasionally find listings that are priced at a premium of 20% to my opinion of todayâ€™s market value.
It would only be reasonable for me to have a buyer ask for a 20% discount on such a house.
The problem many sellers (including, perhaps especially, banks) have is adjusting to the reality of TODAYâ€™S market. They want last years price.
You are willing to offer them next years price, which you expect will be lower than todayâ€™s value.
Here is my perception of todayâ€™s market value:
It is already lower than everyone thinks it is.
Here is why: The sold statistics that everyone is counting on are old news. Yet, most of the calculations that the statisticians input are from last months (or last quarters sales.)
Your observation that perceived values will go down is correct. That is partly because the values that are currently perceived have already gone down.
Think about lightning. You see it, then ten seconds later, you hear it. When you watch a sunrise, the light you see shining left the sun 8 minutes before dawn. Todays market value is calculated off of numbers that are two to three months old.
I also agree with the predictive portion of your opinion. There are still so many factors pulling against a recovery in values, that further deterioration does seem more likely than not.
That means that you will have to be a tough negotiator, and be willing to leave a lot of nice willing houses sitting on the shelf.
Now to explain the 7% solution. Average values have dropped between 20 to 30 % depending on zip code, since the peak: that works out to an average of a 1% decline per month for the past 30 months.
If you extrapolate that out to continue for another 20 months then you would see that full 20% dilution of current value.
No honest real estate agent is going to tell you that they can easily find a seller who is going to part with their house for 80% of its current value. The only way to obtain the full 20% discount is to wait it out.
- The main risk in that plan is that you might wait too long and not catch the absolute bottom of the market.
Sellers can be persuaded to capitulate and sell their properties for 7% discounts from current perceived value.
How do we buyers agents do that? Well, we explain to them that, sure the comps from 2 and 3 months ago show $380,000 but.... since prices have been dropping at 1% per month, the price has to be adjusted to only $370,000. Next we tell them that if they donâ€™t take my buyer who is right here, right now, with an approved loan and 20% cash down. that they risk the very real danger of waiting another two or three months waiting for a buyer willing to pay â€œmarketâ€
I then pull out the 1% depreciation schedule again and show them that the house will only be worth $360K after two or more months. Then I remind them that they will have been paying mortgage payments, insurance, taxes, maintenance, and utilities on a vacant house, and frittered away another $6,600 over the 3 extra months, while they were continuing to lose value.
Then I commiserate with them, I let them know that I understand they perceive that my buyer is trying to take advantage of their unfortunate situation. - but that my buyer also is concerned that the market could continue to drop over the next year as it has for the past 3 and he does not want to lose a lot of equity on his purchase. It is not so much that he is taking unfair advantage as he is scared for his own financial health.
That is one scenario of how we might negotiate a 7% solution
( $26,600 ) on a $380,000 property.