Winning Bidding Strategies

Posted on Monday 28 August 2006

Whether you’re a first-time buyer or the veteran of several home purchases, making an offer can be intimidating. Frequently, there are “intangible” factors in play during a negotiation. While money and terms are critically important, never underestimate the role of emotions—yours and the seller’s.

Laying the Groundwork

You have a better chance of getting your offer accepted if the seller has met and likes you. Your offer may even win out over a higher bid from an unknown bidder. When submitting your offer, include a letter telling the seller how much you like the house, a brief background and family picture.

In negotiations, information is power. A buyer’s agent can’t talk to a seller directly, so consider asking the seller why he’s selling. Find out what his “hot buttons” are. If he’s concerned about finding a replacement property, offer to rent back the property for 30 to 60 days so the seller has time to find a new home. Do whatever you can to make your offer attractive to the seller, accommodating his terms while sticking to your budget.

How Much Should You Bid?

The more you know, the better you can structure your bid. Find out what comparable properties are selling for. Is the trend going higher or lower? Before you bid, set a limit on how much you will pay for a home. It’s tempting to get caught in a bidding frenzy, but before you know it, you’re knee deep in a very expensive game of one-upsmanship.

If comparable properties are much lower than the seller’s asking price, have your agent include this documentation with your offer. In rapidly rising markets, consider bidding slightly above the asking price. The property may rise in value during escrow.

Listing or seller’s agents are usually prohibited from disclosing if there are other bids or revealing a seller’s bottom price unless sellers give permission to share this information. If you are not emotionally attached to the property or if you discover that there are no other offers, start low. However, consider the seller’s feelings; starting too low may insult him. In a multiple bid situation, submit a stronger offer at the onset, as many sellers only counter the top bidders.

If you are reaching your dollar limit while negotiating, have your agent tell the other party that this is your final offer and that you are considering several other properties. If the seller says he will wait for a higher price, have your agent emphasize that you may not be around when he reconsiders.

Timing Counts

If you like a property, write the offer as soon as possible. Most contracts allow the buyer some time to make inspections and review reports during the “due diligence period.” You can
usually back out of the deal during this time without a penalty. Delays can cost you your dream home.

As quick as you are to write an offer, someone might still beat you to the punch. Ask your agent if your offer can be in a backup position. Should the original offer not be consummated for any reason, the property will automatically go to you. Be sure to include a provision in your backup offer allowing you to cancel it at anytime.

Beating the Competition

Even in a buyer’s market, the best homes will attract plenty of attention. Making the highest offer is not the only way to beat competing offers. You might consider a short escrow and an all-cash bid, assuming your lender can accommodate the terms. Always include a pre-approval letter from your lender, which may give you an edge over a higher offer without similar documentation. Another incentive to sellers is to show a bigger deposit with your offer (more than 3% of the purchase price). A higher deposit lets the seller know that you are very committed to the home.

One key consideration is to sell your current home before you bid. Offers that are contingent upon the buyer selling his home first are given the least attention. In fact, minimizing the number of contingencies in your offer will put you head and shoulders above the rest. Remember that if a home needs work, it’s wise to make your request for repairs toward the end of the due diligence period when the seller is more vested in the deal.

If you anticipate the seller taking the highest offer without negotiation, bid an odd number. If the list price is $400,000, bid $400,100. Sometimes, you’ll beat the competition by a mere $100. Finally, if you’re in the counter offer phase and there are other offers, consider adding an “escalation clause.” For example, stipulate that if there is another offer higher than yours, you will increase your bid to $2,000 over the highest offer with proof of the higher offer.

Breaking a Deadlock

If the bidding process comes to a screeching halt, but you still want the home, consider giving in to one of the seller’s demands to achieve a lower price. For example, propose that you and the seller split the difference between your offer and the asking price. You might also consider writing an “either/or contract.” For example, offer the seller a higher price with a longer escrow or a lower price with a shorter escrow. This will provide the seller with some options and might jump-start negotiations.

Smart negotiators often use the “take away clause” technique. Assume that your last bid was $290,000 and the seller’s last offer was $315,000. Your limit is $300,000. Make a counter offer at $295,000 and give the seller two days to accept it. Let the seller know that you will pay $300,000 if he accepts within 24 hours. This method puts pressure on the seller to respond quickly.

Whichever path you choose, set a deadline for action, so everyone can move on if there’s no resolution.

The Art of Giving In

If you absolutely must have a home you’ve seen, you may have to meet the seller’s terms and price. Sometimes, sellers are stuck on a price and just won’t budge.

Consider meeting the seller’s price, but asking him to pay your closing costs. If the seller still won’t compromise and you really want the home, contemplate paying the extra money. Over the course of a 30-year mortgage it may amount to only a couple of dollars per day.

Lastly, consider asking the seller to lend you the difference between your top offer and his bottom line. Create a realistic repayment schedule and begin servicing the loan as soon as possible.

Remember that each seller is different and that there are no one-size-fits-all strategies. However, using some of these tried and true techniques, getting to know the seller, keeping your emotions in check and working with an experienced Realtor can often make the difference in a tough negotiation.


Brian Yui @ 2:34 pm
Filed under: Articles
Condo Conversions

Posted on Wednesday 16 August 2006

The Truth About Condominium Conversions

As home prices climb in major metropolitan areas, many real estate developers are
converting apartment buildings into condominiums. These developers usually renovate kitchens, baths and flooring, replace light fixtures, add a coat of paint and voila! the transformation from apartment to converted condo is complete.


Affordable Housing

In California, these condo conversions create affordable housing for home buyers in many areas where new single-family homes or condominiums have a median price that outpaces average income. Home buyers benefit from the developers’ savings: it costs less to convert apartments to condos than it does to build a project from raw land, particularly in areas where land is at a premium.

Condo conversions generally sell at a discount compared to new condominiums. For buyers, the downside is that they are buying a refurbished older unit as opposed to a brand new one. The obvious upside is that with discounted pricing comes greater accessibility to a broader demographic of potential home buyers. In San Diego, California, for example, a flood of condo conversions over the past few years has created a large inventory of condominiums for sale, resulting in some price decreases in the marketplace. Buyers are offered incentives ranging from cash to cars as developers try to sell their units to recoup the conversion costs. However, each local real estate market is different, so be sure to research the current conditions in your area.

Buyer Beware

Although the carpeting, granite counter tops and remodeled bathrooms inside a converted condo are new, the building’s exterior may or may not have received the same attention or renovation. Buyers should hire an inspector to check the condition of the unit, as well as the entire complex, including common areas, plumbing, and roofs.

Through their monthly home owners’ association fees, condo dwellers are responsible for a prorated portion of building maintenance and upkeep. The developers may have skimped on upgrades or maintenance to the exterior, roof, elevator, pool, wiring, etc. Should any structural problems arise in the future, deferred maintenance items could result in significantly higher homeowner dues to cover the cost of repairs.

While the home inspector is evaluating the building’s condition, be sure to find out how high the cash reserves are in the home owners associations’ bank accounts. Ask for a copy of the Reserve Study and compare the recommended reserve balance with the actual reserve balance. If the home owners’ association has little cash on hand, residents will need to raise money to perform routine maintenance, and you’ll be in for a surprise should the structure need any significant work.

Condo Controversy

When developers buy apartment buildings to convert to condominiums, the existing renters are displaced. Several cities have recently created new laws to protect the rights of these renters. As a result, we are starting to see a decrease in condo conversions as many cities impose greater restrictions on condo conversions.

While some renters have been displaced, others are having difficulty finding an apartment at all. In some areas, the condo conversion trend has decreased the pool of available rentals. Near-term predictions for the rental market already show an increase in demand for rentals due to rising interest rates. As demand increases and the supply of rentals decreases, expect to see rents trend higher in many markets.

In other areas, where the inventory of condos for sale exceeds the number of buyers, developers are turning condo projects into apartments or putting them back on the market as rentals. Some landlords are even inviting back the tenants they displaced because they can't sell the units to developers. So, in these markets, as the supply of rentals increases, renters may benefit from lower prices.

The Bottom Line

For many buyers, condo conversions fit the bill and their bottom line perfectly. These remodeled units compete well against the existing resale condo inventory, many of which have not been renovated and have older fixtures. Assuming that you’ve done your due diligence and that the complex’s structure and finances are in good shape, condo conversions may offer the affordable housing alternative you’ve been seeking.


Brian Yui @ 7:02 am
Filed under: Articles
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