MoCoRealEstate

Should you offer $1M on a $1.2M listing?

April 10th, 2009 Categories: Buying, Market Updates

How low can I go when making a purchase offer?

I get this question a lot these days.  I took a detailed look at all sales for 2008 and provided an analysis for list-to-sales price ratios for Montgomery County.  This provided a good overview for the County, but it left basic questions unanswered:

• How does a home’s ‘days on market’ impact reductions?
• Can a buyer get bigger reductions on more expensive homes?
• Does the available inventory affect price reductions?

In this article, we’ll drill into the statistics and get some answers.

Overall Statistics for Montgomery County

Before we start digging into the numbers, let’s look at a break-down of sales-to-list reductions for Montgomery County for closed sales that went under contract after October 1st, 2008 through April 1st, 2009.  To get a true picture of price reductions, sales prices were reduced by buyer credits (so if a home listed for $700,000 sold for $700,000 with a $10,000 credit, $690,000 would be used as the sales price).  Here’s the breakdown:

The average sales-to-list price for all closed properties was 95% or a 5% reduction.  A summary of homes selling for:

• Asking price or more – 14% of total
• Up to 3% reduction – 22%
• 3% to 5% reduction – 21%
• 5% to 8% reduction – 22%
• Over 8% – 21%

So based on these stats, is a $200,000 reduction (17%) on a $1.2M listing realistic?  Only about 3% of these sales had reductions of 17% or more, so your odds are pretty slim.  How about a $100,000 (8%) reduction?   Your odds are much better.  Over 26% of these homes sold with a reduction of 8% or more.

Price Reductions and Days on Market

The longer a home is on the market, the more motivated the seller, right?  Seems logical.  Let’s break down this data by the number of days on market:

The trend is clear:  a buyer has better odds of larger reductions for homes that have been available for a longer period of time. For homes on the market more than 90 days, about 29% sold for reductions of 9% or more.

Price Reductions, Home Price and Inventory

I have to admit, there’s usually a point in processing stats like this when my eyes start to blur.  The purpose of this type of analysis is to provide clarity on the market – not confusion – so I’ll spare you the sight of another graph.

For homes priced over $900,000, home reductions are greater.  37% of these homes sold with reductions of 9% more.  But price alone isn’t the driver, but rather available inventory.  Inventory is highest in the upper brackets with over two years’ available homes — significantly higher than for lower priced homes.

Conclusion:  The higher the inventory, the greater the buyer’s leverage.

The Bottom Line

After all that, what do you do when making a purchase offer? Go really low? Offer close to asking price?   Here’s some guidelines:

• Look at recent comparable sales — similar homes that have *sold* in the surrounding area (not the *asking* price for similar homes).  This is your baseline.
• Understand available inventory.  The higher the inventory, pressure will continue to push values downward.  Even if the home is well-priced and there’s more than 12 months available inventory, then you need to go in lower.
• If your home of interest has been on the market a while, your odds of negotiating a more aggressive reduction are greater.
• If homes are moving and it’s price right, then you better act quick or you may miss out.

Above all – make sure you stay focused on finding a home that fits your needs and make a purchase that you can live with.

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Do you have questions about the Montgomery County real estate market? Call us at 301-527-9079 or send an email for more info about buying, selling and living in Montgomery County, Maryland.

Posted by Bruce Lemieux

This entry was posted on Friday, April 10th, 2009 at 5:22 pm and is filed under Buying, Market Updates. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

1. Benevolent Spectator said at April 12th, 2009 at 9:09 am

   Very interesting analysis, it shows that inventory and ‘days on market’ are a large factor when determining the potential discount. It would be interesting to see an analysis for different price ranges that takes into account the number of distressed properties. I wonder if the large number of small reductions are due to the fact that the distressed properties are already priced very attractively, to the point where potential buyers have to bid aggressively.

2. Bruce Lemieux said at April 12th, 2009 at 10:09 am

   That is a great question. The challenge with performing this analysis is identifying the distressed properties that have closed. My home search provider has an algorithm for identifying active distressed properties by reviewing comments, but this isn’t available for closed properties, so I can’t segregate these listings and give you a solid answer.

   Here’s my take on what’s happening. I believe that most of the homes selling quickly are normal resales that are priced very well. I see this quite a bit. A home in great condition will come on the market priced below the competition and it gets snapped up. There’s two categories of distressed listings: #1 owner seeking a short-sale (pre-foreclosure) and #2 bank-owned (post-foreclosure). Of these two, I will see many bank-owned properties priced below market that sell very quickly. Short-sales, however, tend to lag. Very few are approved by the bank when they are made available on the market. Buyers and agents aren’t quick to jump on these since most are ‘non listings’.

   I took a look at the number of distressed properties on the market right now. There are about 4,553 homes available in Montgomery County. Of these, about 957 – 21% – are distressed (this number keeps coming down). Looking at the 957, 225 – 24% – are bank owned, and the balance are short-sales. So looking at distress sales, only about 1/4 are bank owned. Most of these move pretty quick.

   Going back to your question, I would agree that the ‘bank-owned’ portion of distress sales are selling quick. Since this still makes up a minority of our home sales, most quick sales are from sellers who have a great product and have priced it to sell.

   Thanks for your comment!

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