Author Topic: Review our offer letter?  (Read 7023 times)

Rob

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Review our offer letter?
« on: July 08, 2013, 05:42:34 PM »
My business partner and I have found a duplex that we are going to make an offer on, and I was hoping to get some feedback on our offer letter. We need to make a strong case because we are trying to get a good deal below the listing and think it may be possible.

There are two properties:
Property A - The duplex we are looking to buy
Property B - The duplex right next door

Both are 2 units - 3 br, 1 bath
Property A is about 1k square feet larger building, no garage.
Property B is about 200 square feet larger lot and has a 2 car garage.

Property A is listed at 230k, reduce from 250k after being on the market only 25 days. It has now been about 35 days.
Property B sold in June 2012 for 215k.

We want to get property A for 200k - 210k, hopefully at about 205k. We believe the seller has some incentive to sell quickly and we can close quickly without significant contingencies.

We are considering two offering strategies. Ideally, we would like to agree on this offer before our lease needs to be renewed on 7/15, but we are willing to resign if we can't agree quickly. Therefore, we are considering making a one time and final offer of about 205k, or offering about 195k and negotiating, which will likely take longer than a week. Would love to hear thoughts on that if you have any. Here is a rough draft of our offer letter, and would really appreciate feedback:

Quote
Dear …

Our one time and final offer for the property of Property A is $20x,xxx
We ask that you please consider the following data when assessing our offer:

For zip code xxxxx:
•   Median sale prices are down 1.2% compared to this time last year. The 4 month moving average for median sale prices is down about 5.5% from this time last year.
•   Over the last 12 months, the moving average days on market is about 170 days. Our offer can be done quickly, and is not contingent on selling our own home.

Nationally:
•   Over the last 3 months, interest rates on mortgages have increased by over 130 basis points and continue to rise rapidly
•   Over the last 12 months, interest rates on mortgages have increased by over 110 basis points
As interest rates have risen, sales prices have fallen and this will continue as interest rates continue to rise rapidly

Comparing to the most comparable home, Property B:
Tax Year        Property B        Property A
2012              $202,600           $202,600
2011              $230,200           $229,300
2010              $245,500           $229,300
2009              $245,500           $229,300
2008              $269,200           $251,500
2007              $292,500           $273,300
2006              $292,500           $273,300
2005              $242,400           $226,500
2004              $198,800           $226,500
Avg                $246,578           $237,956

•   Over the last 9 years, your property has been assessed at a higher value than Property B only one time. Based on the difference in assessments from 2004 to 2005 for Property B while your property remained constant, it seems that some additional value was added at that point. We have chosen to include 2004 in our analysis anyway, because we can’t be sure.

There are a few different methods to mathematically assess fair value here:

o   The first two methods ignore that fact that sales prices are lower now than last year (see data above)
o   Value vs. One Year Assessment
   Property B sold for $215k in a year it was assessed at $230k, a 7% discount
   This would value your property at $187k based on the assessment of $202k
o   Value vs. Average Assessment
   Property B sold for $215k versus a 9 year average assessment (including 2012—after sale) of $246.5k, a 14.7% discount
   This would value your property at $203k based on the 9 year average assessment of $238k

-------------------------------------------------------

o   Both of the following ignore the historically higher value of Property B and assume equivalent values based on 2012 tax assessment
o   Value vs. Zip Code Market Conditions
   The 4 month moving average for sale prices is down 5.5% since Property B sold. $215k discounted by the current market is $203k
   The year on year average for sale prices is down 1.5% since Property B sold. $215k discounted by the current market is $212k

-------------------------------------------------------

o   Value vs. List Price
   Based on the 4 month moving average, houses sell for 93% of their list price.
   If we assume that Property B is valued at $246.5k based on average assessment and was listed at a 7% discount ($230k)to average assessment, your property assessed and an average of $238k could arguably be listed at $214k and sell for 93% of that, at $199k

-------------------------------------------------------

Based on this analysis, we feel the value of the house falls in between $187k and $212k. It is our opinion that it would be unlikely to find a buyer at the high end of the range given the current market conditions and a higher value directly comparable house selling next door for $215k in a time period with significantly lower interest rates and higher average sales prices. It is difficult to argue the higher range, and in our valuations it is somewhat of an outlier. Additionally, we are able to close the deal quickly and easily:
•   We have a letter of pre-approval from our mortgage lender
•   We have no contingencies involving the sale of another property
•   We have not asked you to make any major changes or improvements

We feel strongly that our offer of $20x,xxx is a fair value and we thank you for your consideration. We would be happy to complete this deal quickly if you choose to accept.

Thank you.




(Note) I also have this, but am unsure if I should work it in:
To sell this home for $215k or more, a buyer would have to be convinced that the market is higher than last year (data shows otherwise) and that the value of the property is equivalent or greater to the house next door (equivalent at best).  We find it unlikely that a buyer that has those views will be found quickly and with such an easy sale as our offer would allow. As interest rates continue to rise (still historically low), buyers will be less likely to be convinced of that price tag.

Thank you for the time, we greatly, greatly appreciate any feedback and I will do my best to answer any questions! Is there any huge flaw in this? Is it convincing? Is tax assessment a horrible way to argue value on two neighboring properties?


« Last Edit: July 08, 2013, 06:00:27 PM by Rob »

dragoncar

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Re: Review our offer letter?
« Reply #1 on: July 08, 2013, 05:53:39 PM »
Is this typical?  I think it would be off putting and open to selective nitpicking.

Rob

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Re: Review our offer letter?
« Reply #2 on: July 08, 2013, 05:58:05 PM »
I have no idea, all I know is that we need some form of negotiation because we are fairly sure the realtor has very little interest in selling below 215k and would advise against it to the seller.

Essentially, we think it may be worth more than the property next door, but have some data that may show differently that we want to make the seller aware of.

I am concerned about whether or not it would be off putting and that was one of the reasons I wanted to post.
« Last Edit: July 08, 2013, 06:03:00 PM by Rob »

Zamboni

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Re: Review our offer letter?
« Reply #3 on: July 08, 2013, 06:36:20 PM »
Do you have a buyer's agent?  If so, then you could make the agent aware of all the details in the letter without presenting it so formally to the seller.  Sometimes an informal agent to agent conversation helps.

Seller's agents make their money by turnover.  Their commission won't be much different if the purchase price is $195K or $215K, so I doubt they'll be the one holding firm.  The seller, on the other hand . . .

Rob

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Re: Review our offer letter?
« Reply #4 on: July 08, 2013, 08:10:22 PM »
Thanks for the feedback. No, we don't. Do you think it would be more effective to verbally argue these points to the realtor and hope that he relays the message to the seller?

Additionally, is there anything that jumps out as a silly or irrelevant point that we wouldn't want to include? Are arguments made in it legitimate or do we need to find other points of negotiation?
« Last Edit: July 08, 2013, 08:13:57 PM by Rob »

Zamboni

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Re: Review our offer letter?
« Reply #5 on: July 08, 2013, 08:40:18 PM »
Yes, go verbally through your points.  The offer letter should be simple and boilerplate.  If it is really a one-time firm offer, and you won't accept a counter offer because of timing, then let the agent know that verbally and explain why you are in a rush.  It's much better NOT to be in a rush, as a slow, multi-point negotiation often yields a better result.  If you can go month to month with your current lease, then it might make sense to offer lower (say $195K) and let the agent know that you are reasonable (code for open to counter offers) and not in a huge rush.  Patience is your friend.  Usually there is a window for responding to offers (3days, but could be up to a week; sometimes people go with 24 h deadlines but I think that's impolite)

You can quickly run through all that you carefully wrote out verbally with the seller's agent over the phone.  I think start out with the things in your favor:  pre-approved, not contingent on another sale, etc.  Then point out that the market is flat or declining (which the agent already knows, trust me), and maybe talk about the specific comparisons you've made with the house next door.  Not sure that last part will work; see below.

The seller might (rightly or wrongly) think that their place is much better than the place next door.  They probably like the paint colors better, or perhaps they have a nicer garden or think their light fixtures are more swank.  Perhaps they added some special custom tile in the bathroom; it might look run of the mill or even ugly to you, but they thought it was the best choice when they picked it out.  None of this makes a huge impact on value, but seller's are usually irrational when it comes to the little touches they've added to a property.  Also, it sounds like the house next door is not currently for sale, which makes that angle a bit of a moot point.  So, I just want to let you know that the "house next door" tactic might not work at all.  Better to talk about multiple comparison properties, and how you are making a serious offer but that you have several other places in mind for purchase if this one doesn't pan out.

Good luck!

brandino29

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Re: Review our offer letter?
« Reply #6 on: July 08, 2013, 08:48:59 PM »
I'm with Dragoncar on this one.   

Any reasonable seller should consider a reasonable offer without a detailed letter arguing your points.  I think it will come off as confrontational and cheap and significantly decrease the likelihood they'd accept it.  Make a standard offer through your agent (or theirs if you don't have one) that is a little below what you would be willing to pay for it.  If it's within the ballpark of what they're willing to sell it for, you'll get a counteroffer that ought to be in your ballpark. 

Plus, I'd say be patient.  My dad made an offer on a place 25% below the asking price of a place that was priced too high.  His offer was initially turned down, but 4 months later when the place still hadn't sold because it was overpriced, the seller finally came around, called my dad and came down over 20%.  And if you're thinking you don't have time to be patient because it will sell, then you have to really wonder if you're underpricing your offer. 

Rob

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Re: Review our offer letter?
« Reply #7 on: July 08, 2013, 09:10:52 PM »
Thank you for the feedback. We do think our offer is underpriced, but buying cheap is one of the best ways to make money and we think that the seller wants to move quickly. We originally tried to offer $180k, but the realtor pretty much scoffed it away and we didn't end up offering. I think that is why we feel like we need to make these points to the seller somehow. I'm not sure the realtor will properly convey our points to the seller, hence the letter. I feel like it could sell pretty easily for $215k, but our goal isn't to hold it for more than a few years at this point, so we would like to create equity in the sale. We would be ok with resigning our lease and getting it for cheaper, but then we have the additional risk that someone comes and buys it for closer to the listing than we would like.

honobob

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Re: Review our offer letter?
« Reply #8 on: July 08, 2013, 10:56:39 PM »
This is all your offer should include.  Everything else is garbage and does NOT support a market value.  You think the market value is $215,000 but DO NOT support how you came to that value.  The seller should have a reasonable idea what the market value is but may sell to you for less because of the three valid items you have conveyed,

These:
•   We have a letter of pre-approval from our mortgage lender
•   We have no contingencies involving the sale of another property
•   We have not asked you to make any major changes or improvements

You do seem to rely on assessed values/averages/list price.  These do not have much to do with current market value. 
Why not ask the realtor how the asking price was determined?  If that seems to be market value or higher for negotiation then make your offer based on their market value minus what you think it is worth to the seller to have a ready, willing and able buyer.  Leave the contract open for a very short period (24 hours). 

Zamboni

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Re: Review our offer letter?
« Reply #9 on: July 09, 2013, 05:44:26 AM »
Quote
I feel like it could sell pretty easily for $215k

If this the actual case, then they know that and won't be moved by your arguments.  I agree you'll just sound nitpicky.  They don't care about the house next door or why you personally need to pay less, and tax valuations don't really mean anything. 

As others have noted, keep your offer simple and boilerplate.

imho realtors who talk purchasers out of making an offer (even a low ball one) are not doing their job.  The idea is to get any offer and convey it to the seller, then go from there with negotiations.  But maybe the realtor doesn't want to work hard?  Negotiations are hard work, and most people are bad at it and don't like to do it.

fiveoclockshadow

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Re: Review our offer letter?
« Reply #10 on: July 09, 2013, 07:39:12 AM »
Is there any huge flaw in this?

Yes, it is annoying to receive and read.  Unless the market is desperately bad and there are no other offers it flags you as a buyer to avoid.  Reading further in the thread you already low-balled them once (a great way to get ignored in all future negotiations) and this will only make things worse.  If I got this letter I'd immediately think "this guy is going to be a pain in the ass come escrow and the home inspection".

Quote
Is it convincing?

Of course not.  Even if rational and well founded, what makes you think people rationally value their houses?  Seller brokers want turn over, they are already telling the seller to lower the price.  Just look at most real estate listings, at least half have the 30 to 60 day "owner's price" valuation until dropping to what the seller broker recommended in the first place.  This is what all good seller broker's do, if the owner is too obstinate to take their pricing advice just say "well let's do your price for a month and then re-evaluate".  Only months on the market with no offers at asking will change a seller's mind about price.  You certainly aren't going to change their mind with a letter - especially after having already low-balled them.

Quote
Is tax assessment a horrible way to argue value on two neighboring properties?

Absolutely horrible.  Assessments are all over the place, out of date, and often subject to protest and revision by the owner and taxing authority.  Assessors typically never see the inside of a home or account for the landscaping.  Depending on the location they may have anchored at the last sale and then grossly tracked market movements since then.

The *only* argument that is at all convincing is that the value is well above appraisal and thus can't be mortgaged.  And the only way to do that is have an appraisal.  So if you think you are so right make an offer contingent on the appraisal price in escrow.  At that point maybe the seller will see the light, and if not you can exit escrow.  Otherwise wait or find another property.

SunshineGirl

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Re: Review our offer letter?
« Reply #11 on: July 09, 2013, 08:14:10 AM »
The letter did not bother me, and I think listing the interest rate changes and such was kind of cool. However, as I read the convincing letter, I had to wonder: Are YOU better off not buying the property until you see how interest rate changes might affect the property's value?

You are correct in that you make your money going in, and what you think is a good deal today may, in retrospect, turn out to be not so good if home prices drop further.

The bottom line is the agent is required by law to submit all offers, so her just "scoffing" at your initial lowball offer means nothing if it wasn't a formal written offer. She should be grateful you aren't using an agent and therefore gets to keep a larger fee, and at minimum, a three percent reduction in the asking price reflects that. But any offers need to be in writing. I

However, given the stats you provided about the market in your area, I wouldn't rush to make an offer. You can't be emotional or impatient if this is a business decision vs. a personal one. Be prepared to walk away.

I only own a few properties, and they are cash cows -- but I put in lots of offers that got rejected along the way or that I pulled out of along the way once I had inspections done, etc. Buying right in the first place is key, so if you think $187K is a fair price, you shouldn't be offering more.


SnackDog

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Re: Review our offer letter?
« Reply #12 on: July 09, 2013, 08:38:36 AM »
If I were a realtor I am not sure I would even forward such a letter.  Why aren't you using a buyer's realtor? They are free and in my experience can be worth their weight in gold mostly by helping you not buy the wrong property, by getting the best overall terms in a purchase and working with the seller's agent on any issues during escrow.  My last buyer's agent helped us purchase a home which was not even on the market - he just happened to know about it through contacts.
« Last Edit: July 09, 2013, 10:03:02 AM by SnackDog »

totoro

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Re: Review our offer letter?
« Reply #13 on: July 09, 2013, 09:43:21 AM »
The letter you drafted would be annoying to receive.  You can discuss points you want to make verbally with the realtor.   

Skip the letter and make your second offer.  You realtor is legally bound to present the offer to the seller unless the seller has directed them to refuse all offers below a certain number.  Realtors are motivated to sell at a reduced rate because it does not impact their commission that much.

Buyer's realtors are only helpful imo if you are following the market closely yourself.  I don't use them.  I have negotiated a price drop with a selling realtor as they did not have to split their commission.

DoubleDown

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Re: Review our offer letter?
« Reply #14 on: July 09, 2013, 10:00:59 AM »
This is all your offer should include.  Everything else is garbage and does NOT support a market value.  You think the market value is $215,000 but DO NOT support how you came to that value.  The seller should have a reasonable idea what the market value is but may sell to you for less because of the three valid items you have conveyed,

These:
•   We have a letter of pre-approval from our mortgage lender
•   We have no contingencies involving the sale of another property
•   We have not asked you to make any major changes or improvements

You do seem to rely on assessed values/averages/list price.  These do not have much to do with current market value. 
Why not ask the realtor how the asking price was determined?  If that seems to be market value or higher for negotiation then make your offer based on their market value minus what you think it is worth to the seller to have a ready, willing and able buyer.  Leave the contract open for a very short period (24 hours).

+1

Also, if you want to offer $195k, then instead pick an oddball amount like $194,260. When they question why you offered such an unusual amount, tell them that is the exact amount your market analysis determined the property is worth. Might seem strange, but this approach suggests you used very detailed analysis to determine the actual market value of the property, that you wouldn't pay any more than this exact real market value, and there is substantial evidence this approach works.

Rob

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Re: Review our offer letter?
« Reply #15 on: July 14, 2013, 04:43:08 PM »
Thank you all so much for the help. Last week, we gave an initial offer of 200k. Based on the advice here, we decided not to submit the letter, but rather discussed the points that we had in there with the realtor. The owner countered with 224.9k. We then offered 210k, to which she countered 219k. We have given it a couple of days, and are now in the process of submitting our final offer of 212k with a deadline to accept of tomorrow night. I know it is a little higher than our goal, but I still think it is a good deal for us and we should be able to get at least the same when we sell. The realtor earlier said it would be a miracle if he could get her to 215k, but when we spoke today, he said that he doesn't know if she will accept, but that it could be possible. I tend to think it is going to get accepted. I think in her mind when she countered with 219k, she mentally prepared to let it go for 215k, so I would not be surprised if it is accepted. I will give updates when we know! Exciting! Thanks again for all the advice.

Zamboni

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Re: Review our offer letter?
« Reply #16 on: July 14, 2013, 04:45:12 PM »
Good luck!  Isn't negotiation fun?

fiveoclockshadow

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Re: Review our offer letter?
« Reply #17 on: July 14, 2013, 05:39:25 PM »
Thanks for the update and glad to hear it might go well!  Best of luck!

SnackDog

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Re: Review our offer letter?
« Reply #18 on: July 14, 2013, 07:02:12 PM »
Lock her in to a long escrow then grind her down on inspections and whatnot...

Rob

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Re: Review our offer letter?
« Reply #19 on: July 15, 2013, 09:26:42 PM »
We got an accepted offer for 212k! Thank you all for the help. Very excited. I will definitely be posting more information on the property in the short future! I'll make sure to post pictures when I get a chance and everything, should be fun for people to see through the whole process, and maybe readers can learn a bit as well!


Good luck!  Isn't negotiation fun?

At times haha!

Lock her in to a long escrow then grind her down on inspections and whatnot...

What do you mean by this?

Another Reader

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Re: Review our offer letter?
« Reply #20 on: July 15, 2013, 09:39:05 PM »
You appear to be paying market value, well over your intended purchase price.   Why?

If you sent a knowledgeable seller that letter, you would destroy your credibility with the seller and the seller's agent.  For once, I agree with Honobob.  Make your offer, show you are a strong buyer, and leave the discussion to the seller and his/her agent.

Zamboni

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Re: Review our offer letter?
« Reply #21 on: July 16, 2013, 02:33:35 AM »
Congratulations on having your offer accepted.

$212K is only 1% over your initially stated target range.  Pretty close.

As SnackDog suggested, if anything major comes up in inspection, then you can ask the seller to make the repairs or for further price reductions.  This is common.  So, make sure you get a very thorough inspector.  Something always comes up in inspection, and the seller will be forced to disclose it to new buyers if you walk away from the deal, so they usually have high motivation to get it taken care of or give you some concession to get the deal done.

SnackDog

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Re: Review our offer letter?
« Reply #22 on: July 16, 2013, 07:29:49 AM »
The "forced" disclosure of the inspection deficiencies may depend on state laws and seller ethics.

Years ago we found a house we liked quite a lot which had been originally listed for $1.2MM but had been on the market for a while and had been reduced several times. The seller was hoping to cash out and retire with his equity.  He was asking $975k and we entered escrow at $875k I think.  Inspections turned up all sorts of issues, almost to the point of us walking away.  Our realtor was really waving us off but we had been in the market for a while and wanted to make  it work.  We proposed reducing to $830k to take care of the deficiencies. He went ape!  The whole deal fell apart. He re-listed (this was California where disclosure of everything including previous inspections is mandatory) and finally sold the place about two years later (!) for $660,000 which I'm pretty sure left him only about $50,000 equity to "retire" on after fees, etc.  We ended up with a much better house in a far better neighborhood and were lucky to have dodged a bullet on that deal.