Correct Pricing in Chicago (thoughts of a third realtor)

I'd like to be able to rewrite Chicago history, specifically Chicago real estate history. As I've mentioned many times in the past, I'm intrigued by all things counterfactual--i.e. What if Harold Washington never died? What if there was never a Great Chicago fire? What if Al Capone went to Divinity school? What if Lincoln Park properties were still appreciating by 7% annually?
What if...
Just so we are clear, this is a rewrite of an earlier blog I posted in an earlier sales cycle just as the Chicago real estate market was beginning to flatten out in late 2006. I published it as an All Points Bulletin to sellers across the Northside or more specifically; to all future sellers I might be encountering. I believe the piece still has legs today:

I am of the opinion that now is not the time for Chicago sellers to be "testing" the real estate market; condos, single family houses, or otherwise. Hovering above correct pricing hoping to "see what happens" only makes for agonizing market time, frustration, and interesting fodder for less optimistic writings than this; Nakedrepublic.com for one. (Ironically, NR has not posted on their site since February 18th of 2008 while a year ago they couldn't keep their negative trap shut with daily housing bubble chatter ad nauseam. They would often quote and link back this very blog only because a certain few housing bubble keywords would occasionally pop up in my writings.) To be sure, there are still hundreds of transactions a week occuring in Chicago.

When an overpriced property goes New on the market three things are immediately set into motion. The first one is Market Time. The clock starts ticking on the first day and continues until Expiration, Cancellation or Closing.

The second thing is the New property is placed in a category of similar priced properties--many of which are correctly priced and thus--superior by comparison in the eyes of the potential buyer. Its not unusual for even a correctly priced property to stay on the market for upwards of thirty days. (60 days now.)

But probably the most critical thing that occurs is the loss of the real potential buyer. The overpriced property is "off his radar" and this results in it not even being seen. By the time the inevitable Price Reduction occurs, the potential buyer has already purchased. And it may not just be one or two lost buyers. (There are often times more than a few listing agent casualties along the way as well.)

An experienced realtor (hopefully the first and only one) will strongly advise against being too aggresive in a static market as far as price is concerned. The time of just taking the listing to test the market is in the past, or at the very least, not in the present. There are still many points to negotiate in a contract such as tax prorations, closing cost credits and total earnest money held in escrow. What may seem like a concession in price in the beginning may actually net a higher bottom line at closing when the monthly carrying costs associated with a lengthy market time are reduced.

POSTSCRIPT

There is a saying in the real estate business that applies: First love; Second wife; Third realtor.

Amen,

Geno Petro

Allow Me To Retort...

1. This is really not a 'retort' per se but rather, my personal response to some provocative questions posed by a young couple who frequent this Blog from time to time. (And the above title sounded a little more intriguing to me than simply, Answers To Real Estate Questions blah, blah, blah. ) It is worth mentioning too, that these readers also have a Blog chronicling their own attempt to sell a property that you can find by clicking on the Haloscan section in my sidebar. Their following questions address my two most recent 'Multiple Offer' postings--in short, the Buy Side and Sell Side of the 'Big M.O.'
   
   Q. From a buyer's standpoint, how do you "really" know that another offer is on the table? I mean, do agents sometimes use this (whether legal or illegal) to get the buyer closer to the seller's asking price (or over)?
   
   A. This is where your Buyers Agent needs to have a well trained snout. I can usually smell a fake M.O. a Chicago city block away but yes, Agents sometimes do fake an M.O. I just believe that the skill set is so advanced to pull this off successfully that one might just as well use these talents to do the deal correctly. And this includes a 'Correct Pricing' discussiion with the Seller at the initial Listing appointment.
   
   Q. How does a buyer make sure that there is really another offer or if it is simply a tactic to drive up the price?
   
   A. I'm not sure how a Buyer can make sure but as a Buyers Agent, I have a small aresenal of multi-tiered questions I ask the Listing Agent in rather rapid fire fashion. (For me to proceed and reveal my 'weapons' an Exclusive Buyers Rep Agreement needs to be signed now!) One good way though, is not to change your offer at all during the second 'go round' of the M.O. If you don't get the property then you'll definitely know.
   
   Q. From a seller's perspective, I've heard agents say, "Sometimes the first offer is the best offer.."
   
   A. A Real Estate cliche, to be sure. But if a house is on the market 247 days before the first offer comes then guess what...? It is the best offer, end of story. Any offer under 30 days should be considered a gift and handled with care. I believe that "for every offer there is an equal and opposite re-offer" so the 'Counter-Offer,' a subject for a future post, is almost always in order in cases other than the M.O. Coming back with your Highest and Best in an M.O. is not a counter offer but rather, a repsonse to a 'No Counter' as the Sellers's position hasn't changed at all.
   
   Q. What should a seller encompass during a M.O. to determine the right decision? Is it price, earnest money, etc? I've heard stories about sellers choosing an offer based on price and then the buyer pulls out within the five day period and thus the seller's start from square one. What are your thoughts on this?
   
   A. Who's the Boss?....The Situation. The Situation is always the Boss. Having said that, Price, Earnest Money and Close Date rule in a Multiple Offer. Make sure your offer Price is right and the terms are tight. Keep Contingencies to a bare minimum without seriously jeopordizing your Earnest Money. Know your financial limits but just as importantly, know what you're prepared to live with if you lose out on the deal. Multiple Offers often times go 2-3% above List Price. This answer is obviously intended for the Buyer but I think you can gain some insight as well from a Sellers vantage point. As far as the second part of this question; when a deal starts to go sideways during the Attorney Review Period make sure your legal representation has a few teeth in their mouth. The sharper the better.
   
   polygraph photo by police-test
   
   Geno Petro

In The Catbird's Seat (...on the Sell Side)

I look at the Multiple Offer as being a home team advantage for the Seller in any Real Estate transaction. And it's because of this 'advantage' that the Listing Agent is not only obligated to lend expert advice to his client but obliged to set forth some negotiation ground rules to the other parties involved--i.e. the multiple Buyers making the offers. It's tricky enough when one or more of the parties do not have Buy Side representation but what happens when one of the offers is from the Listing Agent himself--placing him in a Dual Agency situation and a Multiple Offer? (ironically, most of my 'M.O's' have involved female Agents but allow me to use the masculine he/him/his throughout the rest of this post. I'm having a difficult enough time keeping each paragraph in the correct tense!)

Read on as I lay out for you some basic (written and unwritten/spoken and unspoken) 'rules' of the game. If there is ever a time for a Realtor to stay 'on the beam' and 'inside the box' it is when the 'Big M.O.' comes into play. (see my previous post)

Rule 1. The Listing Agent Represents The Seller and while obligated to lend advice to his client, he must ultimately conduct the negotiation as 'he is instructed to,' within the Realtor Code of Ethics and of course, the Law. (Yes, someone could end up in court if dirty doggery comes into play). And do remember, sometimes the Agent is just the 'messenger.'

Rule 2. The Listing Agent Must Let All Parties Know How He Will Be Conducting The Negotiation. Communicate the rules and most importantly, follow them. If everyone is getting a second 'go round' to re-group and re-submit a Highest and Best offer, then be true to your word as a Listing Agent. If for any reason another round is necessary then be fair and above board to all parties involved.

Rule 3. Do Not 'Counter Offer' Anyone. The advantage of being in this M.O. situation (on the List Side) in the first place is you are the only party who knows the details of all the deals. I believe it's best to keep it simple and let everyone come back with their Best. I'll usually advise everyone involved that a third and final round may be necessary and I communicate this as soon as I know for sure that more than one party is making an offer. If negotiation has already begun with one party and in the midst of counter-offering another deal comes in, and if the Seller hasn't accepted and Signed the first contract, then its back to square one. The last counter-offer is generally taken 'off the table' and the 'Highest and Best' rules come into play. If you aren't familiar with what I'm referring to, then read this paragraph again. Everybody hates it when this happens but its the Seller who's in control of the deal at this point.

Rule 4. The Listing Agent Should Be Forthcoming If He Also Represents One Of The Buyers. Dual Agency is an acceptable practice in the state of Illinois but must be followed to the letter of the law. If not, double dirty doggery is sure to follow. Just imagine if one of the deals in the paragraph above belonged to another Buyer of the Listing Agent. Let's just leave that tricky adjunct for another days writing.

Rule 5. Be Timely. None of the parties should be dragging their heels if they are truly serious about getting the deal done. Again, the List side should convey an approximate time when their final decision will be made and the accepted contract 'signed off ' on. Any offer that comes in after a signed contract must be considered a 'Back-Up Offer' only and subsequently dealt with by the Seller's attorney. Oh...and by the way; an offer is in writing. And Signed. And generally with 'Consideration' ($$$ in the form of an initial earnest money check made payable to the Listing Office)

Rule 6. No Contingencies Please. If you are unsure what this means then you definitely aren't 'as smart as a 5th Grader...' And I mean that in the nicest of ways. Pour yourself a glass of wine and go to my Archives.

Rule 7. Don't Grab With Both Hands. Think back to high school English class and the short story, In the Catbird's Seat. The Seller is always in the 'catbird's seat' when a multiple offer comes into play. Be grateful. It's your best chance of getting full price and possibly more. Just don't get greedy and blow the deal up when you are enjoying the 'home team advantage. Remember, in the catbird seat or not...the property still has to appraise.

image by vinylpulse

Geno Petro

The Big M.O. (...on the Buy Side)

No, I don't mean Modus Operandi although I do sometimes wonder what makes certain people (mostly Realtors) tick. What I am referring to is the other M.O.--the acme of all residential real estate negotiation scenarios; one of a handful of situations in the constantly fluctuating Buy/Sell world of Property where someone will definitely lose if all parties play it out to the end; the number one 'case in point' I'll always make for securing experienced Buy side representation. I'm talking about the...Multiple Offer i.e... Two Buyers + One Property= One Winner + One Loser---perhaps.

And I see this occuring just as much now in a relative Buyers market, (high inventory to Buyer ratio) as it was in a so-called Sellers market, (low inventory to Buyer ratio) a few years back. The best examples in each price point bracket will always be first in line to get Offers. And when more than one party presents an Offer at the same time, the highest level of expertise is required on the Buy side of the deal. My next post will address the List side of the M.O. which can be equally as nerve racking for the Seller.

"Two people are in love with me...what to do?" Seller.

"Marry the one with the most money," Seller's Agent.

Whenever there is a large surplus of inventory like we are experiencing presently--a Market flush with Condominiums, Single Family Houses, Multi-Units or just good old vacant Land--there are many fine Properties from which to choose. And it's always the best of the best Properties that generate the most 'buzz' and end up with more than one contract on the fax machine at the end of the day.

The following pointers are therefore in order:

First, and foremost...have Realtor representation. Even the least experienced Agent in our office negotiated more transactions so far this year than most Buyers have experienced in their lifetime. And a 'top producer' (10-20+ million dollar annual volume) has the ability and savvy to structure an initial offer in ways you might never imagine on your own. And contrary to my short romantic dialogue above, it is not always just about Price--Close dates, Contingencies (of which there are many that can kill a deal instantly), Tax Pro-ration and Stamp 'language,' Closing Cost Credits and Buy-Back Clauses (New Construction), Addendums, PITI clauses, Inclusions, Exclusions.... all come into play.

Next, have a pre-plan. I always let my Clients know about the possibility of an M.O. before we submit an Offer. I explain that the majority of the time, going to 'Full Price' might still only give us a 50/50 chance at getting the property depending on how the Sell side is handling the negotiation of the Offers.

"How much do we love this Condo?" are words I've uttered many times in my career.

Be able to work the Sell side of the Offer. I'm not going into detail about this here but trust me, the real professionals can get enough 'scoop' to obtain a 'house advantage' (pun intended) in most M.O. deals. At the very least, we know which questions to ask about the 'ground rules' set by the other side and how to keep them to their word if things start to go sideways. I always research the Closed history of the Listing Agents to check out their List Price/Closed Price ratios. Then I always ask who the other Agents are involved in the M.O. and research their Closing history as well.

Be able to advise when its time to bow out and 'get back in the car.' I don't win every Multiple Office because there are occasions when it's best to just stop and let the other party pay too much. Other times the Seller just 'likes' the other deal better, all things equal, and you lose out anyway. People are funny. 'Funny how?' Don't get me started. But as we approach the 'tipping point' of any deal in which more than two parties are involved, I'll always pose the following question to my Buyers...

"How would you feel if you left this deal then found out later that the other party got the Property at a price you would have paid?" The answer to this question has a lot to do with how we proceed in the negotiation.

There are several strategies when it comes to negotiating a Multiple Offer and your Buy side representative needs to be well versed in all of them. Quick response time and the ability to 'appraise' the value of any given Property are but two of the qualities you must require of your Realtor. And equally as vital is his (my) ability to know when its right to just 'go for it' and get the deal done or...to simply walk away and let the other guy 'win' that one. It is a Buyers arena, after all these days. So if you're going to jump into the Chicago Real Estate game, you have to be prepared for the big M.O. when it comes into play.

photo by velocitypress

Geno Petro

Bubble...or just leaking hot air?

I'm going on the record once again to say that I look at Chicago property on a daily basis, be it in the car with clients or simply scouring the listings of each 'windy city' neighborhood (yes, its windy here today...very) for whatever is new and exciting on the market. I commit what I can to memory and download the rest into my follow-up system for pending and future appointments. Just this past week I brought my '3 Bedroom Clients' to everything worth showing in the 475-525K range in Lincoln Park; I exhausted the 'Under 300K 2 Bedroom Market' in Lakeview and Buena Park with another gentleman; and personally viewed every 'New Construction Single Family House' in the 1.5-2.5 Mil Bucktown/Wicker Park neighborhoods with 10 days or less on the market.

For my second showings I pulled the Property History on each and the Tax Records (previous recorded sales price) for the two places my clients and I plan on taking a run at. It was while doing this exercise that I noticed what I had been suspecting for some time but hadn't bothered to examine closely--Single Family Home and Condominium List prices have moved very little in the past 24 months. And while Market Time has been lingering across the board during this same period, price reductions have been minimal and price slashing has been almost nonexistent. And my Conclusion: No Real Estate Bubble here....just some overpriced listings taken by some well intentioned but 'hot air' listing agents.

I am of the opinion that most overpriced listings have less to do with the actual market than the experience and savvy of the listing agent filling out the paperwork. Thousands of newly licensed agents have hit the streets in and around Chicagoland these past few years and many have taken listings that more experienced agents would pass on. And its not just the newbys. In a crowded industry such as this its very difficult to pass up any opportunity to work for a client. But it does not do the seller justice at all to list a property two pricepoints above correct market value. I've done it. It's painful. Nobody gets happy. (I define correct market value as a price that generates 10 showings a month minimum/3 months on the market maximum for an offer) This applies almost exclusively to the Residential Resale inventory. New Construction has its own set of parameters to examine and will be written about at another sitting.

The new (or just plain unsavvy) agent doesn't realize what happens when a property is listed at the wrong pricepoint. To begin with, the property is consistently the worse example of any showing line-up, market time accumulates like interest on a juice loan, and expectations of a timely sale with premium profits diminish with each passing week/month/quarter. And when the inevitable price reduction finally does come, (often times on the clock of the newly hired listing agent) everyone is screaming 'Bubble!' when in fact, it was just a little 'hot air' correction.

image by metablake

Geno Petro

2 Be 2 Ba Too Blah, blah, blah

My Broker and I are in complete agreement on the following bold (literal and figurative) statement: People don't buy '2 Bedroom 2 Bath Condominiums' on Lake Shore Drive in Chicago. They do, but not for the reasons you or most Realtors might think. And I'm judging this by the comments I've read on a daily basis for the past six years in the Remarks section of most downtown Chicago condo listings.

Consumers don't require a balcony for the balcony's sake any more than they require a Doorman to assist them with the actual ingress and egress of the building. And they definitely don't ponder the mechanical or engineering advantages of Grohe over Kohler or Toto over American Standard. What they do require my Broker and I believe, is what they desire...Lifestyle and Self Image.

Consumers wish to buy into the dream that helps define their domestic existence in a global city such as Chicago. They want 'Neighborhood' first---the cafes, the boutiques, the galleries, taxis in less than a minute. They don't care about the actual balcony. They care about raising a champagne glass into the air with a loved one outside their living room, 40 stories in the sky overlooking Lake Michigan on that first mild evening in April---which in case you haven't figured out, is another way of saying the unit has a balcony.

The types of people who move to, or stay in downtown Chicago do so because the neighborhood in which they choose to live is an extension of themselves; the Gold Coast Chic, West Loop Trader, and yes...even Lincoln Park Trixie are but a few local examples of these 'types.' Now, if someone would just let their Realtors in on the secret.

Consider the following two descriptions: (I lifted one from the 'Remarks' section of another agent's current listing while the second example is from the 'Remarks' section of a recently closed listing of mine in a different building on the same street.)

example #1:

2br/2bth, w/great city views, balcony, tastefully decorated, open kitchen w/ge profile ss appliances, granite counters, newer cabinetry; marble baths w/ double sinks. Side-by-side washer/ dryer. Parking space for sale $50k.

example #2:

Majestic Lake and City views pop from three exposures in the heart of Chicago's finest neighborhood--two king-sized bedrooms w/professionally organized closets, wetbar, frnch drs, hardwoods, marble spa, Chefs kit and tree-top terrace complete this perfect Astor Place home. Martinis at Gibsons, fireworks at home!

Example #1 above has been on the market for 171 days, listed at $759,000 and is really superior in almost every way to mine but that's not the point. Mine sold in 19 days at full price, $400,000 to another Broker. The phone rang off the hook for MLS showings the entire 19 days I had it. The only reason it didn't sell earlier was it really wasn't that great of a specimen.

My unit clearly sounded better than it actually showed as the appliances were a little dated and the cabinets a little worn but I only needed one buyer with a dream or at the very least, an open mind. And anyway,beauty is subjective...right? And who isn't a 'Chef' these days. He fell in love with it the second he walked through the door. When I turned around to speak I noticed he wasn't even looking at the kitchen...he was staring out at the sailboats on the lake.

photo by gb.inmage

Geno Petro

Love At Second Sight (in the housing market)

Regardless of what my wife may tell you, she didn't fall in love with me the second our eyes first met. I'm sure of this for a couple of reasons. To begin with, she couldn't have possibly ignored me any more than she did on that first summer evening even though we were seated an arms length away from each other in a fairly empty ice cream parlor. I mean really, who doesn't notice someone sitting at the next table in an ice cream parlor?

Secondly, and this I definitely know for sure, I'm the type of person that has to grow on you. I'm one of those guys that gets smarter, funnier and better looking the longer you know me. I'm not a 'love at first sight' candidate--pretty sure I never have been. And knowing this has given me an advantage in Sales, I believe. And in many ways, some of my Listings reflect these same personality traits.

I learned to ignore the 'first objection' very early in life and to just keep showing up even as others around me fell by their respective waysides. I'm all about taking a second look at things be it a troubling situation, a prospective property with a few flaws, or anything in between. I guess I've come to expect the same in return and try to promote this behavior on a daily basis to all who will listen or at the very least, to those who happen to sit next to me at work. As I've mentioned before, our office environment is as much think tank as it is Sales.

As a Listing Agent, few things frustrate me more these days than observing a Buyers Agent on a whirlwind tour of one of my properties, pressed for time, and with twenty more places to see that afternoon. Sometimes I just stand there taking it all in, looking for even a glimmer of interest from anyone in the room as they fly right by me on that proverbial be-back bus that only returns 10% of the time. There are very few characteristics of any Listing that, if can't be fixed with a hammer and nails, can certainly be fixed by $$$...i.e negotiation. My Broker calls it the 'What If Game' and will be a subject of a future writing. But to quote an uncle from the old neighborhood, 'Hey..., what are you gonna do?"

I'm telling you, its all in the second showing anyway. Love at first sight isn't a common occurrence in today's Real Estate market. There is simply too much to see. Just fly into any major city at night and as your jet makes its final descent toward the airport runway, look out the porthole window at the billions of microchip lights laid out like a circuit board, stretching to the horizon. You just have to know that they ain't all pretty. They all did however, close at a Title Company and somebody somewhere, holds their deeds. The American Dream is not the 'Center Entry Colonial' for the great majority of us but rather, the best housing we can find on the market for our money at the time we're looking, all other things equal.

I suppose it comes down to the fact that I don't believe any of us live in the 'perfect' dwelling and while my wife and I do enjoy our city condo, wouldn't it be even nicer overlooking the Amalfi Coast of Italy? No need to answer as the question is rhetorical, to be sure. For now we settle for the North Side of Chicago.

I often times encourage my Clients to take second look at a house that at first sight may not seem to perfectly fit the bill, especially when we've exhausted a glutted market place. I generally encourage Buyers Agents from other companies to do likewise when viewing one of my listings (if I can grab their attention for a few private seconds in the whirlwind) although, I'd like to think I'm more about attraction than promotion.

I just don't believe its possible to uncover the inherent beauty in anything with a single look see--especially when it comes to showing property, and I've shown quite a bit. But then again, I'm the guy that ignores the first objection and positions himself for the second take, the one who keeps showing up until someone finally takes notice. My wife still ignores me on occasion but I have a legal document laying around here somewhere that says that deal has already closed.

image byw3.poporo.ne

Geno Petro

One Zero Makes All The Difference

Look up. No really, look up at these two very similar blue houses. They both are blue for starters; in fact they both are 'starters.' One is on a tract of land that is 33x50 (feet that is), the other is on a half acre. Both have basements. Both are described as 'Peaceful' and both are located in Midwest states --the heartland of America, if you will.

Maybe you can already see where this is headed. One of these blue beauties was a recent listing of mine offered for $624,900 and placed under contract after 120 days on the Chicago market. The other is an E-Flyer offering I just received in my Inbox from an agent in Beloit, Wisconsin (less than 2 hours north). List Price: $71,900. Oh... and we both dangled the ubiquitous $900 at the end of our real asking price in typical Realtor fashion.

I had to look twice when I saw the 'pop-up' photo as they do appear similar at first glance. And on paper they are only separated by a single digit...one seemingly meaningless decimal to the right. A lone, hollow zero.

So, what's in a zero?

Answer: In this case, over a half million dollars ($553,000 to be exact)! Paradoxical, huh? An extra zero on a spreadheet is worth a cool half mil. Or to be more specific, $5,475 for each mile between Beloit and Chicago, all 101 of them. And with all due respect, you have to look pretty closely to see the beauty in either of these two examples. Perhaps the real beauty is in fact, on the inside (as in equity).

There's really not much more of a point to be made here except that while a picture might indeed be worth a thousand words, a picture in the right location is worth that plus a half million dollars to boot! Now, look up again and tell me...which is which?

Geno Petro