Foreclosure Sales and Pretend Pricing

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From the Wacky Week of Kris grab bag, I have a couple topics from which to choose. Shall I unlock the mysteries of the Contingency for Sale or Purchase of Other Property contract, the one which most agents, let alone buyers and sellers, do not understand? Nah, that’s too heavy for a Friday.

How about tackling the idea that faxing me a 10-page purchase agreement and as many more attachments upside down will result in a big pile of blank pages at my end? (And, by the way, when you don’t call me to tell me your offer is coming, I have no way of responding to you, particularly given that the sending fax number is the number to a local pizza parlor. “Will that be for take-out, delivery or a counter offer?”)

Instead I am going to offer my first installment of Lenders Gone Wild. You will most definitely want to pre-order the DVD.

Now, any reasonable discussion of foreclosed property sales would be far too long for a single post. So today I am going to be focusing on what is the first and arguably the most important step in the process of selling any home: Pricing.

Traditional Pricing Method

The traditional pricing method (TPM) involves a complex thought process. TPMs rely heavily on what we call “numbers.”  These numbers are typically derived from other, actual sales of similar properties and on an at least rudimentary knowledge of current market conditions and competing listings.

Let’s use an example:

You have a 2,029 square foot home which you would like to sell. Your neighbor had a 2,029 square foot home which sold last Tuesday and, coincidentally, is the exact same floor plan. It’s not enough to be aware that they sold for $625,000, because we all know that no two homes are alike.  So your agent will discuss the differences with you, and you will make adjustments to reflect all of your special features (like the slab granite counter tops and the new bathroom door stop).

Next, you need to be aware of your competition. If the other 272 homes in the subdivision each have lawn ornaments that look suspiciously like “For Sale” signs, you might consider pricing a little more aggressively. If, on the other hand, people routinely drive up and down your street waiving purchase contracts out the passenger-side window, then you might not. In any event, you will ultimately decide to set an asking price either slightly higher or lower than your neighbor’s price. Only in rare circumstances, however, will your list price be different by a factor of twelve.

You can see here where “numbers” were involved (like 625,000, 2,029 and “factor of twelve”), and, as complex as they can be, they are an essential part of any traditional pricing strategy.

Pretend Pricing Method

Now, the lender pricing method, or as we call it, the pretend pricing method (PPM) is an entirely different and oft-mysterious approach to the whole conundrum of determining what the market value really is for a home. Once a lender has foreclosed on a home, the PPM comes into play.

First, the lender-owner of the foreclosed property will need an agent to assist them with the sale. They will go through a rigorous selection process involving a lot of exhaling and mirrors, and questions like “Do you now have or have you ever had a real estate license?”  Then they will need another agent to give them an estimate of value, because either they don’t trust the first one or he is too busy ignoring my phone calls to do much else. This estimate of value, or Broker Price Opinion (BPO) is ultimately presented as a “number,” but it is not a real number. It is more of a magic number. Real numbers are rarely employed in the PPM.

Where does this “number” come from, you ask? Again, we will use an example.

Let’s say your client, the bank, has a property he wishes to dump sell, and you have been hired to prepare a BPO. Preparing BPO’s is hard work, but times are tough, so you agree to do them. Dozens of them a day…  every day… for what amounts to about $1.82 an hour. And these properties are located all over the county or across several counties, places with which you might not be all that familiar (unless you count the stuff you have picked up on the Travel Channel). You are left with three choices in determining value: Ouija board; dart board; wheel of fortune; or your son’s birthday expressed in the European date format. (I recognize that this is four choices; I told you numbers weren’t really involved.)

So you return a BPO — your son’s birthday in dog years expressed as currency. The lender, whose offices are located on Mars, will not question you. Their other agent, the one who is now busy ignoring my email pleas for a confirmation of receipt of my client’s offer, hasn’t actually ever seen the property. So your price becomes the price.

If it’s too good to be true…

We are finding ourselves spending a whole lot of time explaining lender pricing methods to buyers. This week we saw another bank-owned listing priced a full 20% below one active listing and two in escrow – all identical homes within two blocks of the perpetrator. Now, one can argue this is a brilliant strategy for ensuring a speedy-quick sale, and one might even argue that the price will tend to float toward something more in line with true values. Both arguments are valid, but is blatant and gross under-pricing moving toward an ethical gray area? And, what about an agent’s fiduciary responsibilities? Lenders are clients, if not people, too, and pricing a property using a dreidel could be considered negligent. Finally, there is the confusion among buyers that this causes.

Pretend prices – This is what the prices we see attached to many of the foreclosure homes on the market actually are. Most of these homes are knee-deep in offers numbering double-digits before the sun goes down on the first day of showings. Unfortunately, this is a difficult concept to explain to buyers. “Yes, the home is priced exactly at the amount for which you are approved and, no, you cannot buy it.” This is a bitter, even seemingly incredulous message to swallow, and so often a buyer will need to go through the exercise once or twice before they take my word for it.

There is a bigger issue which will have to wait for another 2000-word time slot, the one of uber-low pretend prices becoming a popular “lead generation” tool for the agents representing the listings. In a world where buyers are doing their own searches, a too-good-to-be-true carrot can sure make that phone ring. And it leaves the rest of us who use real numbers with a lot of explaining to do.

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