Your Real Estate Expert for Berkeley and Beyond
“Marilyn is exceptional. Her knowledge base, enthusiasm for her job, professional ethics, organization, sensitivity to our aesthetic requirements, loyalty and gentle perseverance set her apart.”
— Bill and Carol Seidel
Marilyn Garcia, PhD
Broker Associate, Realtor®
CA DRE LICENSE #01355514
The Grubb Company
1656 Shattuck Avenue
Berkeley, CA 94709
Direct:
(510) 390-5406
REAL ESTATE ANSWERS: How has the negotiating environment changed as the market has shifted?
How has the negotiating environment changed as the market has shifted? When the real estate market is at its strongest, there is not a vast amount of negotiation between buyers and sellers. Buyers make strong offers in competition, often waiving the inspection contingency, and many sellers choose to accept the best offer, rather than negotiate and risk de-stabilizing the transaction. When the market is more balanced, there are fewer offers on properties, and buyers may not feel that they have to make their best offer at the start. An accepted offer might also have an inspection contingency, so there may [...]
REAL ESTATE ANSWERS: How much difference do higher interest rates make for home sales in our area?
How much difference do higher interest rates make for home sales in our area? Over the spring, the Federal Reserve announced a plan for multiple interest rate hikes this year to try to get inflation under control, and we’ve seen three rate increases already this year. As I write this, interest rates on home loans are approaching 6%, up from about 3% at the start of the year. Interest rates are at their highest level in 10 years, and there may be additional increases to come. Increasing rates make a lot of difference in the purchasing power of individual buyers. [...]
REAL ESTATE ANSWERS: Why are most sellers in our area no longer accepting “love letters” from buyers?
Why are most sellers in our area no longer accepting “love letters” from buyers? In our market, where buying a home is a super-competitive process, it used to be the case that buyers would include a “love letter” with their offer in hopes that it would influence the seller in their favor. The letter would tell the seller about the buyers, their qualifications, and why this property would be the perfect home for them. It also often included a photo of the buyers. The idea was that, because many (even most) sellers have some emotional attachment to the property they’re [...]
REAL ESTATE ANSWERS: How has the negotiating environment changed as the market has shifted?
How has the negotiating environment changed as the market has shifted?
When the real estate market is at its strongest, there is not a vast amount of negotiation between buyers and sellers. Buyers make strong offers in competition, often waiving the inspection contingency, and many sellers choose to accept the best offer, rather than negotiate and risk de-stabilizing the transaction. When the market is more balanced, there are fewer offers on properties, and buyers may not feel that they have to make their best offer at the start. An accepted offer might also have an inspection contingency, so there may be further negotiations during the inspection period.
Most real estate negotiations are over dollar amounts (although timing and other terms can also be negotiated), but the same dollars can be factored into a contract in different ways: as a change in price, as a change in who is paying various closing costs, as a credit towards closing costs for the buyer, or as a buy-down of the buyer’s interest rate by the seller. Each of these possibilities affects the buyer’s and seller’s bottom lines differently, so a strong, creative negotiation strategy weighs the effects of each to find the right one or the right mix.
From a financial perspective, the seller’s goals are relatively simple. Sellers want to maximize their net proceeds, so they want the price as high as possible, and their costs as low as possible. The buyer side is much more complicated. Buyers want to minimize their cost for the purchase, so to keep the sale price and their closing costs as low as possible. Buyers also want to minimize their ongoing costs of ownership: their loan payments (if any) and their annual property taxes. In addition, buyers will consider the available cash they will have after the purchase to make needed repairs or improvements.
When I am negotiating for a seller client, my first step is aways to gather as much information as possible about the buyers and their circumstances. Are they getting a loan? Will they have plenty of cash on hand after the purchase for needed repairs? Is the monthly cost of ownership their primary constraint, or do they ultimately care the most about the overall purchase price? Will their lender allow credits toward closing costs? How much will a point paid on their loan reduce their monthly payment? Using that information, I can then consider all the various ways to structure potential contract changes, to find an option that will be the most attractive to the seller, while making the deal work for the buyer.
It is all quite complex, but it’s an important part of the process. One of the benefits of longevity in this business is having experience navigating markets of all different strengths. I guess that makes up for the extra wrinkles the years have also brought me!
REAL ESTATE ANSWERS: How much difference do higher interest rates make for home sales in our area?
How much difference do higher interest rates make for home sales in our area?
Over the spring, the Federal Reserve announced a plan for multiple interest rate hikes this year to try to get inflation under control, and we’ve seen three rate increases already this year. As I write this, interest rates on home loans are approaching 6%, up from about 3% at the start of the year. Interest rates are at their highest level in 10 years, and there may be additional increases to come.
Increasing rates make a lot of difference in the purchasing power of individual buyers. For sellers and property values in our market, where we have excess demand, the impact is not as extreme, but it does definitely affect the market.
Consider individual buyers who are qualified for at most a $1 million dollar home loan (to choose a round number) when interest rates are 3%. This means that they are qualified, given their income and other debts, for a maximum monthly loan payment of $4216. When rates go up to 6%, assuming the buyers can afford that same payment, they now only qualify for a loan of $703K (so they can spend $297K less on a home, compared to when rates were at 3%). As a very rough rule of thumb, the maximum loan amount people can qualify for goes down about 10% each time the interest rate goes up by one percentage point.
Another way to think about this – a particular buyer might need something like $230K of household income to qualify for a $1M home loan when the interest rate is 3%. (The actual income requirement will depend on things like credit rating, other debt, etc.) When the interest rate rises to 6%, that same buyer would now need over $300K in income to qualify.
How do buyers respond to increasing interest rates? With less purchasing power, buyers need to adjust their expectations. They could look for a smaller home, a less expensive location, or a home that needs more repairs or improvements. Other buyers, who were not already planning to spend their max, might decide to go closer to their limit, and still buy the same thing.
In thinking about how higher interest rates affect our market as a whole, the crucial question is, will there be fewer buyers at particular price points after all this happens? In our market, we have had an excess of buyers at various price points, and a good number of cash buyers as well. Some buyers will need to move down a price category, but there should be other buyers (moving down from higher price points) to take their place. And yes, some buyers will be unwilling to compromise on their purchase and may choose not to buy now at all.
Overall, I would expect there to be somewhat fewer buyers in each price point. There was so much excess demand before, though, that there should still be enough buyers out there to keep the market stable.
REAL ESTATE ANSWERS: Why are most sellers in our area no longer accepting “love letters” from buyers?
Why are most sellers in our area no longer accepting “love letters” from buyers?
In our market, where buying a home is a super-competitive process, it used to be the case that buyers would include a “love letter” with their offer in hopes that it would influence the seller in their favor. The letter would tell the seller about the buyers, their qualifications, and why this property would be the perfect home for them. It also often included a photo of the buyers.
The idea was that, because many (even most) sellers have some emotional attachment to the property they’re selling, providing more information about the buyers and how much they appreciate the property could highlight commonalities and make it easy for the sellers to picture a particular set of buyers as the new owners. Maybe the seller would think “Oh, these buyers are a cute young couple who want to raise their family here like we did!” Or, “Look, we both work for X Company!” Or “These people love to garden, so will maintain the yard I put so much effort into!” Buyers hoped that these commonalities might lead the seller to choose their offer over others (maybe even if their price wasn’t quite as high).
The problem with these letters is that they can reveal information about the buyers that the seller cannot legally consider in choosing between offers.
Sellers are prohibited by law from choosing a buyer based on any of these criteria: race, color, ancestry, national origin, religion, sex, sexual orientation, gender, gender identity, gender expression, marital status, familial status, source of income, disability, medical condition, citizenship, primary language, immigration status, military/veteran status, age, criminal history, and any arbitrary determination.
Notice that my “cute family” example above is on the list of prohibited criteria (familial status), and “We both work for the same company” is related to source of income.
Even the best-intentioned seller, who would never knowingly violate Fair Housing laws, could be subconsciously influenced, and even if this is not the case, it is still safer as a seller to not have information related to the prohibited criteria at all. In our super-competitive market, there are routinely multiple unsuccessful buyers, and there is always the risk that an unhappy buyer whose offer was not accepted could claim that a decision was influenced by something that is in a protected category.
The safest choice is to “just say no” to buyer letters. If you as the seller do not have information the about buyers’ characteristics, it’s hard for someone to say that you made a decision for the wrong reasons. I think skipping the buyer letters is not just the safest choice, but it’s also the right choice, because it levels the playing field for everyone.
Your Real Estate Expert for Berkeley and Beyond
“Marilyn is exceptional. Her knowledge base, enthusiasm for her job, professional ethics, organization, sensitivity to our aesthetic requirements, loyalty and gentle perseverance set her apart.”
— Bill and Carol Seidel
Marilyn Garcia, PhD
Broker Associate, Realtor®
CA DRE LICENSE #01355514
The Grubb Company
1656 Shattuck Avenue
Berkeley, CA 94709
Direct:
(510) 390-5406