Watch out for a "hair-cut". Price reductions in the middle of a sale...

Sellers…Ready for a haircut? The increasing phenomenon of “re-trading”

In an environment where investment property sales have plummeted in the Sacramento region approximately 75% or more over the past year, any Seller who has a property in escrow must be prepared for the growing phenomenon of “re-trading” a “hair-cut” or a “price reduction” that is taking place and is prevalent with almost every transaction these days.

The phenomenon of re-trading is also categorized as a “haircut”” or “price reduction.” It typically occurs when the property is in escrow, during some point of the Buyer’s due diligence process. Perhaps some sort of unanticipated or unexpected property defect is discovered whose repair/update requires significant additional dollars , or the amount and type of financing that the buyer expected to achieve is not possible or requires additional buyer equity. In this tightening credit market, these issues are no longer a remote possibility, but instead a daily market reality.

The end result is that the Buyer asks the Seller for a “price reduction”, after having spent a certain amount of time having the property tied up in escrow. No buyer or broker for that fact likes it, but in this market, it is more inevitable than ever. Our advice to most clients is “don’t take it personal” it doesn’t necessarily mean that the Buyer “isn’t ethical and dealing fairly” – most often it is a reflection of the tough times that we are in…

How does a Seller minimize the probability of a haircut when selling a property?

The more certainly a Seller can provide a Buyer up front in regards to the condition of the property, the better. Oftentimes, this may mean the Seller may pay for key inspections such as a roof inspection or a Phase 1 environmental report prior to bringing the property to market to understand the property condition and disclose any issues to Buyers up front before they have put the property in Escrow. It may mean some up front costs, but it goes a long way in defining the scope of any potential problems to potential Buyers prior to putting the property in escrow. Having accurate records regarding income and expenses, square footages, rent rolls and etc is also very essential.

Also, we as brokers know that counseling a Seller on choosing the correct buyer is really an art. Despite all of the Seller’s best efforts in doing so, there are occasions, now much more frequent, that require a buyer to say, “Oops, sorry, for XYZ reason, I can only pay this reduced amount.” As brokers, we counsel our seller clients to accept deals based on a combination of 3 primary factors. First, it is what PRICE the buyer is willing to pay. Second, it is the TERMS of the deal (how long the due diligence takes, any contingencies in place), and third, it is the Buyer’s ABILITY TO CLOSE. It is oftentimes not the Buyer who is willing to pay the highest price who will come through at the end of the day. Reputation on previous transactions is key variable.

Sellers have to understand that in a rapidly declining market, which seems in the short term to be getting worse, gone are the days where a Buyer who wants to change the terms of an agreed-to deal is substituted for another Buyer. Many negotiations are extending into and during the escrow period, with Sellers and their brokers working to keep the existing Buyer engaged and committed rather than disappearing. In this market, time or delays, kill all deals or certainly increase the probability of a haircut. Brokers and sellers as well as lenders, inspectors, attorneys and escrow agents have to work with a heightened sense of urgency. A prompt closing with a pre-qualified buyer and completed due diligence package on the property is the best defense to a “hair-cut”.

If you are ever faced with the issue of retrading as a Seller, take the time to think through all of your options and strategies. It is a normal reaction to become mad by the request to change the financial terms. But, sometimes, your best option is to continue to keep riding the horse you’ve chosen, taking a “little trim” if you are lucky, and helping the Buyer get over the finish line. Ultimately, this response may result in you achieving your objectives or the majority of your objectives of disposing of your asset more quickly rather than starting from scratch with someone new in a falling market.

If you would like to discuss this blog post with us or if we can help you with a commercial or investment real estate transactions, please call or email us at Jim Gray (916) 617-4255 jgray@naibt.com or Nahz Anvary (916) 617-4257 nanvary@naibt.com. “Build on the power of our network” visit our website at http://www.naibtcommercial.com/