Pricing

Effect of wildfire on land prices

Wildfires scorch the landscape and reduce houses to rubble. They destroy community infrastructure and recreational resources. The result is a decline in real estate prices.

How much will real estate prices decrease after a wildfire? Read on.

Reasons Why Real Estate Prices Drop After a Wildfire

The most obvious reason that real estate prices go down is that where there was once house+land, there is now only land. Vacant land with no house usually sells for less than land with a house.

Further, even if you own vacant land that never had a structure on it, the trees and vegetation may be charred. Land with unattractive or no vegetation will sell for less than land with attractive vegetation.

Even if your land was not affected, your neighbor’s land was. All the houses around you are gone; the local market is boarded up; the medical clinic severely damaged; the forest where you used to take your dog for hikes is now a bunch of eerie charred twigs. The state of community infrastructure affects the attractiveness, and therefore the value, of your land.

Lastly, wildfires increase the perception of risk in the minds of buyers. All things being equal, buyers may be reluctant to purchase real estate in areas prone to wildfire.

These factors, and others, combine to cause a reduction in real estate prices.

What Does the Research Say about the Effect of Past Wildfires on Land Values?

Several scientists have examined the effect of historical wildfires on real estate prices. Here is what they found:

Huggett, Murphy and Holmes (2008) examined the 1994 Chelan County wildfires in Washington state and found that real estate prices dropped 13-14% over a one year period afterward.

Mueller, Loomis and Gonzalez-Caban (2007) studied fires in Southern California. They found that repeated forest fires cause houses near fires decreased in value. The first fire reduced house prices by 9.7%, while the second fire reduced house prices by 22.7%.

PricewaterhouseCoopers (2001) performed an analysis of how the Los Alamos, New Mexico real estate market responded to the 2000 Cerro Grande fire. The report showed that after the fire, the average sale price of single-family homes in Los Alamos County declined 3-11%.

Loomis (2004) estimated that house prices in Pine, Colorado decreased by approximately 15% following the Buffalo Creek fire.

Kiel and Matheson (2015) studied the Fourmile-Lefthand Canyon forest fire in Colorado and found a 21.9% decline in sale prices.

The Good News

If I put on my rose-colored glasses and squint real hard, I can come up with some examples of good news regarding the value of real estate after a wildfire.

First, the house that burned to the ground probably had underground utilities. The water pipes are still there buried in the ground; the septic system or sewer pipes are also there; and if you have a well, the vertical casing is still in the dirt even if the above-ground equipment might be damaged. Most vacant land on the market does not have utilities stubbed into the building area because there was never a house. But yours does. Builders love it when utilities are not just “in the street” they are stubbed all the way into where a new structure might be built. The presence of utilities adds considerable value to vacant land.

Second, any structures that are rebuilt in the affected neighborhood will be new, and possibly more valuable, than what was there before. For example, your plot of vacant land may end up next to a brand new 4-bedroom, 3-bath house instead of next to the tired 2-bedroom, 1-bath bungalow built in 1958 that was there before. This may positively affect the value of your lot.

Third, if you own a nearby rental property that was not affected by the fire, you may find that demand for your units will increase. This is due to the many displaced homeowners who now want to rent near the same area where they once owned home. Supply is down and demand is up, so you may be able to increase your rental rates accordingly. (Don’t price-gouge though, it’s not nice).

Fourth, recently I was listing some acreage located 2 miles from the edge of a wildfire. After the fire, I noticed an uptick in interest in this parcel, i.e., more calls and e-mails. This may have been related to displaced families needing to move animals or themselves. Or perhaps buyers were previously looking for land in the wildfire-torn area and now they have shifted their focus to the area just outside of that area. Supply and demand can cause an increase in value just outside the wildfire perimeter.

Fifth, sometimes homeowners who receive a handsome insurance settlement want to rebuild a larger home and need more land to do that. The adjacent owner might be able to sell their land to that person at an inflated price. One example of this occurring is with the Felton Estate. This 14,000-square-foot property was built five years after fire destroyed all the homes on top of Schooner Hill in Oakland California. One owner bought up neighboring land, built a large house in 1996, and recently sold that house for $20.5 million.

Lastly, real estate prices will not be low forever. As time goes on, vegetation will come back, infrastructure will be rebuilt, and buyer’s memories of the fire will fade.

So, to Summarize

After a major wildfire, land prices in the affected area are likely to decrease. Prices decrease for a host of reasons including reduced infrastructure and increased perception of risk. According to the research, land prices after fires have historically decreased between 3 and 23%. However, there are scattered cases where the value of land can remain steady or even increase.

Reading the “days on market” tea leaves

by Tammy Tengs

“How many days has that parcel been on the market?” Buyers call and ask me this question all the time. They assume that the longer a parcel has been on the market, the more motivated the owner is to sell. When the “Days on Market” (DOM) are high, buyers think that they can offer a price that is much lower than the listing price and the seller will gladly accept it.

However, as an agent, I know the opposite is often true. A seller whose land has been on the market for 300 days may have turned down offers received at 30 DOM, 100 DOM, and 200 DOM. Land owners like this have demonstrated a low motivation to sell not a high motivation to sell. Sellers with high DOM are often waiting patiently for a buyer to come along who will pay them their target price.

It is my experience that when buyers try to read DOM, it’s like reading tea leaves.

That is, it’s an ancient superstition passed down through the ages. And it’s not all that helpful in figuring out what price a seller will accept for their land.

To separate myth from the reality, I decided to look at actual data. I compared the price difference (the percent difference between the listing price and the selling price) with DOM. If the buyers who call me are correct, the percent “discount” the seller gives the buyer off the listing price should be higher for high DOM and lower for low DOM. Let’s just see if that’s true or not.

Research

I obtained data from the California Regional Multiple Listing Service (CRMLS). This Multiple Listing Service (MLS) system covers much of California. I searched the MLS for the 2000 most recent land sales. For these 2000 sales, I extracted the listing price, selling price, and days on market.

I eliminated four wonky data points. For example, in one case the list price was $17,500 and the broker indicated that it sold for $175,000. While it is not unheard of for land to sell over the asking price, these digits were so similar I assumed that there was a typo and the listing agent just added in an extra 0 when entering the selling price. After eliminating these four weird cases, I ended up with a total of n=1996 land sales.

I calculated: Percent Price Difference = (Listing Price – Selling Price)/Listing Price

In Excel, I performed a statistical linear regression to find y=mx+b, the equation for the line that best fits the data. In this case, Percent Price Difference was y and DOM was x. M is the slope of the line and b is the y-intercept.

The parameter m is of particular interest. The m, produced as a result from the statistical regression, tells us how much Percent Price Difference changes with each additional DOM. If m is a large negative number then the buyers who think DOM is important are right. If m is zero then buyers are wrong.

Results

The following scatterplot shows Percent Price Difference and DOM for all land sales:

Two things jump out at me in this figure. The first is that there were a fair number of parcels (n=144) that sold for over the asking price. Second, 38 parcels were on the market for 3 years or more before selling:

Due to the clustering of points at the left, the scatterplots above, showing all data, are hard to read. So below is a revised figure. The scatterplot below shows a subset of the data for the first 365 days on market and for prices ranging from a reduction of 75% to an increase of 25%:

How do you read this figure? As one example, consider point A. This point reflects a land sale that occurred after 100 days on market. The selling price was approximately 39% less than the listing price. The land sale at Point B also occurred at approximately 100 days on market but this selling price was 0% from the listing price. That is, the seller at Point B sold their parcel for full price.

Points C, D and E occurred at approximately 200 days on market. Point C reflects a parcel of land that sold for approximately 25% less than the listing price. Point D is a sale that also occurred at 200 days on market but this parcel sold at 50% less than the asking price. Finally, point E occurred at the same 200 days on market but it sold at 18% over the asking price.

After performing the statistical linear regression on all data, the resulting equation for the line that best fits the data was:

y = mx + b

Percent Price Difference = m (DOM) + b

Percent Price Difference = -0.0000546341974725283 (DOM) + -0.103314904970139

What does this equation mean? It means that the day a parcel goes on the market (0 DOM), the average seller will accept 10.33% less than the listing price. Further, for every additional day a parcel stays on the market (DOM), that discount changes by -0.00005.

Note that -0.00005 is close to zero. That means that the slope of the best fitting line will be close to zero which would make the line virtually horizontal. The best fitting line is shown in pink in the above figure.

In other words:

At 1 DOM, the average seller may accept a 10.3% reduction in price. (This was calculated as -0.0000546341974725283 (1) + -0.103314904970139)
At 30 DOM, the average seller may accept a 10.5% reduction in price. (This was calculated as -0.0000546341974725283 (30) + -0.103314904970139)
At 90 DOM, the average seller may accept a 10.8% reduction in price. (This was calculated as -0.0000546341974725283 (90) + -0.103314904970139)
At 180 DOM, the average seller may accept a 11.3% reduction in price. (This was calculated as -0.0000546341974725283 (180) + -0.103314904970139)
At 365 DOM, the average seller may accept a 12.3% reduction in price. (This was calculated as -0.0000546341974725283 (365) + -0.103314904970139)

Discussion

Are you a buyer interested in knowing the lowest price a seller will take on a parcel of land? What is their bottom line – that’s what you really want to know, right?

This research shows that the amount of time a parcel has been on the market is a poor indicator of seller flexibility on price. There is almost no relationship between the price a seller will accept and how long their parcel has been on the market.

For example, a parcel listed at $100,000 that’s been on the market 30 days might sell for 5%, 25% or 50% less than the asking price. Or it might even sell for more than the asking price.

On average, a parcel that is sold the day it comes on the market listed at $100,000 will go for 10.33% less than the $100,000 asking price or $89,668. In comparison, a parcel that’s been on the market 180 days might sell for an average of 11.3% less or $88,685. The difference between $89,668 and $88,685 is only $983.

Fortunately, for buyers, there are better ways to figure out how flexible a seller may be on price:

Pick up the phone and call the listing agent and ask. (As a listing agent and fiduciary to the seller, I personally won’t reveal to a buyer how flexible a seller is on price, unless the seller has sent me strong signals that they want me to share their flexibility. However, other listing agents might reveal this information. Try it.)
Ask the listing agent if the seller has received offers that they turned down. What prices were offered but declined? For example, if a parcel is listed at $100,000 and the seller has turned down offers of $80,000 and $85,000, that’s a pretty good indication that the seller will not accept your offer of $82,000. (Again, as a listing agent I may or may not give a buyer this information, depending on whether I think it’s in the seller’s best interest. But other listing agents might. It doesn’t hurt to ask.)
If the parcel recently fell out of escrow, ask the listing agent what price it was in escrow at. While the seller’s motivation to sell may have increased or decreased since they accepted their last offer, the answer will at least tell you what price the seller was willing to accept historically. (As a listing agent, the only time I might reveal this is if the seller was previously in escrow at full price. This is because I want to convey to the new buyer that the previous buyer clearly thought the property was worth full price and, in any case, the seller is unlikely to accept less.)
Float a verbal offer. For example, ask the listing agent to check with the seller on whether they will accept $90,000 on that parcel listed at $100,000. (Personally, I often decline to do this and insist that buyers submit a written signed offer. Listing agents are required by law to present all offers. However, a verbal conversation is not an offer. A true offer is written and signed by the buyer and contains lots of other details such as how the buyer plans to pay for the land, who pays the closing costs, and the closing date. Nevertheless, there are situations where I will present a verbal offer to the seller and other agents may too.)
Submit a written signed offer. Ask your agent or the listing agent to prepare an actual offer on proper forms with all the other details in addition to price. Sign it. Then the listing agent will present it to the seller. A seller who receives a written signed offer is likely to respond, via the listing agent, and tell you whether or not they will accept your price. The seller may counteroffer. Then you’ll have your answer!

Conclusion

This research shows that it is a fallacy that the longer a parcel of land is on the market the more likely a seller will accept a significantly lower price. This is because high Days on Market does not always lead to extreme motivation to sell as buyers assume. High Days on Market could be an indicator of the reverse, low motivation to sell.

Attempting to read the meaning of Days on Market is like reading tea leaves.

Cost-effective improvements you can make to sell your land faster and for more money

by Tammy Tengs

Sellers sometimes ask me what they can do to improve their land for sale? Land owners want suggestions that will yield a positive return on their investment. They want to spend $1 on an improvement and get back $2 on the price, that kind of thing. And they definitely want to avoid the hassle of spending $1 to get a return of $1. No point in that.

Based on 13+ years of experience in land sales, and no hard data whatsoever, I have noticed that some improvements really affect the price my clients get for their land. Other improvements, not so much. So here are my top suggestions on things that you can do to improve your land that might offer a positive return on investment:

Mark the Corners

Buyers just love-love-love to know exactly-exactly-exactly where the corners are. Aerial maps are useful, definitely. But there’s nothing like actual corner markers in the dirt to give buyers a sense of security that they know what they’re buying. However, don’t mark the corners yourself as that may open you up to more liability if they’re off. Hire a surveyor to do it.

Money saving tip: Don’t spend money on a new fence just so buyers will know where the boundaries are. If there’s no fence already it will generally not be cost-effective for you to install one now just to sell your land. Fences are too expensive and you may not get your money back on it. Plus, there are some buyers who will actually consider your fence a negative. They may not like the look of it and think it’s an eyesore. Just arrange for a surveyor to mark the corners in some highly visible way. Corner markers go a long way toward improving the value of your land and the ease of selling it.

Record an Easement

Many land parcels do not have legal access for ingress and egress. They’re not on a road. They are surrounded by privately owned parcels and there is no easement across the neighbor’s land. That is, they are “landlocked”. That dirt path you’ve been taking across your neighbor’s land to reach your parcel will not be enough for the title company to insure for access. When buyers see the title report, they may get scared and run away. So, take care of the situation before you put your parcel on the market. Talk to the neighbor, hire a surveyor, and arrange to record an access easement with the county.

Money saving tip: There is usually no need to bulldoze a road. My suggestion is to create legal access, not necessarily physical access. It’s a paperwork-thing not a dirt-moving-thing. With legally recorded access, the title company will probably insure for “marketable access”. That’s the main thing you need to get more money for your land.

Drill a Well

City folk, who are used to water districts providing the water that comes through their faucets, have a hard time wrapping their brain around the idea of buying a parcel of land with no district water. They imagine nightmare scenarios of buying the land and attempting to drill a well only to find no water. Further, they are unsure about the cost of drilling a well. So, take all of this uncertainty and fear out of the equation and drill the well for them. Provide a well report showing the flow in gallons per minute etc. (This suggestion to drill a well obviously applies to land in rural areas where there is no district water in the street.)

Money saving tip: I am not necessarily suggesting that you install expensive equipment on your new well. There is no need for that yet because you are selling the land, not building a house, and there’s no need to pump water anywhere. Plus, above-ground well equipment may be stolen. To get more money for your land what you need is a hole in the ground with well casing (i.e., a capped well) and a written well report.

Order a Perc Test for Septic

In areas where no sewer is available, a septic system will be needed. Buyers will wonder if the land has had a percolation test for septic and whether that test was favorable. Without a perc test, buyers will imagine scary scenarios where they buy the land and then find later that the parcel does not “perc” for septic. How will they ever build a house with no toilet, they wonder? How will they resell the land? Savvy sellers can take buyer’s uncertainty away and pay for a perc test in advance. Provide a perc test report. Then, charge more for the land.

Money saving tip: Bear in mind that any reports you have on the land, such as a perc test report, must be disclosed to buyers when selling your land. Regardless of whether the perc test is successful or unsuccessful, you must disclose. If the perc test reveals that an unusual expensive engineered septic system will be needed, sellers must disclose this too. Land owners should keep disclosure requirements in mind when considering whether or not to even order a perc test to begin with. You do not want to create a situation where you pay for the perc, get bad news in the perc, fail to disclose, the buyer purchases the land, and then the neighbor toddles over and tells the buyer about the failed perc test. Because then you will have a lawsuit on your lands. That will cost you lots of money in attorney fees. So, my two money-saving tips for sellers are: 1) Pay for a perc test prior to selling your land only if you are fairly certain the result will be positive, and 2) always disclose material facts to buyers regardless of whether they hurt you or help you.

Create a Clearing and Walking Path

Buyers like to walk the land. Naturally, they want to see what they’re buying. If your land is completely wooded, or if it has impenetrable brush, carve out a walking path. Cut back the vegetation to create unobstructed lanes in the vegetation so that buyers can reach parcel corners, which they will surely want to verify. Clear a larger location where a house might go. If there is a view, clear enough vegetation out of the way so that buyers can appreciate the panorama.

Money saving tip: Don’t clear the entire parcel leaving large areas of bare naked dirt. Many buyers like natural vegetation. While you might view that sage brush or yellow flowering gorse as just a nuisance, just in the way of walking and building, buyers might appreciate its natural beauty and view it as “god’s creation”. Buyers may want to decide which areas get cleared and which areas don’t and it will take years for natural vegetation to grow back. Also, when it comes to trees, be aware that there may be rules about tree removal in your area. So, don’t go crazy with your clearing. Just make sure buyers can walk the land, see one area large enough to build, and enjoy a view of distant scenery that is unobstructed.

Grade a Pad

If your land has a fairly steep slope, you may find that buyers lack insight into how they will build a house on an incline. The wonder if a flat area can be graded that is large enough for a house. They will want to walk on the parcel but they can’t because it is too sloped. So, reduce their uncertainty and grade a flat pad. Or tiers. Also create some kind of access to the flat area, like steps.

Money saving tip: Grading requires a permit. Without a permit you could be fined, so look into that first.

Haul Away Debris

Remove any debris that creates an eyesore. Examples include anything manmade such as old tires, a shopping cart, an old broken-down car, etc. Your land will photograph better. Plus. you will avoid the situation where buyers try to negotiate down the price in anticipation of having to deal with the debris themselves after closing escrow.

Money saving tip: Consider that there may be “good” debris and “bad” debris. What I mean is there are certain situations in which some kinds of debris are actually helpful in selling your land. For example, one time I was selling a parcel buried deep in a forested area. The seller had wisely cleared some open areas creating paths and meadows in the forest but he left a big pile of twigs and branches. He asked whether he should remove it? I advised him that the pile was actually helpful because it served to “mark the spot” where the land was located making it easier for buyers to find the parcel amidst all the trees. As another example, I was selling a parcel with an old fallen down rickety shack. This was actually helpful debris because it served to reinforce the idea in buyer’s minds that the land is buildable. After all, there was once a house there so it’s easy to imagine a house there again. As a final example, skilled photographers can use fallen logs and branches to add visual interest in the foreground when photographing an otherwise bland parcel of land. So, to summarize, save money by hauling away only “bad” debris. Discuss with your Realtor before investing the money.

Remove Negative Barriers to Entry

Take down those no trespassing signs. Remove the lock on the gate. Leave the gate open. Roll out the red carpet for buyers while your land is on the market. You want them to feel like they are invited and valued guests when they arrive at your land. Buyers should feel free to walk the land, unaccompanied by an agent, without worrying that they are not supposed to be there.

So, to Summarize

Land buyers love certainty and hate uncertainty. Anything you can do to reduce their uncertainty about the features of your land will likely yield a positive return on investment. That’s why things such as flagging corners and obtaining a perc test for septic are so helpful.

But don’t go hog-wild improving your land for sale. Invest only in those things that you expect to yield a positive return. Consider also that there are situations in which the best investment may be no investment. In some situations, selling land “as is” for whatever price it can fetch is the best option.

Your Realtor will be able to guide you on whether or not an improvement that you are contemplating will yield a substantially higher selling price and/or make the land much easier to sell.

The imperfect relationship between selling prices and tax-assessed value for vacant land

by Tammy Tengs

Sellers frequently ask me to assist them with pricing their land for sale. After I spend 30-45 minutes on my research, thoughtfully considering price from every angle, the seller will sometimes say: “But my tax-assessed value is a different number.”

Um, and that’s important why?

It’s almost like some land owners believe the tax-assessed value is some officially correct number, the TRUE value of their land, handed down from on high by the trusted GOVERNMENT. They think that if a Realtor gives them a different number then it is the Realtor who got it wrong.

This attitude frustrates me every time.

So today I want to do a little research for you. We’ll look systematically at whether there is any relationship between government-issued tax-assessed values and selling prices. Let’s just see if the taxman can help you price your land for sale or not, shall we?

Method

I extracted data from the MLS – specifically I gathered sales prices from the California Regional Multiple Listing Service (CRMLS) and 2016 tax-assessed values from Realist.

In the MLS, I identified land parcels that sold between 9/13/16 and 9/16/16. Because I was interested in vacant land, I excluded listings that described structures such as barns or houses or where build-to-suit was included in the selling price. I also excluded listings offering two or more parcels. Finally, I omitted listings with incorrect parcel numbers (APNs). My sample consisted of the first 50 listings that met these criteria.

Tax-Assessed Value vs. Selling Price

Below is a scatterplot of all 50 vacant land parcels that sold. Tax-assessed value is plotted on the horizontal x-axis and selling price on the vertical y-axis. Examine any point and you will see that they are generally two different numbers.

Due to the many points clustered in the low price range, the pattern there is difficult to see. So in this next figure I show just those sales where the tax-assessed value is under $50,000:

If tax-assessed value and selling price were the same then all sales would fall neatly on the white line. However, as you can see, the orange points do not fall on the white line – some are below the line and some are above.

Below the line are parcels where the tax-assessed value is higher then the selling price.

Above the line are parcels where the selling price is higher then the tax-assessed value.

Consider Parcel A for example. This parcel had a 2016 tax-assessed value of $40,600 and yet sold for substantially more at $100,000.
Similarly, Parcel B had a tax-assessed value of $12,733 but sold for over four times that at $54,000.
On the other hand, Parcel C had a tax-assessed value of $47,092 yet sold for a lower price of $37,500.

Don’t Leave Money on the Table

Let’s do a thought experiment. Imagine a world where all 50 of these sellers had priced their land at the tax-assessed value.

What would have happened?

The sellers who should have priced their land at more than the assessed value would probably sell their land quickly in this imaginary world. However, compared to the price they could have gotten, they would leave money on the table. How much money would they lose? The loss can be calculated as the difference between the tax-assessed value and the selling price. Collectively, for these 50 sellers the loss would have been $3,308,249.

Don’t Waste Time

But wait, in our thought experiment, what about the sellers who priced their land under the tax-assessed value. What if they had priced it right at the assessed value instead? What would have happened to them?

The answer is, those parcels would still be on the market today, unsold.

How do I know?

I went back and looked at the average “days on market” (DOM) for those parcels and discovered it was 129 days.

So it’s not like these parcels flew off the market in a day, a week, or a month just because they were priced at less than the tax-assessed value. Those sellers were not “giving them away”. Apparently buyers were not lining up to purchase these particular parcels.

Due to their unique, and possibly undesirable, characteristics, these parcels were actually priced correctly at less than tax-assessed value and still took an average of over four months to sell. If they had been priced incorrectly, higher, right at tax-assessed value, they probably would not have sold at all and they’d still be on the market today as I write this one month later.

My Last Three Sales

Finally, I looked at my own sales at Land22 Real Estate to see if I could find any relationship. I did not cherry pick these examples for dramatic effect, I just chose the last three sales:

334+ acres, 6 parcels, in Clearlake Oaks, Lake County, were priced at $325,000 combined. There were two offers so these parcels sold for over the asking price at $330,000 after 132 days on market. The 2016 tax-assessed value for all six parcels combined was lower at $161,800.
19 acres in Moreno Valley, Riverside County, was priced at $60,000. It sold for $50,000 after 289 days on market. The 2016 tax-assessed value was higher at $65,419. This parcel had legal, but strange, access and a neighbor had posted huge “no trespassing” signs, affecting value. Just one example of something the tax assessor might not be aware of.
1 acre in Topanga Canyon, Los Angeles County, was priced at $179,000. It sold for $130,000 after 309 days on market. The 2016 tax-assessed value was lower at $31,349.

Conclusion

There is little relationship between tax-assessed value and actual selling prices for vacant land. Compared to the government tax assessor, your Realtor will do a far better job helping you take into account the specific characteristics of your particular parcel, the current real estate market, available listings that you are competing with and other factors when assisting you in pricing your land for sale. When pricing vacant land, it is unwise to base your list price on tax-assessed value.

Can the seller counter over the asking price?

by Tammy Tengs

Recently, I received a full price offer from a Realtor who was representing a buyer. I was representing the seller. Surprisingly, my client declined the full price offer. He gave the buyer a written counteroffer that was higher than his asking price.

Let’s just say that my client had his reasons.

The Realtor representing the buyer went absolutely ballistic! She threw a tantrum and sent me several flaming e-mails. She implied there was some conspiracy afoot.

I listened politely. I mean, gosh.

So while that other Realtor is taking a time-out in the naughty-girl corner, let’s talk, just you and I. From this experience, it became clear to me that not all buyers, and perhaps not all agents, understand that it’s acceptable for sellers to decline full price offers. Buyers and their agents may not grasp the reasons why a seller might do that. Further, sellers may not realize the drama that they unleash when they counter over the asking price.

Does The Seller Have To Accept A Full Price Offer?

The short answer is “No.”

Real estate is not like shopping at the supermarket. When you go to the grocery store and an item is marked $1.29 you can be confident that when you take it up to the cash register you will be allowed to purchase it for $1.29. Even if the computer register makes a mistake and shows it at $1.50, for example, you can still talk to a manager and he will likely give it to you for $1.29 because that’s the price marked on the item.

Real estate doesn’t work that way.

Does the Seller Have to Explain Their Reason for Declining A Full Price Offer?

No. In fact, the seller does not even have to reply to the buyer’s offer at all, even a full price offer. The seller can remain entirely silent.

Of course the listing agent may well explain the seller’s reasons to the buyer’s agent if she feels it is in her client’s best interest. For example, if the seller wants the buyer to re-submit a revised offer, the listing agent might explain to the buyer’s agent the reasons that justify the higher price. However, there are times when the listing agent, acting as the seller’s fiduciary, will feel that it’s in seller’s best interest to say nothing. In that event, she will remain silent.

Why Would a Seller Decline A Full Price Offer?

First, rest assured that the vast majority of sellers will accept a full price offers. Or, they may give a buyer a counteroffer on a couple of details but accept the full price.

However, there are reasons why some sellers may not accept full price. Here are a few of those reasons:

1. The seller may have received another written offer

In fact, the seller may have not just one additional offer – he may have two or more. The other offer(s) may be higher than your offer, lower than your offer, or the same as your offer. Regardless, the seller is free to accept one offer, counter one offer, counter multiple offers, or decline all offers. There is no “first come first served” in real estate.

In practice, the way it usually works is that when a seller receives two or more offers, the seller will either 1) accept the best offer, or 2) counter one offer on a couple of details, or 3) counter two or more offers. In the event of a bidding war, the parcel is likely to sell for over the asking price.

2. The seller may have received another verbal offer

Even if the seller does not have another written offer, he may have received another verbal offer via his agent. He may be hoping to get more from the competing buyer. It could be that the other buyer is planning to put their verbal offer in writing any day now, but has not gotten around to doing that yet.

3. The seller may be unhappy with the terms

Offers are not all about price. Offers consist of price and terms. Sure you may have offered full price, but did you ask for a 120-day escrow period so that you would have time to come up with the money? Is your offer contingent on selling your house in another state? Did you ask the seller to pay for all of the closing costs including your portion? Did you say you were going to get a bank loan on vacant land with 5% down when the seller knows that no such loans exist? Did you ask the seller to pay for a perc test for septic, a well inspection, and a survey? If you answered “yes” to any of these questions, the seller may be saying to himself “Give me a break. I’m not even going to reply to this frivolous offer” even if it is full price. Sure, the price is fine. But the seller doesn’t like the terms.

4. The buyer’s agent may have “shown her hand” to the listing agent

The agent representing the buyer may have inadvertently or deliberately disclosed to the listing agent the buyer’s extreme motivation to purchase or even the buyer’s willingness to pay more if necessary. The buyer’s agent may have said that she thinks the parcel is a “good deal” or “very well priced”. She may have called the listing agent incessantly asking if there are competing offers, or pressuring the listing agent for a response. This is a “tell” that the buyer is very interested and is pushing her agent to get a response from the listing agent and seller.

The listing agent (who is the seller’s fiduciary) may advise the seller that she believes the buyer may be willing to pay more than the asking price. This advice may cause a seller to decline or counter a full price offer even when the seller has no other offers.

5. The listing agent’s phone may be ringing off the hook

If you think a parcel is so awesome that you are motivated to offer full price, then it stands to reason there are other buyers just like you. The listing agent may be receiving considerable interest – a high volume of phone calls and lots of e-mails. The listing agent has likely shared this information with the seller. The seller may take this as a sign that he can get more than his initial asking price for the parcel.

6. The seller may have had a change of heart on list price based on reliable or unreliable new information from outside sources

After signing the listing agreement at a particular price, the seller may discuss the price with his “financial advisor” Spike, his neighbor Mary Sue, or his favorite uncle Herb who used to sell real estate back in 1958. New advice (reliable or unreliable) may cause him to change his willingness to sell at his original list price. Wisely or unwisely, this may cause him to decline your full price offer.

7. The seller’s confidence in the economy may have improved since he listed the parcel

The actual economy for land sales typically does not change in 3-6 months, the timeframe of a typical real estate listing. However, the seller’s psychological confidence in the economy based on news reports could easily change in a period that short. The seller may be thinking “sure I listed my property at $X five months ago, but now the economy has improved so I want more money for my land”.

8. The buyer or the buyer’s agent may be acting like a jerk

Sellers do not want to sell their land to buyers who are acting like jerks or who are represented by agents who are acting like jerks. An example of a jerky thing to do would be to submit a full price offer and then get angry, threatening litigation if the seller doesn’t immediately accept the offer (like the agent who inspired this blog post did). Any mention of the L-word for any reason is naturally a huge turnoff to sellers. Sellers do not want to do business with buyers who seem litigious or who might create a complicated unhappy escrow experience. As a pure business decision, a seller is unlikely to accept a full price offer from someone who is acting like a jerk.

Advice to Sellers

Yes, technically you can ask a buyer to pay more than the listing price. But let’s face it – you will create an unhappy melodrama between the buyer, buyer’s agent and listing agent. More importantly for you, a move like this is unlikely to be successful.

Countering over the asking price may cause the buyer to disappear. There are some buyers who, upon receiving such a counteroffer, will think you’re an unfair meanie and will walk away just on principle.

As a seller, it’s far better to list the property at a price you are actually willing to accept. If the price you are willing to accept changes, then talk with your Realtor immediately about modifying the advertised listing price.

Also listen to your Realtor. Ask your Realtor to do some updated research. Maybe the higher price you think you can fetch is ill-considered and you should keep the list price the way it is. After all, it hasn’t sold at current listing price yet, now has it?

As a strategy, countering over the asking price should be reserved for only the rarest of circumstances. And only when you’re mentally prepared for the buyer to say “no thanks”.

Advice to Buyers

If you think a parcel is an awesome deal, it is likely you’re not alone in that opinion. When you find a fabulous real estate opportunity, be aware that multiple offers and counteroffers over the asking price are a possibility. The best way to avoid a bidding war is to write a “clean” offer. That means you should offer full price and, in addition, offer 50% of all closing costs including title insurance. To increase the odds of acceptance, write into your offer that the seller can choose the escrow and title company. Finally, submit your offer quickly before anyone else sees the listing!

Advice to Agents

If you are a buyer’s agent and you submit a full price offer and get no response please don’t jump to the conclusion that there’s some conspiracy afoot against your buyer like the agent who inspired this blog post did. There are many reasons why a seller would decline a full price offer that have nothing to do with you and your buyer. Even if you get no reply, remember, a non-reply, while no fun, is legal.

Further, the buyer’s agent should remember that the listing agent has a fiduciary responsibility to the seller, not to you or to your client. The listing agent has no ethical responsibility to tell you what the seller is thinking. A seller could be declining your full price offer for any number of reasons and the listing agent has no duty to tell you the reason. She may. She may not.

Just politely contact the listing agent to inquire about the status of your buyer’s offer. Be careful about seeming too desperate and “showing your hand” because the wily listing agent may use that to her client’s advantage. Monitor the MLS listing daily to see if the seller might have increased the listing price. If you get the news that your full price offer is declined just ask your buyer if they want to submit a better offer.

As the economy improves, you will see more and more bidding wars, declined full price offers, and counteroffers over asking price. Just take a deep breath and take it in stride.

When you are acting as a listing agent, make sure your sellers know that they should list at a price they are actually prepared to accept. If the price they are willing to accept changes, encourage them to contact you immediately to discuss whether it makes sense to officially change the listing price.