Renegotiating and Walking Back to Olive8

I posted this to the Twitter news wire yesterday, but since the original story merited a full blog post back in May (Walking Away at Olive8), I thought that Andy’s thoughtful follow-up would be worth posting as well.

As it turns out, local internet entrepreneur Andy Liu didn’t end up walking away from Olive8 after all.

One of my more popular blog posts was on my decision to walk away from Olive 8. I was ready to walk away, but did engage in a few interesting conversations with the folks there. Needless to say, we were able to come to an agreement to purchase property there. It’s far from clear that I bought at the bottom, nor was I trying to time the bottom. In fact, I’m probably early as only about 25% of the units are actually closed, there’s a lot of units still available. However, I approached the decision in a few different ways.

First, the decision was a purchase decision first and an investment decision second. Like I mentioned in past blog posts, when you buy a car, it’s a purchase decision, rarely is it an investment decision where you are trying to calculate your return on investment and equity gains after acquiring the car. Because my wife and I really enjoyed the location of the property and the conveniences of the property – it fit us well for a purchase decision.

If I’m reading between the lines correctly here, it sounds like the sales people at Olive8 negotiated a lower price with Andy to keep him from walking away. I also find it interesting that he mentions that “only about 25% of the units are actually closed.” According to a February 2008 Seattle Times article, over 75% of the units were pre-sold at that time. Considering that closings have been taking place since April last year, it definitely looks like they are still having some problems getting that building filled.

Andy’s post also includes some great advice for anyone considering buying a home, whether it’s an expensive upscale condo or a modest craftsman in Everett:

Once we decided it was a purchase decision first, we did want to make sure that we were not overpaying – in the car example, even if you decided that you wanted that Toyota doesn’t mean you should pay sticker. In real estate, you can always buy below market, but you can rarely sell above market. So, the lesson is to make sure you get in at the right price. For us, that meant that we don’t purchase more property than we can afford.

If there was a lesson learned from the recent real estate debacle, it’s that real estate does not always go up and becoming overleveraged leaves you exposed to potentially horrible options. In fact, our decision was to downsize to a place that we wanted, reduce our exposure to leverage and stay well within our budget. There’s always the temptation to buy up and lever up and bet on the real estate market with your personal property, I enjoy risk and often take risk, but for less liquid assets like real estate and levering just seems like a bad risk-reward proposition.

Remember, I’m just arguing for your personal property. For an investment property or buying undervalued properties, it might be different. Why overspend on your personal property when you can evaluate much better opportunities with professional investors that could bring better returns? My thesis is to keep your personal property to something that you like and equity returns are like icing on the cake and keep your investing decisions with strict criteria to secure the best returns. There are a lot of great asset classes out there, find the ones that best suit you.

Exactly. This is basically the same message I’ve been pushing here on Seattle Bubble for years, and it’s just as true today as it was in 2006.

Andy also gives some thoughts about the broader economy and buying assets as an investment. It would appear that he is definitely in the inflation camp on that discussion.

It’s great to read an update on Andy’s experience in negotiating with a developer and the thought process that went into his decision to ultimately buy. I wish the best of luck to Andy, and hope that he enjoys his new home.

Hat tip: Urbnlivn

  

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

28 comments:

  1. 1
    AMS says:

    All of this is nice, but there is one small part missing: The purchase price.

    The other day I wrote about how I was going to start buying art. For the sake of this discussion, let’s assume that I am buying art to enjoy. Does it make sense to buy a fine piece of art for $10M? I don’t think so. I come to this determination based on the ratio of art cost to annual income ratio.

    I also commented how in Marin county the median price to median annual household income is ten. Sure all those homeowners are probably enjoying the homes, but is it prudent to buy at 10x annual household income?

    So while it’s nice to buy something to use, such as a car or home, preservation of one’s financial condition should be considered too.

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  2. 2
    The Tim says:

    RE: AMS @ 1 – Well once the sale fully closes and the county records get updated, you’ll be able to look up his purchase price in the public records for Olive8.

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  3. 3
    AMS says:

    RE: The Tim @ 2 – If the guy has plenty of cash, then the final sales price isn’t that important. Imagine if Gates were making an Olive8 purchase because he likes it. Who cares how low the price paid is, it’s pocket change.

    On the other hand, if someone has very limited resources, then the purchase price is critical.

    Does it make sense to buy a $10M piece of art for $5M?

    Does it make sense to buy a $5M home for $1M if you cannot afford $1M?

    Note the difference between the top and bottom end:

    Does it make sense to buy a $500,000 home for $100,000?

    Just as in the case of the $5M home for $1M, there is some positive Alpha, but the risk on the lower end is far less. Because of the differences in risk, for the average buyer, proportionally the positive alpha on the lower end is greater than the upper end.

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  4. 4
    Ray Pepper says:

    Okay, I will be the ass here.

    Andy who represented you in this transaction? You mean to tell me there was no protection in the P & S for the property not appraising at the sales price? You still plopped down 24k without an escape clause.

    You mentioned ” a deal is a deal “. I disagree strongly and would have had my documents in front of a real estate attorney day 1 when I was presented with a loss of my earnest money. What if you lost your job? Had a decrease in income? Had to move? Got a divorce? A complete wipe out of your earnest money? You signed this?

    Andy, it seems to me it was a COMPLETE debacle on your part. I would really wish someone could post the P&S agreement Olive 8 had its Buyers sign so we can all review it.

    Andy’s story, in my opinion, has nothing to do with his decision to buy or not. His story brings to light bad judgement, bad advice, or horrendous representation that should be exposed.

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  5. 5
    AMS says:

    RE: The Tim @ 2 – By the way, I once had a friend go on and on about a $20,000 loss. I finally asked, how much capital are you down to? Let’s just say he was ‘down’ to about $10M. I asked how much he spends when he goes to Vegas…

    It’s like the guy who was all upset the other week over the $10, or whatever amount it was, that he was owed by a coworker. Sure his home is falling in value by $100 per day, but that $10 is really important.

    Sure I’ve got a gunshot wound, but could you please treat this minor abrasion?

    I’ll probably never understand any of this thinking.

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  6. 6
    Jonnny says:

    RE: AMS @ 3

    If you buy it for $100K, it’s not a $500K home (unless you can turn around and sell it for $500K)

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  7. 7
    AMS says:

    RE: Jonnny @ 6 – Yes, you can turn around and sell it for $500k under normal sale conditions. Similar with all the other examples.

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  8. 8
    deejayoh says:

    By AMS @ 7:

    RE: Jonnny @ 6 – Yes, you can turn around and sell it for $500k under normal sale conditions. Similar with all the other examples.

    If I was that good at finding irrational sellers, I think I’d have a new line of work! Capital woudl be no problem

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  9. 9
    AMS says:

    RE: deejayoh @ 8 – That $20 bill on the sidewalk is clearly fake–it’s not worth the chance to check it out.

    Ray talks about finding GEMs…

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  10. 10
    softwarengineer says:

    When You Buy a Big Ticket Item

    Common sense may be a low priority to the rich and the elite, with this caveat:

    Many common people also got sucked into buying Condos in the 80s and when they turned into apartments [due to low unit closure, like Olive8] lost their shirts.

    Andy may be bought out by the new landlord of Olive8 at whatever the market bears, assuming that happens [it could] and I assume, if he still lives there, may be a renter again, with a lot less pocket change.

    Even renters on the blog fear units that could foreclose out from under them and then they have to move again.

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  11. 11
    Groundhogday says:

    If you are making a purchase decision, then you are really talking about different ways of financing the value of living in a particular unit. The obvious comparison is buy vs. rent, particularly for a condo in a building where there will probably be many rentals available. And you don’t get to put in a garden for a condo. So where is the buy vs. rent financial comparison?

    Sorry, this reads like a good rationalization.

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  12. 12
    Alan says:

    In the spirit of #7, if you could fly like Superman, should you go to Paris if airplane tickets are $10000? Of course, you should. It doesn’t matter if you can’t really fly or if your income isn’t high enough to buy an airplane ticket because we are talking about hypothetical situations.

    If you are earning $100k a year, should you buy a house for $1M that you believe is really worth $5M? No, you shouldn’t. Because the house isn’t worth $5M and the fact that you believe it is means you are kind of deluded.

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  13. 13
    AMS says:

    RE: Alan @ 12 – I’ve been offered some very attractive purchases that I could have immediately flipped. There are plenty of good deals out there. Ask Ray about some of his GEMs.

    That said, I’ve turned down many deals because I simply had better projects going.

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  14. 14
    Ray Pepper says:

    RE: AMS @ 13

    Actually AMS all the GEMS I’m finding are STI very quickly or have multiple offers waiting for bank Approval. This Obama bounce is proving to be meteoric in Bellevue, Kirkland, Issaquah, and Redmond. Knock 150-200k off a 800k home in those areas and the VULTURES are swarming. I see why some analysts are concerned about another small Bubble forming. Hope we don’t get a 2nd wave of Short Sales in 10 years from this “mini-bubble” we have forming again.
    Expect the short sales to be much more efficient in late 2010 forward to move this inventory much quicker.

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  15. 15
    AMS says:

    RE: Ray Pepper @ 14 – “…all the GEMS I’m finding are STI very quickly or have multiple offers waiting for bank Approval.”

    The underlying point remains, however, that you are finding some. They exist.

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  16. 16
    AMS says:

    About three years ago, I was bidding on some items at that large online auction site. Various sellers, I was bidding about $250, but my bids were simply not high enough. After checking out who I was bidding against, I noticed a single bidder had spent $15,000 in a single month. Not only that, the bidder appeared to be honest, in that he was paying for his winnings. His value on the item was about double how much value I placed on the item. In fact, I bid him up a few times. I’d punch in a bid of $350 knowing that it was a safe bet. I didn’t mind spending his money.

    After some time, he won all he needed, and then I won my item for less than $250.

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  17. 17
    Packet says:

    RE: AMS @ 15

    No, they don’t really exist. All those properties end up getting in bidding wars and going for significantly over asking price. It’s not exactly a gem if you’re paying 30k more than advertised.

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  18. 18
    AMS says:

    RE: Packet @ 17 – I’ll be happy to pay $30k more than advertised if I think it’s still $50k lower than I am willing to spend.

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  19. 19
    corncob says:

    His post sounds, to me, more like Olive8 convinced him to buy a cheaper/lesser unit instead of him bargaining them way down on his reserved unit.

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  20. 20
    The Tim says:

    FYI: Hardware crash lost yesterday’s comments to this post, but I will be restoring them manually later this afternoon.

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  21. 21
    Raj says:

    Last week I saw a short sale property on Eastside. We liked it and it is listed for 280K. My agent said you will give an offer for around 300k inculding closing cost bcoz there will be more offers

    My questions
    1) Is the agent saying is right?
    2) My thinking we usually gave offer less than the listed price. Am i right?

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  22. 22
    AMS says:

    RE: Raj @ 21 – You can offer whatever you want, including below asking price, asking price, and above asking price.

    But, just like a first-price sealed bid auction, highest bidder wins for his bid, so bid lower than a second-price auction.

    If you were the seller and two offers came in, which would you take?

    I have no idea how many offers are going to be made. It’s unclear how your agent knows the number that will be made. Maybe you could explore that a bit more. Also how much is the property worth to you?

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  23. 23

    RE: Raj @ 21
    Short sales are sometimes a different animal altogether. Even if the seller accepts your offer, the lender also needs to approve the deal. I have heard that lenders will not generally approve deals where the agreed upon price is less than 80% of the current market value. Maybe your agent knows the current market value and has an idea what the lender will accept.
    Most short sale deals don’t end up closing. If you feel that it’s a place you like, and even at 300,000 seems to be a much lower price than comparable properties, go ahead and make an offer. Just don’t expect to actually end up getting the property. Make sure that in your offer you have the right to walk away from the deal without losing earnest money any time before lender approval.

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  24. 24
    The Tim says:

    RE: The Tim @ 20 – I have restored all of the lost comments.

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  25. 25
    AMS says:

    RE: Ira Sacharoff @ 23 – “Make sure that in your offer you have the right to walk away from the deal without losing earnest money any time before lender approval.”

    Is there any time when you cannot withdraw an offer before it’s completely approved?

    Even if you give an initial deadline of 30 days, that can always be shortened before it’s approved, or even withdrawn.

    As always, I am not an attorney, and I always recommend legal representation.

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  26. 26

    “Is there any time when you cannot withdraw an offer before it’s completely approved?”

    The difference being that in a short sale, you’re not only going to need the approval of your own lender, but also the approval of the seller’s lender, and that could take a very long time.
    In a typical non short sale deal, there are a a number of contingencies typically, which would enable you to change your mind and get your earnest money back. But what if your agent possessed award winning incompetence, and the contract didn’t contain any of those contingencies, that you waived inspection, etc?

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  27. 27
    mukoh says:

    RE: AMS @ 16 – AMS I ran into that same issue at this month world coin at Heritage. Some people are willing to pay 20% higher then last months kunker auction. Beats me.

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  28. 28
    truthtold says:

    RE: Ray Pepper @ 4 – agreed… consistent bad-advice or poor-judgement storyblog does not indicate cleverness or good representation.

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