Home owners often want to list their home at a much higher price than they are expecting in order to leave room for negotiating. I often get asked “How much negotiating room should I leave when pricing my home?.” On first thought, this logic may make sense, but for real estate sales, it doesn’t really work that way. In many ways real estate sales is not like any other types of sales.
In real estate, the very first step in negotiating, is getting people to come see your home in the first place. The second step is getting your home on the top of their list. An overpriced home does just the opposite on both steps.
When I bought 3 T-shirts recently in a Bali market place, the negotiating principals followed this logic: Both parties know that the item is priced at the high end, and both parties know and expect the back-and-forth negotiation to take place. When negotiating over t-shirts with a shop owner in Bali (a fierce negotiation I might add!) it is really a two dimensional proposition – I want the product, but I only want to pay X. The shop owner wants to sell me the t-shirts and he wants as much as he can get. After we haggle, we come to an agreement on just what that amount is.
Real Estate is different; the negotiation is multi-dimensional. There are so many more moving parts to a real estate negotiation. Buyer and seller must come to a “meeting of the minds” about many things:
- Time Frames – Buyers need to settle and move in within a time frame, sellers need to make sure the settlement coincides with their next move.
- Loan Approval Contingencies – Buyers need time to get their loan approval; time varies with the type of loan and amount borrowed
- Inspection Contingencies – Structural, termite and other inspections often reveal repairs or replacements that require further negotiation.
- Subject to sale – A buyer may need to sell their own home in order to satisfy the contract.
There are more moving parts and many that are equally important in either the buyer or seller’s goals.
Real Estate Negotiation Basics
There are several misunderstandings surrounding the topic of real estate negotiation. Maybe television is to blame!. Pricing a home higher to have negotiating room usually backfires and we’ve rarely known this tactic to work.
Here are the reasons:
1.Overpricing Eliminates Eligible Buyers : By listing your home at a higher price, you eliminate buyers before they ever get a chance to see it. If a buyer doesn’t qualify for the higher price, or if it is out of their desired budget, you won’t get them through the door.You will, however, succeed in getting buyers into the home who are looking in that price range. The problem is that they will be looking for more than you are offering, because they are in that higher price range. Don’t forget, they are comparing your home to other homes in that price range. Your h ome will be disappointment in the comparison. The net result is that you’ll make the competition look better and help them get their home sold.
2. Overpricing Lengthens Time On Market : You run the serious risk of staying on the market longer. The longer your home stays on the market, compared to the average selling time for your neighbourhood and comparative homes, the worse it gets for you. Remember, buyers have agents who have access to the same statistics. You risk having a stigmatized home. In these cases, buyers start to believe that something is either wrong with the home, or the home seller.
In our present market, well-priced homes in great condition are selling quickly, on average 47 days (my average days on market is now only 17 days). If the average selling time is 47 days, and your home has been sitting on the market for 180 days, the buyer thinks only one of two things:
a) What’s wrong with the house?
b) The seller must be desperate. Get ready for lowball offers !!
3. The Bank Valuation Trumps All : Unlike so many other types of sales, the real estate purchase has what we like to call “the second sale” – the Appraisal. In about 90% of real estate sales the home is being financed and must be valued by the lending bank. There is a strong likelihood that the buyer who wants your home will be buying it with lender financing. The bank will never knowingly lend more money to the buyer than the home is worth. Therefore, the agreed-upon purchase price MUST be proven through a bank appraisal before the loan is approved.
So you see, it doesn’t matter what a you think your home is worth. The home’s worth is determined by:
- a) what a ready and able buyer is willing to pay, according to the present market, AND, most importantly,
- b) what the lender is willing to lend, according to the present market.
So, How do I Correctly Price My Home?
So, how do you come up with the correct list price? You want a price that will get buyers lining up at the home open and plenty of offers – without under-pricing a home.
- Do your own research to start with. There is a plethora of sales information freely available these days to the public. Research the sales prices in your area for the past 12 months as well as what is currently available for sale
- Work out a reasonable range of what a home of your specifications would be expected to sell for based upon your research.
- Visit home opens of similar homes to yours to see how yours compares – and be realistic.
- Consider this – If you had $x to spend in your area, would you buy your home? – or another? It needs to make sense.
- Research what agents are making the most sales in your area, prepare a short list and call them in to appraise your home. Web sites like http://www.ratemyagent.com.au are a good resource to check out what previous clients think of them.
- Beware the agent who overprices the home to secure your business as this can be a very expensive mistake.
- Just because you want your home to be worth a certain amount, doesn’t make it so. The market is s brutal mistress and unfortunately doesn’t take into account what you want or need.
There are always myths that circulate regarding real estate sales. Home buyers and sellers can make sure they don’t fall for these myths by finding an experienced, ethical and local real estate professional.
If you’re considering buying or selling a home in 2018, give us a call, 0412 770 743.
Real estate negotiation is an art all to itself. My friend from the Bali market knows his products, but he doesn’t know real estate!