If I were to ask 100 home buyers "how much are you willing to pay for the home," when they found the right home to buy, most would give me an answer that would work against them. The purpose of this post is to demonstrate for home buyers and home sellers the smartest way to negotiate during a home sale.
Much of my advice on real estate negotiation is counter intuitive, but that is why I believe most people are not very good at it. I believe negotiation is the process two parties use to come to an agreement, but in my experience, most negotiations in real estate start from a position of isolation, where each party ignores the needs and wants of the other.
What is the initial thought of most home owners? "I'm not going to give my home away;" while each home buyer thinks the opening gambit should be? "Let's start real low, I don't want to overpay for the home!"
Two Key Pieces Of Information Needed To Successfully Negotiate A Home Sale
There are two things each party needs to know if they are going to successfully negotiate a sale of a home (or anything for that matter). They must be knowledgeable on liquidity and they must have a good understanding of value.
Liquidity: This is simply the ability to get a home sold. If hundreds of homes are selling each month in a particular price range, then we know there is ample liquidity and there exists enough competition in the market, both from buyers and sellers, to establish a fair range of values. If too few homes are selling, it is difficult to determine a very tight range of values.
Value Range: The market value of a home is a range of prices in which we know the home will sell, where the low end of the value range will appeal to multiple buyers in the market and thus bring an immediate sale, and the high end of the range is a price that appears to be the top value the home could bring, though it might not occur in an acceptable time frame.
Thinking Through Home Sales Negotiation
We know that the current real estate market is the most lopsided buyers' market that Tallahassee (and the US) has ever seen. There are way too many homes for sale (especially when you consider how many homes are in the shadow inventory), and buyers have all the selection opportunities they could desire.
Knowing this, one might think that homes are selling for a mere fraction of their asking price. Believe it or not, this is not true!
In the real estate graph above, we see that over the past year, the median Sales Price to List Price ratio ranged from 95% to 99%. How can this be? We know there is a glut of homes on the market, yet home sellers are getting nearly everything they are asking?
The Simple Truth About Home Sales Negotiation
Here is what most people do not know about the real estate negotiation process. Most home sales situations have enough liquidity that the value range is not hard to figure out. That means a smart negotiator (one who is thinking about the position of the other party) can determine what the other party is going to ultimately do.
For home buyers, this means we know they will have to pay between "X" and "Y" for the home, and for home sellers, this means they will have to take between "X" and "Y" for the home.
How To Win A Home Sales Negotiation
Homebuyer: The best offer from a buyer is one where the seller will be "scared" to lose the buyer and thus will concede to a lower end of the range of values. With this knowledge, a smart buyer is going to write a compelling offer. Knowing that the seller will be getting between "X" and "Y," any offer below "X" will not be compelling and the seller will be forced to counter the offer.
Homeseller: Selecting the best asking price for a home is part art, part science. If a home is priced correctly, it is likely to sell for full price (or even higher). This might not seem to make sense, but if a home is the best deal in a market with sufficient liquidity, and it has utilized a great internet marketing plan for total exposure, then a competitive environment will exist for the home.
Paying For A Home Sales Negotiation
The funny thing about real estate is that most of us in the industry pretty much charge the same thing. Those who make more money do so because they are doing more business, not so much because they charge more.
We have roughly 90% of the people in the real estate brokerage business working part-time while the rest are full time. So that makes me wonder ...
If you can get the best for the same price as a "not the best," what is it costing you during the negotiation stage of buying or selling a home? In my experience, the difference is usually more than double the standard charged rate, meaning that working with "not the best" is going to cost a buyer or seller three times what it will cost to work with "the best."
If you are getting ready to sell or buy a home, take the time to make sure you have the best home sales negotiation expert in town!
Joe Manausa, MBA is a 27 year veteran of real estate brokerage in Tallahassee, Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.