Five Different Housing Market Conditions That Require Different Negotiation Strategies
There are five different market conditions possible that you might face when it comes time to negotiate your next home sale or purchase, and you need to prepare to adapt your negotiation position to parallel what the market bears.
Of course, sellers often have the advantage of determining their own market conditions, as they set the asking price for the home when it hits the market. Price the home too high and it will be in a buyers' market; price it too low, they may end up leaving money on the table. But price the home correctly, and sellers can sell their home in sellers' market conditions, despite what the prevailing conditions are around them (if you'd like to know more about Why It's Always A Sellers' Market In Real Estate, just click the link!).
The five different market conditions that you will face range from a strong sellers' market, to a slight sellers' market, to a balanced to market, a slight buyer's market, or a strong buyers' market. Each condition requires you to adjust your plan of attack. Since we're in a strong sellers' market for most homes in Tallahassee today, I'll start with that and work my way through all five conditions.
Bear in mind, my 30 years of experience selling homes in Tallahassee has shown me that buyers and sellers alike instinctively all want to use the same negotiation style, regardless of conditions, so they are often disappointed with their first go at the market. Don't let this be your experience!
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Graphing Housing Market Conditions
Each of these graphs in today's report is the same, though each has a different area and condition identified. A diagonal line splits the graph, with the supply of homes for sale shown on the bottom, and the number of buyers shown at the top.
The resulting months of supply of homes for sale are shown at the bottom, and it's these numbers that help us determine whether or not the market favors buyers or sellers. When sellers outnumber buyers, we call this a buyers' market. When buyers outnumber sellers, we call it a sellers' market. A balanced market exists when the number of buyers is equivalent to six months of inventory (6 months of supply of homes for sale).
How To Negotiate In A Strong Sellers' Market
When there are fewer than four months of supply of homes for sale, buyers heavily outweigh sellers and we refer to this as a strong sellers' market. Here's how you should prepare to negotiate when these conditions exist:
For Home Sellers - These are the conditions you dream of! In fact, these are the conditions for which you are most prepared because most home sellers face all market conditions as if it's a strong sellers' market. Your plan requires you to lure as many buyers as possible to your home so that you can get them competing for the right to be top bidder! This is pretty easy to do. Just don't make the mistake of overpricing your home, as this will result in chasing away buyers that could end up being part of a group that bids the final buyer to the highest price possible. The key is to ensure as much competition as possible so that you can select the best buyer (which is a combination of price and terms).
For Home Buyers - Get the thought of negotiating with a seller out of your head, this will not be happening in these market conditions. Any ideas you have read or assumed about what the seller will do have no bearing on your negotiation. Do you want to know why?
It's because, in extreme sellers' market conditions, buyers do not negotiate with sellers. Buyers negotiate with other buyers. Who will pay the most to get this home! Picture an auction house. Are you negotiating with the auctioneer, or are you bidding against other buyers? This auction house mentality needs to be your mindset when you are competing to buy a home in a strong sellers' market.
You should strategize with a very active and experienced buyers' agent who will help you prepare a winning bid. There is so much more to it than just a big offer, but know that you likely won't even get a chance to change your offer if yours is far below several other buyer offers. The key is to show the seller that you are strong, serious, and capable, and that you are flexible to make it work perfectly for the seller.
How To Negotiate In A Slight Sellers' Market
When there are between four and five and a half months of supply of homes for sale, buyers slightly outweigh sellers and we refer to this as a slight sellers' market. Here's how you should prepare to negotiate when these conditions exist:
For Home Sellers - In a slight sellers' market, buyers slightly outnumber sellers. That means there are fewer homes available than what buyers normally would find, and that means smart sellers can get their homes sold fast and for top dollar. Unlike conditions today, where sellers can expect to generate multiple offers, sellers in a slight sellers' market aren't as likely to see that happen. Instead, they have to prepare to make it happen.
Without going off on a tangent, sellers need to create competition for their neighborhood stalker (find out more about this at this link).
We know there is somebody ready to buy in the neighborhood, and they will be at your home the moment it is listed. Because market conditions have not created a frenzy among buyers, it is very likely this will be your only visitor within the first few days. My experience has taught me that the first buyer to see your home is the one most likely to pay you the most money for it. This buyer has been prowling the neighborhood, waiting for the next listing to hit the market. All other listings have already been viewed, rejected, or lost to other buyers. So this buyer is ready, willing, and able to give you top dollar for your home.
But this buyer is not stupid. And this buyer wants to negotiate. This is why it is imperative we create the appearance of high demand for your home. Weeks should be spent pre-marketing the home so that the stalker is not the only buyer who knows about it the day it goes live in the MLS. If you succeed in generating more buyers, then the stalker will know that there is competition and the buyer will do what it takes to not lose your home. If you create this early demand, then you can follow my negotiation guidance for strong sellers' market conditions. But if you over-price your home or just spring it quickly on the market, then you'll likely need to prepare to get a lower offer than you would like.
My guidance for sellers is to play the role of the bully. Price your home aggressively, and then make buyers step up and surpass your terms! If you do not price your home correctly, then you risk a long delay on the market and you'll likely start to attract bottom feeders who hit you occasionally with a low-ball offer. This is no way to sell a home!
For Home Buyers - You can still get a good deal in a slight sellers' market, you just have to be prepared. Take the time to work with a great buyers' agent who can help you be prepared to move fast ... and then take your time reviewing the availability of homes.
It's important for you to have a great understanding of value because if you make the wrong offer on a home in these market conditions, you will lose leverage with the seller. Remember, there are more buyers than sellers, so the seller is not going to want to deal with somebody making unrealistic requests on terms or property improvements, so the key is to make a compelling offer. This is one that is likely less than the seller could receive if the seller would wait for the next buyer, but so good that the seller does not want to lose you.
Again, with more buyers than sellers in the market, you have to be able to move fast and to know what a home is worth. This happens through proper preparation and the use of a high-quality, highly active buyers' agent.
How To Negotiate In A Balanced Market
When there are between five and a half months and six and a half months of supply of homes for sale, there is an equivalent number of buyers and sellers in the market. Here's how you should prepare to negotiate when these conditions exist:
For Home Sellers - Even in a balanced market, home sellers should make it a sellers' market! How do you do this? You make your home the best deal on the market. It's counterintuitive, but it works. If you price your home slightly below its market value, won't you attract more buyers than any other seller? If you do, then you can follow my guidance for selling a home in a slight sellers' market, because that is exactly the conditions you have created with smart pricing.
But if you price your home below market, and it attracts little to no attention, then something is wrong. Either you have hired the wrong listing agent, or you have made a mistake on its true market value. It has to be one of those two things. It's your agent's job to pre-market and market your home to raise awareness, but it's the asking price that you set that determines whether or not buyers see it as a good enough deal to pursue.
So if you are in a balanced market, and you set an aggressive price, you should get buyers competing for your home. If they are not, talk to your agent about what is being done to market the home. If you don't see activity LIKE THIS, then you need a better agent.
For Home Buyers - In order to prepare to negotiate on a home in a balanced market, you should first understand that you'll likely be at a disadvantage to the seller. Why? Because in a balanced market, there is usually a small segment of the homes for sale that are priced aggressively, whereas the remaining homes are priced at or above the market. So if you find a home you love, it's likely priced very well, and thus it's likely that another buyer has found it too. In situations like this, you need to follow the guidance I've provided for buying a home in slight sellers' market conditions.
Now if by chance you have found a home that has been on the market for some time and has been slowly lowering the asking price over time, then they will have eliminated a lot of buyer competition for you, and you will likely have a good chance on gaining some ground with the seller. Seek the advice of your buyer's agent, and make a compelling offer.
On the chance that you find a grossly over-priced home, you should avoid it like the plague. There is only one way you'll own that home, and it requires you to pay more than the home is worth. My experience has taught me that overpriced sellers are not yet motivated to sell their homes, so there is no effective way to negotiate them out of the clouds and down to the ground. If you badly want their home, you'll need to pony up and pay them an above-market price, or wait the months (or years) that it takes for their motivation to change.
There are a lot of people who endorse Joe for the job of selling your home, from Barbara Corcoran (Star of ABC's Shark Tank) to Preston Scott (host of Tallahassee's top daily "Audio Magazine," as well as the thousands of happy customers Joe has helped in the past. Listen why!
How To Negotiate In A Slight Buyers' Market
When there are between six and a half months and eight months of supply of homes for sale, there are more sellers than buyers in the market. Here's how you should prepare to negotiate when these conditions exist:
For Home Sellers - When you are selling a home in a slight buyers' market, you have to understand that there are more sellers than buyers and that means that some homes are not going to sell. In order to succeed, you need to realize that you are not really going to be negotiating with a buyer, rather you are negotiating with other sellers as to who will lower their price to be the best buy on the block.
There will be more than one home that fits the needs of every buyer, so you are essentially negotiating with those other sellers as to who will make their home the most enticing. To do this, you must have an excellent understanding of the market for your specific home at the time you go to market. Remember, every market is a sellers' market, so use that to your advantage to sell your home fast and for top dollar, even when market conditions are not favorable. Top-dollar might not be what you want to get for the home, but there is an amount that is the most you can expect to get, and that should be your target.
For Home Buyers - It's much more fun to buy a home when the market is weighted in your favor, but that does not guarantee that you will get a great deal. The majority of homes listed for sale are going to be priced incorrectly, and it is likely that you will be drawn to the home (or homes) that are properly priced. This means that you need to have a great understanding of value before you start making offers on homes.
Make sure you hire a super-competent buyers' agent. You need somebody who truly understands current valuations, not some brand-new rookie and not some seasoned agent that no longer sells many homes. The best buys typically are known about before they hit the market, so your best bet is finding the buyers' agent who is super-active and has his/her finger on the pulse of the market.
When you find the home you want, be decisive, and stay in control of the negotiation. Remember, there are more sellers than buyers, so the seller does not want to lose you. DO NOT LOW-BALL THIS SELLER! If you make an offer you know the seller absolutely will not accept, you will have passed control back to the seller. The market conditions give you an advantage, do not throw away this advantage because you do not know what to offer.
How To Negotiate In A Strong Buyers' Market
When there are more than eight months of supply of homes for sale, there are significantly more sellers than buyers in the market. Here's how you should prepare to negotiate when these conditions exist:
For Home Sellers - These will be trying times for you, so you have to work with a very active (busy) agent that you completely trust, and then do what she or he says. In 2012, we saw that more than 1/2 of the homes that hit the market failed to sell, so getting a home sold was frustrating (to say the least).
What I found during these times was that there were home sellers who failed to recognize their loss. They felt that if they waited to sell their home, that they wouldn't lose money. Unfortunately, that's not really how it works. Whether or not you sell your home, it does have a specific market value. That value typically is rising, but during extreme market cycles, it could be falling.
If you want to move, do not let the home you own (own you!). If values are falling, sell the home and move to where you want to live. It's likely that home values are falling there too. For most home sellers, it made more sense to sell and move to where they wanted to live to enjoy the market recovery in their new home. Staying in a home does not stop the home from losing value.
For Home Buyers - Extreme buyers' market conditions are actually tough times for buyers. It is highly likely that homes are falling in value, so be prepared to feel like any decision you make is a bad one. This underlying feeling could cause you to make a huge mistake, so that is why I mentioned it specifically before addressing negotiating tactics.
My biggest tip for buyers when negotiating in a strong buyers' market is to avoid the temptation to "win" a negotiation and instead take on the mindset that you are going to go out and get the best home that your budget will allow. There is a huge difference between these two mindsets.
The former has the buyer trying to take a pound of flesh from a seller, whereas the latter has the buyer focusing on his or her own needs. I always encourage buyers to focus on the result, not the process. I would rather pay 100% of the asking price in a buyers' market to get the best home for my family than I would pay 75% for a home that is not as well suited to my needs and wants.
It's not about the negotiation, and it's not about the seller. Smart buyers focus on the outcome, which means where you will be living and what you had to spend! The need for accurate value assessment requires you have to have a highly active buyers' agent who will help you understand current market values.
You are not likely going to be able to get an over-priced home seller to come down greatly on their price. My experience gained over the past thirty years has taught me that unrealistic sellers have low motivation to sell and that only time can erode their asking price as motivation begins to rise.
This means that you will find thousands of homes for sale in a sellers' market, but the majority of them will be overpriced and not truly ready to be seen or purchased. Avoid these homes. They will only cause you frustration (unless you don't mind overpaying for a home). Stick with the homes that you and your agent think are priced appropriately, and then be prepared to make a compelling offer.
Remember that sellers have control of the market at the onset of a negotiation. If they are priced aggressively, you might have to pay full price (or higher) to get the home, even in a strong buyers' market. But if the sellers have made the mistake of pricing at or above the market, you can take control of the negotiation.
You will be tempted to low-ball the seller to "see what the seller will do," but do not give them that chance. Have your agent do an analysis on the home to come up with the price that your agent thinks it will sell (whether to you or to another buyer), then you make an offer very close to that amount. This is what I call a compelling offer!
A seller will have conflicting thoughts when receiving your compelling offer. They know that they might chase you away if they counter, yet they also believe they might be able to get more from another buyer. This is what makes the offer so compelling.
By being so close to what they could receive from another buyer, your offer will activate their "fear of loss" and likely get them to accept an offer lower than what the home is worth. This is why compelling offers work, yet low-ball offers fail. Low-ball offers do not activate the fear of loss, thus they are ignored and force you to resign control of the negotiation. Even if you come back with a compelling offer afterward, you have shown your hand to the seller and they know they can counter your offer up to the full market value of the home. They know you want it really badly and now you'll have to pay.
Negotiation Position Is Set By Market Conditions And Seller Pricing Strategy
I hope this has been helpful to you. As you can have learned, your negotiation style must reflect the conditions that you find out in the market, and you have to be prepared for differing conditions on different homes.
A homeowner has the ability to price a home in a manner that makes a buyer highly reactive. Of course, the opposite is true too. The home seller can price a home too high and give a buyer a great advantage in the negotiation.
Ultimately, a well-prepared consumer, working alongside a highly active real estate agent can conspire to ensure that the consumer gains the best outcome possible from a real estate transaction.
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