The following is a super lucid look at the considerations buyers and sellers weigh, or should weigh, in the balance of power during real estate negotiations.
Thanks, Joe Manausa for a thoughtful post worthy of reposting.
Have you ever wondered what your real estate buyer's agent thinks about when you ask how much you should offer on a house?
The answer is not so simple, it is not merely some percentage of the asking price. You see, how much you should offer on the house differs from home to home, based upon a myriad of factors.
Offer too little, and you lose control of the negotiation. Offer too much and you will over-pay for the home. Neither serves your best interests.
So how much should you offer on the house you want to buy? Here's what I think:
If you look at the image on the right, it shows a negotiation in process. Every time you negotiate, you take on the roll of one of those three people. Which one do you want to be?
In my experience, everybody (both buyer and seller alike) thinks they are the confident, controlling young lady. Rarely are they correct.
The key to determining what you should offer on a house rests in your understanding of your position in the negotiation. Here is what I mean:
The Seller's Position First
If you are offering on a house that is grossly overpriced, then it is likely you are in a strong position (like the young lady in the picture). Nobody else is likely going to make an offer, so you can go in and dictate what the seller will need to do to get their home sold.
But if the seller is priced at or below market, then you are the gentleman on the right. The seller is the strong, confident young lady, totally unconcerned about you and your offer. The seller knows that multiple people will want to buy the home, so you and your offer are not that important. If you try to dictate terms to this seller, you will lose.
Ultimately, negotiation is about fear and greed. The seller starts the negotiation with an asking price, and that price either produces fear (the price is so low you are worried another buyer with snatch it up before you can get a chance to buy it) or greed (you know you are the only one interested in the home so you low-ball the seller).
So the very first factor that I examine when a client wants to make an offer on the home is how well priced the home is compared to its market value. Ultimately, the seller has the initial control of the negotiation solely based upon how wisely they have priced their home.
The asking price is not the only critical issue though. I also have to measure the level of your desire to own this home. For example, say a home is down the street from a friend of yours, and it has everything you want. You might REALLY want that home, compared to a similar one in a different neighborhood. Thus, there could exist a situational value to a home that I must consider before making a recommended offer. There might also be no situational value, where you find the home to be worth less than many other buyers might be willing to pay.
I also use a heavy dose of market analysis to help a buyer with an asking price. The key for the buyer is to make a compelling offer, and again we must consider the concept of "fear and greed." The buyer can cultivate "fear" by making a compelling offer, one so high that the seller does not want the buyer to get away. The opposite type of offer is one that is so low that it stimulates "greed" from the seller, where the seller does not see you as a viable buyer and therefore either counters at full price or does not even reply to your offer.
By studying the market in great length, we can advise a buyer as to the level of competition for the home. We can tell a buyer that based upon current trends, there is like to be "X" number of buyers competing for this home. If the number is high, a compelling offer might need to be near, at, or above asking price. If the number is low, we might be able to get a discount off of its market value.
A recent survey conducted by the National Association of REALTORS reported that 74% of homebuyers work with the first agent with whom they speak about buying a home.
We also know that 95% of agents in the business are not fully trained to help a homebuyer negotiate the best possible price for a home, and less than 1% are considered highly trained and experienced at buyer brokerage. With this in mind, why do 3 out of every 4 buyers work with the first agent they bump into?
Take the time to interview and hire a real estate buyer's agent who has been trained on the art of negotiation, who maintains very current market trends and analysis at your price range, and one who takes the time to advise you on the process of buying a home. If your agent is willing to show you houses before putting you on a money-savings plan, then you likely are working with the wrong agent.
If you want to save money when buying a home, you have to use a smarter home buying process. Take the time to enroll in our free e-Course "Home Buying For Smart People," as it will show you ways to ensure that you get the best deal when buying a home. And when the time comes to determine how much to offer on a house you want to buy, you will be confident and prepared.Joe Manausa, MBA
Joe Manausa Real Estate