Those of us who are experienced representing buyers have been through it many times. We help them finalize their requirements, check the MLS, schedule viewings, visit the properties and attend open houses with them. Also, many clients tell us which properties they found on the Internet which must be included in the batch to be visited.
If the buyers are sufficiently motivated and there is at least one exceptional property that pretty much meets their requirements then they begin thinking about moving to the offer stage. However, if there are multiple properties and each has aroused their interest how might the buyers go about evaluating and ranking them in order to select one and make an offer? Here’s a process that can help pull the trigger.
Some of you may recall the marketing mix equation which says that a transaction will not occur unless the following equation prevails:
PRICE PAID, WHICH IS THE LOSS OF VALUE OF THE BUYER’S FUNDS TO THE BUYER, IS EQUAL OR LESS THAN THE VALUE GAINED FROM THE PRODUCT ITSELF, THE PROMOTION OF IT AND WHERE THE HOME IS LOCATED ALSO KNOWN AS PLACE. THE FORMULA IS:
PRICE ≤ PRODUCT + PROMOTION + PLACE
When multiple properties are involved the challenge is to identify the property among those viewed where the sum of the right side of the equation exceeds the left side by the maximum amount. This represents the best deal to the rational buyer. However, how do you determine the value of each component to plug into the equation? The answer is by asking a series of questions for each component and answering them. Once all the pertinent questions are answered for each property comparisons can be made for each of the four value categories and a simple table can be used to identify the best choice as follows:
|PROPERTY/VALUE||OFFER PRICE ≤||PRODUCT +||PROMOTION||+ PLACE||GAP|
|LOWEST FIT (1)||SOMEWHAT EFFECTIVE (2)||A FEW NEGATIVES (2)||2|
(MAX. VALUE TO BUYER)
|BEST FIT (3)||VERY EFECTIVE (3)||NO NEGATIVES (3)||8|
(INBETWEEN VALUE TO BUYER)
|MODERATE FIT (2)||VERY EFFECTIVE (3)||A FEW NEGATIVES (2)||5|
Obviously Property 2 is the best choice.
Some buyers ask a lot of questions, others not so many. Some of the more popular ones follow preceded by explanations:
PRICE: The price is not just the amount of funds offered. It also includes the context of the funds offered. Here the buyers compare the pricing aspect of their offer to that of an ideal offer which in most cases is a full cash offer with proof of funds, a flexible date for closing escrow and no contingencies.
An offer at or near the bottom of the true market value range, plagued with many unfavorable terms for an above average home, is a low value offer when it does not lead to a transaction, aka meeting of the minds. A high value offer for the buyer results when the price and terms are jointly just enough to elicit seller acceptance. Offers at the high end of the true market value range, with terms costly to the buyer and not appreciated by the seller, are of the lowest value to the buyer and should be avoided.
Keep in mind that in some circumstances a willingness to pay a higher price than a value analysis such as this suggests is necessary because of a shortage of inventory and other factors favoring sellers. This must be factored into the analysis.
Here are some pricing questions for buyers to think about and the answers affect the value of their offer:
Will there be a mortgage involved?
Is there a need for seller financing?
Is a bridge loan necessary?
How much of a deposit is expected and according to what schedule?
Will the purchase price put an undue strain on the housing budget leading to a lower offer that might not be competitive enough to be accepted?
Do they just have a letter of qualification for a mortgage or actual mortgage commitment documentation?
Is there a willingness to waive the need for a financing contingency?
Is a requirement for an inspection absolute?
Who pays for some or all needed repairs?
Does a current home need to be sold before purchasing another home?
- Are there any "hidden or additional costs" like special assessments or capital contributions that must be paid and typically who pays them?
This list can be trimmed or expanded and the value of the offer price made by the buyer to the seller varies according to the answers to these types of questions.
PRODUCT: The product refers to both the tangible and intangible aspects of the home. Here the buyers compare the home’s attributes with their requirements.
- Is the amount of livable space just right, too much or too little?
- Does the floor plan work?
How desirable is the view?
Is decorating required and, if so, how much?
What is the condition of the home and how safe are its systems and components?
What might family and friends think about the home and how much do their opinions matter?
Are there any encroachments and how willing is the seller to remove them if not acceptable?
- Does the property have any liens and what is the plan to remove them?
Is there apt to be buyer’s regret?
What amenities come with the home and to what degree are they valued?
- How energy efficient is the home?
- Is the home house smart and how important is it to the buyer?
Once buyers have identified all their questions related to the product and completed their assessments they are in a position to determine the product contribution to the overall value of the home.
PROMOTION: Sellers and their agents are tasked with finding their target market and attracting qualified and willing buyers. They have many choices including listing the property on the MLS, de-cluttering, staging, improving curb appeal, holding open houses, putting up signage, placing ads in various media, engaging in direct sales and seeking publicity. Some seller/agent teams get heavily engaged in activities such as these. Others do no more than list as-is and wait for offers. Plus there is a continuum between these extremes. Whatever the case buyers are always wary of surprises that are not in their favor.
Today detailed seller disclosures and home inspection results have done much to reduce buyer anxiety, cognitive dissonance and possible buyer regret. However, these reports only focus on the material and safety aspects of the home. Plus the reports are only as good as the questions they evoke and the acceptability of the answers.
Some of the more crucial questions involving the promotion of the home that buyers might be concerned about prior to entering a purchase contract or during the contract contingency period include:
In general how trustworthy are these reports?
Is the seller hiding or disguising something I need to know?
Did the inspector miss a defect that’s costly to fix?
Will the inspector and sellers answer my questions about the reports in a timely manner?
Are there any answers that lead to further questions and what are they?
Are there any contradictions in the reports that need to be discussed with the sellers?
What is a cosmetic defect compared to functional or safety defects and what are the implications of these findings?
- What parts of the promotional materials are puffery compared to substance and what are the implications relative to a possible offer?
Is it reasonable to expect and demand that sellers make all repairs?
Are the sellers apt to leave the premises in good condition?
Might the sellers be prone to remove anything they should not and what precautions might be taken to ensure that it doesn't happen?
Will the sellers unexpectedly leave furnishings and personal items after closing escrow and what is to be done with these items?
After promotional due diligence is conducted by the buyers the overall value of this component in the marketing mix becomes evident. It can then be used in the marketing mix equation.
PLACE: Place or location refers to the value derived from the location of the home. Pertinent questions can include the following and others depending on circumstances:
- Is the home a luxury home in a middle class neighborhood, a fixer-upper in an upscale neighborhood or about right for the neighborhood?
Are the views from the house breath-taking, just okay or unpleasant?
Is the lot of adequate size, too small or too large?
Is the home properly sited on the lot?
What types of utilities service the property; electricity, solar, gas, sanitary sewer, septic tank, storm sewer, drainage ditch, natural rainwater absorption, public potable water or well water and what are the issues, if any?
Is Federal Flood Insurance required?
Are the insurance premiums acceptable?
Does the property have environmental issues and, if so, what are the implications and cost to resolve?
Are there any traffic issues in the neighborhood or with the feeder streets?
What is the quality of the schools especially if the buyers have school age children and is school choice available?
What are the crime rates and how are they trending?
How close are shopping, restaurants, recreational areas, hospitals and entertainment venues?
What are the market values of the homes in the neighborhood and how are the values trending?
Tailor the list to your needs and wants but remember that the location is fixed and not much can be done about it. It is located where-it-is.
Questions can sometimes fit in more than one value category. Just select the area where you're most comfortable putting it. However, don't omit it or consider it more than once otherwise your analysis might become skewed to the point where it's misleading.
Some buyers want to dig deep. Others just want to remove the outer covering. So you may end up with a lot of factors to consider and compare or very few like on HGTV.
There’s a good chance that the best home will become obvious and an offer will emerge from this type of analysis or a more simplified version of it. If not, peel the onion a little more and repeat the comparison. Surprisingly, with the aid of your agent, the process can progress quite quickly.
While the process described in this blog post may seem somewhat complex, time-consuming and possibly highly detailed many buyers informally engage in it during the pre-purchase phase but don't realize it. They just don't write it down and directly compare the homes they investigate. Rather, there is a tendency to look for reasons to disqualify prospective homes and make an offer on the last one standing. This tendency might very well lead to buyer remorse because of its lack of rigor and comprehensiveness.
Besides the marketing mix process helping buyers identify the home of their dreams, there at least a dozen other very important related payoffs including:
1. Possibly avoiding offering too much or too little money for the property.
2. Obtaining a better understanding of the characteristics of the home you are considering buying.
3. Comprehensively assessing the pros and cons of the locations of the properties that appeal to you, the buyer.
4. Separating facts from fiction and and inclinations that might not be true.
5. Possibly revealing some important terms that the buyer should include in the purchase offer to protect themselves.
6. Surprises during the purchasing process are apt to be minimized since risk minimization is embedded in the selection process.
7. This selection process can enhance the working relationship between the buyer and agent.
8. This approach can reduce the possibility that the contract will not be executed and ownership not transfer.
9. Value items can be weighted differently reflecting priorities.
10. The process can possibly uncover information that could be useful during the negotiation stage.
11. Using a process like this can go a long way in making buyers feel comfortable with their home choice and how much they are willing to pay for it.
12. Finally, this approach can help buyers arrive at the point where the house they are considering starts feeling like their home. Now the challenge is to persuade the sellers to accept the offer!
I WOULD BE HONORED TO HELP YOU FULFILL YOUR REAL ESTATE NEEDS.
JUST CONTACT ME TO GET STARTED.
I WORK WITH ALL PRICE POINTS AND THERE'S NEVER AN OBLIGATION!
JIM LAWSON, DBA, RSPS, BPOR
Serving Marco Island, Naples, Bonita Springs, Estero, Fort Myers Beach, Fort Myers, Cape Coral and Lehigh Acres
Resales (Buyers & Sellers) - New Construction - Land - Tear Downs/Rebuilds - Rentals (Landlords Only)email@example.com www.mynaplesareahome.com DomainRealty.com LLC