Home Sellers Myth: “Negotiating Room”
Often we hear this sellers myth about negotiating room when they determine a list price. They ask “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 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 silk scarves in a Turkish bazaar, 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 scarves with a shop owner in Turkey, (a fierce negotiation I might add!) it is really a two dimensional proposition – I want the scarves, but I only want to pay X. The shop owner wants to sell me the scarves 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.
- Appraisal Contingency – Appraisals can come in high or low, adding a new layer of negotiations.
- Inspection Contingencies – Inspections often reveal repairs or replacements that require further negotiation.
- Closing Costs – Buyers may ask for closing cost help.
- 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. #toomuchHGTV. Pricing a home higher to have negotiating room usually backfires. In over 25 years of real estate, we’ve rarely known this tactic to work. Here are the reasons:
1. In our present market, well-priced homes in great condition are selling in days. (our listing at in New Market Md sold in 3 days). When a home is listed at market value, as determined by a Comparative Market Analysis, (CMA) buyers will come to see it. Their buyer’s agent, also doing a buyer’s version of a market analysis, will tell them something like, “If you want this home, this is a price that is right with the current market…” In the case of competing offers, which happens when the inventory is low, (something we’ve been experiencing for about a year) it’s even more important to understand current values.
If a home is overpriced, the buyer’s agent will advise their buyer that it is overpriced, in their opinion.
After more than 100 years of the licensing of real estate agents, the industry has become proficient at keeping meaningful statistics about home sales.
Real estate agents who study their industry and have local knowledge of neighborhood trends will give the best advice to their buyers.
Here is a meaningful statistic:
If a home is priced at market value and in great condition concerning other comparative homes, every 10 to 11 showings will net one offer.
If this is not the case, the home is overpriced, or in need of improvement in it’s condition.
Overpricing Eliminates Eligible Buyers
2. 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 because they are in that higher price range. Don’t forget, the are comparing your home to other homes in that price range. Your home 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.
Overpricing Lengthens Time On Market
3. 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 neighborhood 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.
If the average selling time is 60 days, and your home has been sitting on the market for 180 days, the buyer thinks two things:
a) What’s wrong with the house?
b) The seller must be desperate. Get ready for lowball offers in this case.
The Appraisal Trumps All
4. 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 appraised. 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 seller thinks their 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.
Negotiating Room was written by Chris and Karen Highland.