Negotiate in Confidence
Real estate is such an emotional topic because it involves one of life’s most basic needs: a roof over your head. Negotiations often get heated because both the owner and the buyer are emotionally involved. They’re making offers and counteroffers with their hearts. They’re not thinking with their heads. Realtors®, on the other hand, are not emotionally involved. They know that there’s one magic number that’s going to make or break a deal: the “comp” – or prices for comparable properties.
The real estate market is no different than any other market. There’s a labor market, a market for stocks and bonds, and a supermarket for groceries. There all all kinds of markets for every kind of good or service imaginable. In every case, supply and demand sets the price. Yet, there’s nothing so personal as the real estate market. That’s because each property is unique. Each seller and each buyer is unique. And so there must be a negotiation.
Negotiations will ultimately set a price. Experienced investors and Realtors® already know what that price will be: It’ll be the same as what every other house of a similar size and style, location, size of lot, and condition has sold for recently. It’s not a mystery. It happens all the time.
Any given house will sell for what comparable properties have sold for. Plus or minus about 4%.
Here’s how it works: An owner decides to sell their house and they have to set a price. But what price? Where do they start? The only thing that is known is what similar properties have sold for in the recent past. And, of course, those prices were set with negotiations. Those are accurate prices. They reflect what a willing buyer and willing seller agreed upon for that type of house in that location and in that condition. EVERY owner thinks their house is worth more. They set their asking price somewhat higher than recent comparable sales.
EVERY buyer would like to pay as little as possible for a house. They’ll offer considerably less than the seller’s asking price. The negotiations begin. The seller will come down, the buyer will come up. They’ll meet somewhere in the middle. Guess where? At the comp price plus or minus 4%. And thus, a new comp price is set for future sales.
An investor is only concerned with comp prices. Remember, comps are RECENT sales. Investors buy and sell in a short period of time so “recent” is the only thing that matters to them. Investors are looking at two comp prices: The comp price of a beat up home and the comp price of the SAME home at full market value. The don’t want to overpay when they buy and they need to know what the home will sell for after they renovate it.
Primary homeowners just need to know one comp price: The price of the home they’re negotiating. Buyers are at a disadvantage because the seller already knows the comp price. Their Realtor® provided that number before the owner set their asking price. EVERY house has a comp price but buyers aren’t comparing comparable houses. They’re comparing PRICES FIRST, houses second.
Here’s what’s happening: Buyers are looking for “a house” for X dollars. They compare a Ranch in one neighborhood against a Colonial in another neighborhood based on price alone. There’s no focus other than the focus on price. It’s kind of like trying to buy “some food” for X dollars. The grocer already knows what their particular basket of food is going to cost and there’s not much room for negotiation. If the buyer can’t meet the grocer’s price for that particular basket, the buyer has to look for another basket with a different variety of products to meet their budget.
A buyer can only compare one grocer’s price against another grocer’s price if both of their baskets had the same products in them. The same goes with houses. The houses have to be the same size, in the same condition, and in the same kind of neighborhood in order to make a rational decision on price.
Buyers can level the playing field by settling on the kind of neighborhood they want to live in, first. They should next decide on the type and size of house that will meet their needs. Finally, they should decide on the condition of the house they’re willing to accept. Comp prices can be pulled for houses that meet these specific requirements. If the prices don’t meet the buyer’s budget, adjustments can be made and shopping can begin with confidence that the buyer is comparing similar or comparable properties in order to make a rational decision when they enter negotiations.
