Sunday, February 20, 2011

The dance

Early morning downtown Cocoa Beach Feb. 19, 2011

Some random observations about real estate buyer/seller interactions from my man on the street perspective.

Real estate transactions are not a zero sum situation where one participant's gain or loss is exactly balanced by the losses or gains of the other participant(s). In real estate deals buyers and sellers often play a game of classic prisoner's dilemma, where, by not co-operating a participant gambles for the maximum gain (best price) by risking the maximum loss (no deal). In the case of a buyer, maximum loss only means not getting this property. Unless it's unique, she can always move on to another similar property. In a seller's case, maximum loss (no deal) means prolonging the sales process. The usual result (at least for the last five years in our market) is a lower price later, sometimes much lower, much later. Sometimes that gamble pays off and another buyer materializes quickly willing to pay more. I said "sometimes" but meant "once in a blue moon".

When offering to purchase anything for sale at a lower price than a seller is asking, it makes sense to have a strategy for success. Every situation is different and offers need to be tailored to the seller and the specific property. In most cases a buyer can't know all of a property seller's motivations and circumstances but enough can be determined from publicly available information to guide a strategy. Offering an arbitrary X% less than the asking price is not a strategy although, in most cases, all offers should be less than the asking. The exceptions are aggressively-priced or unique properties. In that case, trying to squeeze a few bucks off the price may lose the property to a more aggressive buyer. Your buyer's agent should be finding out everything about your target property and seller before you make your offer and should know what the market is saying about that property's value. An active, good buyer's agent will often know more than is publicly available. And, I can't repeat this enough; know what current market value is. Without that knowledge you may overpay or, just as bad, miss out on a good deal.

I see all kinds of seller reactions to offers. Most are hopeful stabs at getting a price above market value or a particular buyer's ability to pay but some are angry, irrational and counterproductive. Buyers understand that every seller wants to get the highest possible price for their property. They also want, or need, to pay the lowest possible price and in most cases are going to offer below market value. Even with these contrary goals, record numbers of buyer/seller pairs are reaching the middle ground and closing sales.

Three "need to know" points for sellers when fielding offers.

Carrying costs until the sale. If your property is costing $2000 a month to hold, waiting a year hoping to get an extra $24,000 doesn't make sense. Selling for less today might yield more than selling later for a higher price. Do the math and quantify the exposure.

Recent comparable sales and current "for sales". Without a significant difference in your property, you are unlikely to find that mythical buyer willing to pay you above the market. If you don't know the recent sold comparable prices, you won't be able to recognize a fair offer if you get one. What your neighbor sold his for two years ago is not a comp nor is the offer you turned down last summer. Cautionary hint: your listing agent might not know market price either and might not care.

Buyer behavior. Know that you're probably going to get some not-serious lowball offers but also know that every offer you get is going to be less than your asking price unless you have stated in your listing that the price is firm "not a penny less". Conversely, unless the buyer has stated that her offer is "take it or leave it", no matter how low, it is an invitation to begin negotiations. Refusing to counter an offer, no matter how crazy you consider it, is not productive. Unless the buyer said "take it or leave it" she is willing to pay more. If you consider her offer crazy, make a crazy counter but keep her engaged. She may be unrealistic but you lose nothing but time if a deal does not materialize. I have seen bad starts evolve into acceptance. Another consequence of refusing to counter an offer is that it sends a dangerous message. That buyer's agent walks away from a no-counter response with the impression that your asking price is firm. Not a smart message to be sending to buyers' agents who probably represent other buyers, one of whom may be willing to pay more.

Having said all that, there are unreasonable participants on both sides of the transaction fence. For every seller clinging to 2008 prices there is an unreasonable buyer who will never pay fair market value for anything. Be careful not to let your interactions with unreasonable players affect your response to the next one who really wants to get the deal done. Understand that it's a dance and put your best foot forward. Paying more or accepting less may, in retrospect, look like a great move. Do your homework and conduct yourself accordingly.

"When you get the chance to sit it out or dance, I hope you dance."
____sung by Lee Ann Womack (written by others)