The most important key to avoid overpaying for a house
A willingness to walk away from any negotiation is essential to avoid overpaying for a house, or anything else for that matter.
Negotiating the sale of residential real estate should be no more difficult than negotiating the sale of any other product or service without a fixed price; however, since houses cost so much, and since people get emotionally involved in the transaction, negotiating to by a family home is much more difficult.
The principles of negotiation may be the same, but since the cost of houses is so large, even small mistakes can be extremely costly. If someone overpays for a car, it may cost them a few hundred or a few thousand dollars — painful, but manageable. If someone overpays (or undersells) for real estate it may cost them a few cars — tens or even hundreds of thousands of dollars. The stakes are high.
Skilled negotiators can obtain favorable pricing and terms without the assistance of a broker, but the novice who is inexperienced at this process often will not. Novice homebuyers generally benefit from using a professional real estate agent — assuming they find a trustworthy one, which is no easy task.
Real Estate Agents
Real estate agents ostensibly put the interests of their clients first, but since they don’t get paid unless a transaction occurs, most real estate agents will push their clients into deals whether it is good for the client or not. The few agents who have a conscience console themselves with the idea that overextending their clients to overpay for a home is good for the client because the client obtained the home they wanted, and now that client is “on the property ladder”. Perhaps the agents are right, but the stress on the clients after the sale can be enormous.
After getting paid, an agent’s secondary motivation is to obtain the best possible price for the party they represent; they have a fiduciary duty to serve one party to the transaction (although they can serve both in a dual agency situation). Many sales agents believe deceiving the other party in a negotiation is an appropriate tactic justified by their fiduciary duty. Realtor duplicity contributes to the public’s impression that real estate agents cannot be trusted. Many cannot be.
Everything the listing agent says is a lie
Whenever someone is offering to purchase a piece of real estate, they often ask questions of the listing agent to obtain more information. Physical or legal information about the property itself is the only information an buyer can rely on.
Many buyers (and even some buyer’s agents) ask questions about the sellers to try to gauge their level of motivation. This is a mistake because the listing agent is under no duty to tell the truth, and a good listing agent will lie — yes, good listing agents lie.
Professional poker players spend hours studying people’s reactions to try to elucidate the cards their opponents are holding. In poker if players can determine what their opponents believe about the strength of their hands, they gain a significant advantage over the other players. If the motivations of the other party in a negotiation is known, people can respond by concealing their own motivation in hopes that the other party will either raise or lower their pricing favorably. This isn’t deceitful; it’s sound negotiating practice.
The listing agent represents the seller, and the agent wants to get the best price possible for the seller. The seller may be very desperate and needs the deal to go through, but the listing agent cannot and should not reveal this fact to a buyer. It will merely serve to lower the buyer’s bid and reduce the seller’s negotiating power.
Knowing that a listing agent’s incentive is to lie, why would anyone even bother to ask about the seller’s situation? Do they hope the listing agent is a fool who tells them something that saves them money? I suppose it happens once in a while, but buyers should always be mindful of the fact that the listing agent is a paid liar, and all buyers should assume every word out of a listing agent’s mouth unrelated to the property itself is a bold-faced lie.
Motivated parties always pay a price
If parties to a negotiation are strongly motivated but pretend not to be, failure to complete a deal can be very frustrating. For anyone who has ever fallen in love with a property, not raising their bid to close the deal and then losing the property can be very disheartening. For any seller who desperately wants to get out of a property but fails to lower their price to meet the market, watching a buyer walk away is disappointing.
To try to gain advantage in this part of the negotiation, people often ask why the other party wants to buy or sell. Listing agents will almost universally tell buyers some story that makes the seller look less motivated than they really are. Buyer’s agents will tell the seller that the buyer is interested, but not too interested or “in love” with the property. Each side looks to gain advantage over the other by disguising their motivation. Sometimes this practice kills the deal, but sometimes it results in a significant monetary benefit to one party, which is why it pays not to be too motivated.
Don’t fall in love with a property
By far the biggest mistake most people make when negotiating for real estate is to form deep emotional attachments to a property they want. This generally starts in the selection stage as most people won’t even offer on any property they aren’t “in love” with. It’s like trying to get married before dating.
It’s easier said than done, but the best strategy is to find properties you could fall in love with and make offers on them before forming any attachments. Everyone who has fallen in love with a property and failed to obtain it knows the pain that causes, but that pain was entirely self-inflicted.
People tell themselves nonsensical stories about how this property or that one is “the one”. It’s not. No property is perfect, and no matter how much someone wants a particular property, no matter how “perfect” the property seems, another property will always come along. In fact, it could just as easily be true that the “perfect” property comes to market after someone is already in a deal for an inferior property. It happens all the time.
In order to avoid overpaying for a home, it’s critical not to become attached to any property when shopping.
By Laura Agadoni | January 14, 2016
Whether they’re buying designer jeans or a new house, no one wants to suffer from buyer’s remorse.
There are lots of potential complications that can cause you to overpay for a house, from being caught up in open-house frenzy to skipping a home inspection to “save” yourself money. But just as there are obstacles to getting the best deal, there are also tried-and-true strategies to get a fair price for a home. …
2. Know the comps
One of the best ways to know the value of a home is to find out what similar homes in the area recently sold for, known as “comps,” or “comparable sales.” Looking at what other homes in the neighborhood are listed for helps too. But you usually get the most accurate picture of local home values by looking at the price someone actually paid. …
The property details on this site have two tabs where you can check comparable resales and rental properties.
The search parameters are adjustable to narrow the list to the closest comps.
When Shevy works with clients, he prepares detailed reports using comparable sales and the rental parity analysis.
7. Don’t get sucked into a bidding war
If you know you’re in a seller’s market (little supply with lots of demand), making an offer that’s below the asking price probably won’t get you the house — and it might put you in a bidding war situation. … Entering a bidding war can become emotional. “If you really, really want the property, your logical, rational perceptions can get influenced,” says Downs. Know your limit, and walk away if the price goes higher. There are always other homes that come on the market.
Why do sellers lower their price?
The most obvious reason is that they know if they don’t, they won’t sell their property, but a more nuanced explanation is required to really understand what is going on. Once a seller has established an asking price, greed motivates them to keep it as high as possible. Once a buyer has made an offer, fear motivates a seller to lower the price to close the deal. The battle between greed and fear is the essence of a seller’s struggle.
If the seller perceives their asking price to be “fair” they are not strongly motivated to lower it because they believe any buyer who will not agree to their asking price will be replaced with a buyer who will. This is particularly true in a rising market and during the spring selling season.
To the seller with a “fair” price, it is only a matter of time before a buyer shows up willing to pay their price. It doesn’t matter if the price is fair; it only matters if the seller believes it is. If the price is not fair and the seller is delusional, no buyer will show up to pay how much the seller wants, and no transaction will take place. Denial and delusion distort perception and prevent sellers from doing what is necessary to sell their property.
Why do buyers raise their bids?
Again, the most obvious reason is that they know if they do not, they will not get the property because they will either be outbid, or the seller will not lower the asking price to meet their bid. There are a number of motivations buyers have for increasing their bids, and these motivations emanate from their perceptions of (1) scarcity, (2) market trend, (3) bidding competition, (4) property value, and (5) property desirability. Manipulative real estate agents use techniques to generate fear in buyers and alter the buyer’s perceptions and motivate them to increase their bids.
If buyers perceive another property will be available if the current deal falls through, they feel no sense of urgency to raise their bid to close the deal. In order to provide that motivation—through perfidy—realtors taunt buyers with the idea that they should “buy now or be priced out forever.”
If buyers believe this fallacious nonsense realtors peddle, they will believe properties are scarce, another deal will not come along, and they should raise their bids to close the deal. It doesn’t matter whether or not this perception is reality, if buyers believe properties are scarce, they will be more motivated to raise their bids and close the transaction.