Reality Doesn’t Live Up To The Real Estate Negotiation Myth
today at 7:30 am
At this point in my career I’ve witnessed or been a party to hundreds of real estate negotiations and I can tell you in no uncertain terms that the process doesn’t usually live up to the expectations of either home buyers or sellers. I actually wrote a really comprehensive blog post on this topic about 4 1/2 years ago: Real Estate Negotiation Myths And Reality – When Selling A Home. I was supposed to follow up with another post from the home buyer’s perspective but I can’t find any evidence that I ever did. I vaguely recall concluding that looking at if from the home buyer’s perspective wasn’t going to add anything to the subject. However, I’ve been thinking about this ever since and I believe I now have a little more perspective to bring to this subject.
The Rationality Myth
For starters, I think the biggest problem in the negotiation process is that both buyers and sellers expect it to be a 100% rational process. And they believe that they themselves are rational. Well, neither of those assumptions are accurate. However, I do believe that buyers are a bit more rational than sellers.
First of all home sellers all live in Lake Wobegon where all homes are above average. Yeah. Like the house down the street may have updated bathrooms and kitchens but theirs has an extra large entry closet. Second, home sellers get fixated on what they paid for/ put into a house, which is totally irrelevant today. All that matters is what someone else is willing to pay today. If you spent $100,000 putting Grecian columns in every room you are not entitled to getting that money back. And, third, and perhaps the most insidious problem, if a home seller was ever offered an attractive sum to sell their home then they have to meet or exceed that price, even if they spend an additional $50,000 waiting to get it.
Home buyers on the other hand are not anchored to a particular value and, even more importantly, they’ve been out in the market looking at various homes on the market. They know what’s available, as does their agent, and they have a good sense of what something is worth to them. However, they are terrified of overpaying so quite often they want to come in with lowball offers.
The Comps (Comparables) Myth
Notice in the last paragraph that I said “worth to them“. Because that’s what this comes down to for the buyer. Both home sellers and home buyers always want to know what a home is worth but I always tell home sellers that their home doesn’t have a single value. A home has different values with different probabilities. It all depends upon which buyer is putting a value on it. It’s actually kinda like quantum mechanics. Particles don’t have a single location.
So this makes it very difficult for the real estate agent because their clients expect them to effectively argue the value of the home by throwing all sorts of comps at the other side. Of course, the home seller cherry picks the the most attractive comps out there while the buyer cherry picks the worst ones. The vast, vast majority of the time the two parties do not come to agreement through this process. The reality is that the comps don’t matter to either side when each has placed their own values on the property.
I should note that there are important exceptions to that statement. For instance, if a home has been on the market for a really long time without a price reduction chances are the seller has a distorted view of how much they can sell the home for. In cases like that a comp battle just might get the seller to drop their price a bit more.
Perhaps the best evidence for my useless comp theory is what happens when you have a multiple bid situation. First, you end up with several bids at different prices. They don’t all come in at some uniform comp-determined value. But, more importantly, none of the buyers try to convince the seller of what the comps say because the price is being set by the highest bidder. The comps don’t really matter.
In Reality Everyone Is/ Should Be Estimating The Odds
At the end of the day the home buyer and seller are gambling. Each is estimating the odds that a better deal will come along if they can’t make this one happen. And they are estimating the odds that the current deal will be irretrievably lost. So, let’s say the two parties reach an impasse and start to walk away from each other. From the seller’s perspective they need to estimate the odds that:
- The buyer will find something better and never come back
- Another buyer will come along to offer more money for the home
And the buyer is estimating the odds that:
- They can eventually find a better deal
- Another buyer will come along to offer more money for this home while they wait for the seller to come to their senses.
The way the two parties evaluate #2 on each list is the key for determining whether or not a deal happens right away, some time in the future, or never. The key role of the realtor is really helping ensure that their client is thinking about things rationally in these scenarios. For instance, if we’ve had 14 showings on a listing before getting an offer I might point out that we could very likely have to do another 14 showings before getting another one and that will take 3 months. Or before a buyer walks away from a property they really want to buy I need to point out that obviously the seller thinks there is a good chance that someone else will come along and offer more money. How likely does my buyer think that is? Does the seller have his head in an anatomically impossible location? A good realtor can really help clarify this thought process for their clients.
When negotiations get to this stage the dynamics get interesting. The home buyer is in a slightly stronger position because if they wait long enough another viable home will almost certainly come along. Of course, they don’t know if it will be a better deal than this one. The home seller on the other hand has to sit back and wait for another interested buyer to come along and offer more money than this buyer. In the words of Dirty Harry “Do you feel lucky?”
#HomeBuying #HomeSelling #RealEstateNegotiation
Gary Lucido is the President of Lucid Realty, the Chicago area’s full service real estate brokerage that offers home buyer rebates and discount commissions. If you want to keep up to date on the Chicago real estate market or get an insider’s view of the seamy underbelly of the real estate industry you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.