Andrew Wetzel's Musings

June 21, 2017

The psychology behind the initial offer

Filed under: Uncategorized — awetzel @ 3:55 PM

Many, many books and articles have been written and many discussions had over the age-old question:  how much should I offer on a proposed purchase of Real Estate? Years ago I actually had what seemed to be a young prospective buyer call me to discuss a property and, during the conversation, he asked if there were some customary percentage off the asking price that a buyer would typically offer. There have been times in my life where I could not control my laughter and this was one of them. I gathered myself and explained that if there were some such guidance, the process of selling Real Estate would be like reading from a script and that both parties simply had to rehearse their parts. I never got to meet or work with that person but have met many others looking for some rationale behind how to construct their initial offer, including the price, on a piece of Real Estate. Of course, “initial” implies that they would consider “improving” their offer and that a seller would give them that opportunity.

Let me start by  saying that sellers come in all types, ranging from “realistic” to completely “unrealistic”, each having their own thinking behind their expectations. Some care about their local market and what an appraiser and buyer might think, others not so much. Buyers can try to figure out what a seller is thinking but, unlike most “sales”, buyers and sellers rarely meet until the end and they generally do not interact directly, instead using surrogates called “agents”.  That alone can create issues unless a client and their surrogate/ agent are “on the same page.

I believe that an offer has to be somewhat coherent, meaning that there should be some relationship between the amount of the offer and the hoops you expect a seller to jump  through if you expect there to be any chance of acceptance let alone a reply.  Offer little and demand a lot and that is a recipe for frustration. Some sellers will not respond at all.

Agents can help their buyer-clients by supplying market data that may give some insight into what a property might achieve including the history of the property itself (has it been on the market before?, how long has it been on the market?, what is the pricing history?). Armed with these details, a buyer still has to guess what the seller is thinking, wonder if there is any competition and, perhaps most importantly, determine how much they really want to own the property in question. Urgency or a lack thereof may tell you a great deal.

Buyers tend to buy for one of three reasons, each with their own general guiding principles.  If they are going to “flip” a property, they must be able to size-up its potential future selling price and what it may cost, including acquisition and renovation, to get there. Over-estimate (meaning you expect more than what happens) and you may achieve less than expected or even lose money.  If it is going to be an investment property, the “sizing up” includes considering how easy it will be to find tenants (such as whether there competition for tenants, does the building and/ or neighborhood offer amenities that will attract interest?) and what they may be willing to pay. Many “gurus” suggest that an investment is good if the tenants pay the mortgage for you. Presumably, or should I say hopefully, the rents will rise over time while the mortgage stays flat and, equally importantly, vacancies will not be an issue (expect there to be some but keep in mind that you will never recover lost rent!) and repairs will be at a minimum (frequent tenant changes generally add to this expense).

The third reason is to buy a home to live in. While the process may differ depending on a number of factors (such as how long will you stay?, will the size of your family grow?, what is your employment status?), buying a home to live in is quite different from the other “reasons” and, assuming a buyer is financially “qualified” and personally invested/ engaged in a logical process to determine which house(s) should be the main focus, buyers need to understand that they may well have competition and that may mean they get ONE CHANCE to make a serious, perhaps even their “highest and best”, offer.

Most humans find negotiating awkward, difficult and confusing. Couple that with their wanting a “bargain”and you have a potential dilemma. Buyers will do what they will do. Even if the terms and conditions of an offer are consistent with the price they are offering, I encourage my clients to make an offer that will allow them to sleep soundly that night, knowing that they did what they were comfortable doing as they may not get a chance to “improve” their offer. Do they listen? Most do but they need to know that I am looking out for them, not trying to work for the seller or to increase my fee. It is not fun telling a buyer that they did not get the house. It is even harder when they did not think another offer could be better than theirs.



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