Once you have finally found a suitable
home, you inherit a new challenge.
What to offer the vendor? There are so
many variables when it comes to
making the owner an offer.
Quite
simply, there are more questions than
answers once you find a property that
meets your needs.
Do you make a one off, best offer, with a
take it or leave it attitude? Or start low
and work up to your maximum price?
Maybe wait for the auction? Once you
make an offer, how long do you leave it
on the table. Indeed, the questions keep
coming as you ponder how to secure your
dream home. If you are purchasing an
investment property, maybe you are
emotionally detached from the home. But
the home buyers you are bidding against
may be emotionally engaged. Setting a
game plan is the key to success when
making an offer.
If you have found a home that you are
unable to let go of, you are at risk of being
left devastated should you miss it, or at
risk of over-paying. Indeed, it’s okay to
over-pay to secure your dream home, so
long as you know that you are overpaying
and can afford to do so. Admittedly, this
logic does not quite stand up for
investors. Many people who ‘over-paid’,
10 years ago in 2005 now look back on
the
purchase
as
a
bargain.
Three prices
If you focus on the competition when
buying, you will find yourself being drawn
into games. Whether the games are
played at the auction or you are trading
information through the agent, games will
be played. If you focus on what other
buyers are prepared to pay as a means of
determining what you offer, your desire to
purchase the property can be overtaken
by a complete stranger’s interpretation of
value. Buyers who have an extreme
focus on the competition end up dazed
and confused. The key is not to work out
what the property is worth to the
competing buyer. The key is to work out
what the home is worth to you!
what the home is worth to you! The best
way to enter a negotiation for a property
purchase is to accept that there are 3
prices.
Those 3 prices are good value, fair market
price and expensive. By being conscious of
the 3 prices for every property, you can
allow them to act as your guide through
negotiations.
Good Value
In recent times, not many homes have sold
for what could be termed good value. At
times, the market has been rising so quickly
that expensive on the day the Contract is
signed is good value at settlement. Aside
from abnormally sharp movements in the
market, you can only ever transact on the
available information. Whether you are
buying or selling, it’s best for your sanity not
to study the market once you have
transacted. It won’t change anything.
Good value is what many buyers love to
claim they bought – a bargain. In reality,
only about 10% of all transactions would fit
in to the good value category. Good value
is any property that sells for below market
price.
The value that was left on the table may be
due to a desperate vendor, a poorly run
sales campaign or a hidden feature that
everyone missed (such as development
potential),
except
for
the
buyer.
Even if you find a grossly incompetent agent
that compromises the vendor’s position, it’s
worth noting that you are still negotiating
with a vendor that just wants fair market
price for their asset. Buyers who prey on
weak agents with weak vendors carry bad
karma. Everyone loves to criticise David
Tweed, the stock trader who offers
unsuspecting people below market price for
their shares, in the hope they don’t know the
value of their shares. The real estate
market is full of people with the same
mindset that Tweed displays to the
vulnerable in the share market. If you are
aiming to purchase below market value,
ensure
that
you
don’t
buy
a
compromised/flawed property thinking you
have nabbed a bargain.
This is more common than buyers actually
buying a bargain.
One of the most
common (and fair) ways to buy good value
is with stale properties that were initially
overpriced.
Overpriced property that
languish on the market often continue to
languish, even once they are priced
correctly. They often need to be priced
below market value to ignite interest.
If you do find a home that is languishing on
the market below market price, judge the
home on the price, not the length of the
sales campaign.
Fair Market Price
Agents claim they got $200,000 over
reserve and the buyers claim they got a
bargain. So what really happened? It
probably sold for fair market price. The
majority of transactions occur at fair market
price, with a 5% variance.
Buyers who are prepared to pay a fair
market price will always end up securing a
home, unless they are buying in a rapidly
rising market.
In being able to secure a home, that’s not
to say they will always secure the one they
really want though. Murphy’s Law states
that if you really want a particular home at
fair market price, others will too.
Expensive
Intense buyer competition is what usually
causes properties to sell above the market
price. Even though the home is desirable,
the recent sales evidence of similar homes
does not support the sale price. Buyer
emotion took it past fair market price,
making it an expensive purchase.
Agents often claim to have beaten the
market by so much when interviewed after
an auction. The reality is they quoted
below market price and sold for fair market
price, creating an illusion of the sale being
stronger than it really was.
If you are buying real estate, you owe it to
yourself to pragmatically establish the 3
prices for your target property before
commencing negotiations. In doing so, it
will help you accept the outcome, whether
you are the successful buyer or not.
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