I was recently reminded of a common problem that can cost some buyers either the opportunity to purchase their dream home, or thousands more dollars in a transaction. It’s a mistake that’s amplified when markets are shifting gear too – which is exactly the case right now.
I spoke to two different purchasers last week who had each found properties they were keen on but were unsure how to price their offer.
The first felt so uncertain of the home’s value that they literally guessed what it would be worth and put forward a figure without any evidence to back them up.
The second buyer “spoke to a few friends” about the listing. Unfortunately, those mates placed some doubt in their mind about the price, and in the end their estimated value and was more than 20 per cent below the home’s true worth, which affected their first offer to the seller.
These approaches (and others like them) are fraught with risk, with some big emotional and/or financial downsides as a result.
All too often I see people approach negotiations by simply picking what’s effectively a random number as their starting offer, putting it forward and then seeing how things unfold.
I call this the “offer and hope” approach – and its rarely successful.
Being wildly inaccurate with your initial offer usually delivers one of two undesirable outcomes.
Firstly, you’ll be woefully under the mark and the vendor will refuse to engage with you. Some sellers even become offended and factor that into their decisions about you as a buyer moving forward. The other danger here is that when markets are improving, and you are competing against others for the property, your low offer will see you left behind as the real estate agent chooses to negotiate with more realistic buyers. Even if you had additional funds to spend, there’s a good chance you’ll miss out because your first suggestion didn’t seem serious.
The second instance is where you are excessively optimistic with your offer. In this case, you end up paying tens of thousands more for the home than was necessary. If you put forward an offer that’s too high, the seller’s agent will be quick to jump – some may even get you to increase the figure by a few thousand more, “just to get it off the market”. You’re so high on price that there’s no competition.
I’ve seen both the over-priced and under-priced instances play out in the real world, with purchaser disappointment virtually guaranteed in both cases.
Use the range
When we’re about to negotiate on a purchase, we never go in without having completed comprehensive search to determine a property’s value range.
By studying other recent, comparable sales, you gain an appreciation of property value. Doing that properly takes months of attending open homes and auction events. You must track all the relevant listings and jump on the phone to agents to chase down results. It’s essential you have access to services like CoreLogic too.
We also conduct a thorough and efficient inspection of the home, along with comprehensive due diligence. This allows us to properly compare the property to the sales and quickly determine a range of value.
Now, why am I saying a range and not a distinct price? Well, even the professionals will tell you nobody can pick every property’s’ eventual sale price down to the dollar 100 per cent of the time. A host of unknowns come into play around each buyer’s and seller’s personal circumstances.
Instead, buyers’ agents will work out what the property will likely sell for. They’ll then determine a low but realistic figure that would represent “good” buying, and an upper-limit number which is the top price that should be paid. With this spectrum of figures in hand, we begin negotiations, safe in the knowledge that the starting figure won’t offend the seller, but also that we won’t overpay for a home.
Fixing a price by relying on research takes time, proficiency and the ability to be unemotional about the property you’re considering. It’s yet another reason why relying on the skills of a buyers’ agent makes sense. We can be objective about the value, while also understanding a client’s personal circumstances. In the end, you’ll secure a home that not only meets your needs but is purchased at the best price possible.