How much wiggle room you give yourself when bidding or asking (relative to the listed price of property) in a competitive real estate market can make or break a transaction. Too much and you might lose the deal. Too little, and you could “leave money on the table”.
To avoid morning-after regrets, plan your math in advance. After you have subtracted the emotional components from the equation you will have a better chance of putting a fair deal together. And during what might normally be a stressful process – the period of negotiation before reaching a final agreement – you can remain comfortable and calm, knowing that although the market forces are at play, you aren’t at risk of getting unfairly played.
In any market, what a buyer is willing to pay and what a seller will accept determines actual value. No matter which side of the transaction you are on, reaching the “sweet spot” of market equilibrium will involve the same dynamics, based upon the fundamental economic physics of supply and demand.
But before you enter the marketplace – to either list your property for sale or go house hunting – first determine what the market is doing, through a comparative analysis of recent sales. The more recent the data, the better. Information has a shortened shelf life during changing real estate climates. To avoid stale figures, try to get your hands on the most current numbers possible. The easiest way to locate fresh data is to ask a Realtor to provide it. Any Realtor can download and print the latest sales figures from the Multiple Listing Service with a few clicks of a computer mouse, and this is a professional favor you should expect to be offered free of charge. Most Realtors will be happy to also help you interpret the data, in order to compare the asking or “list” prices to the actual prices at closing.
The differential will show you the “spread”, which is normally going to be within a range of about 2-5 percent. For example, if a house was listed for $300,000 and sold for $290,000, the spread was $10,000, or a little more than 3 percent. A 5 percent spread on the same transaction would be reflected in a closing price of about $285,000.
Average out the spreads for half a dozen houses similar to yours, and use that percentage amount to decide how to proceed. Armed with information, you now know what to expect in terms of the space – or disagreement – between buyers and sellers when the tug-of-war over price begins. For instance, if the average difference between listing price and sold price is 6 percent, and you want to put your house on the market, you will do well to list it within 6-8 percent of the price you expect it to bring. Priced too high the house will languish on the market, because the gap between what you’re asking and what the typical buyer will pay is too great. Priced too low you might get a faster sale by giving your property away at a bargain basement price.
If you’re bidding on a house to purchase, the same concept applies. Offer a price within that same average range and you will have a better chance of getting your price. Of course if you don’t want to take a chance on losing the deal, offer full price. But in a market defined by declining prices, sellers are usually willing to entertain offers of less money.
This formula is especially useful in situations where your competitors have not done their arithmetic, and are asking too much or offering too little. Since you know the math, you’ll likely come out ahead. For example, if the market dictates a spread of 3 percent and you put your house on the market for 3 or 4 percent above what you’re willing to take for it, your house may sell faster than your neighbor’s who listed at 10 percent above their desired price. They accidentally priced themselves out of the market.
Be sure to work any unusual circumstances into your calculations. For instance, if there are needed repairs not already discounted from the price, or if you need to relocate quickly to land that high-paying job, then you should adjust your expectations and pricing accordingly.
Ultimately, buying or selling property should be a satisfying and comfortable experience. Knowing what to expect from the current economic environment can help you succeed in reaching your goals efficiently, in a practical and methodic way.
If a reasonable offer isn’t enough to clinch a deal, then you may be better off looking elsewhere for your buyer or seller, because you deserve a fair trade. But if you don’t know what constitutes a reasonable price to begin with, you will be confused and vulnerable. Do your homework ahead of time. Then enter the marketplace with informed confidence and enjoy real estate success.