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Wednesday, November 14, 2007

Closing Deals in a Soft Market: Understanding Buyer Psychology

What’s the difference between a good real estate agent and a great one? A good agent thinks that their job is to attract a well-qualified buyer willing to pay the seller’s asking price. A great agent thinks their job is to find . . . three or four of those buyers.

Especially in a buyer’s market like the current one, the difference is crucial, for four reasons.

One. Leverage. A seller negotiating with a solitary buyer doesn’t have any leverage: if the seller doesn’t like the buyer’s offer and can’t get them to raise it, their only other choice is to wait. In the meantime, the seller must pay the mortgage, property taxes, insurance, utilities, and maintenance. In a weakening market, waiting also means anticipating new listings that compete with their home, hoping interest rates don’t rise, etc.

Two. Motivation. Buyer’s markets are characterized not just by a scarcity of buyers relative to sellers, but by unmotivated, even spoiled buyers who lack any sense of urgency. The same sense of anticipation that grinds down sellers and fills them with angst has the opposite effect on buyers: their attitude is, "there will be even better choices tomorrow than today, at even lower prices, so why rush?"

Often, the only thing that can counter that psychology is the appearance of a second buyer interested in the same home. In fact, multiple offers in buyers’ markets (yes, they still happen) often start out with several buyers noncommittally circling a property. Then, once one "fence-sitter" jumps, they all do.

Why? Because suddenly the time horizon for buying a given home is no longer infinite, but very finite. And if someone else wants the home the buyer is interested in -- out of all the dozens that are available -- maybe there really is something unique and appealing about it, validating their own judgment.

Three. Follow-Through. Great agents know that there are many, many steps between a would-be buyer submitting an offer, and consummating a deal with that buyer at closing. Buyers who don’t hear footsteps drive hard bargains. They make low offers that they raise slowly, if at all; put down little earnest money; and ask for steep discounts for any issues identified during the inspection.

By contrast, buyers who know they have competition try not to rock the boat. They overlook inspection issues, and are careful not to do anything to drive the seller into the arms of another suitor.

Four. Deal Insurance. Great agents know that even solid-looking deals can derail. The parties may not be able to resolve a major inspection issue; or, the buyer’s financing may fall through. Even when a buyer receives a firm financing commitment, if they lose their job or suffer a financial setback, the lender may still back out.

That’s why great agents keep the pressure on, aggressively marketing a property until the buyer’s inspection contingency is removed. Identifying backup buyers in advance not only minimizes the fallout from a broken deal, it actually reduces the risk of that happening, by lessening the buyer’s willingness to test a deal to the breaking point.