Is the Buyer's Budget Negotiating Leverage?

Buyers Whose Eyes are Bigger Than Their Wallets

What is the Buyer counterpart to Sellers who "need" a certain price to consider selling?

Buyers whose final (first?) offer is 100% of their budget, and therefore can't go any higher.

So, the Buyer's agent will typically couch the offer in terms of, "I know this is a mediocre (or worse) offer for this house, but that's all my client can afford."

Assuming that that's true, do Sellers find that explanation compelling?

Budget Constraints

Put it this way: imagine going to a restaurant, and telling the waiter you'd like to order the $50 filet mignon, but you've only got $30.

While sympathetic, the waiter is likely to suggest ordering a cheaper cut -- or maybe trying another restaurant altogether.

Which is mostly how Sellers react.

There's nothing wrong with having a $300,000 -- or $150,000, or $800,000 -- housing budget.

After all, practically everyone is subject to budget constraints, whatever they may be.

But then, the appropriate course of action is to look for a home whose fair market value, ballpark, is . . . $300,000 or $150,000 or $800,000.

"Will Consider All Offers," Explained

Stealth Price Cut

What does it mean when a listing agent puts out the word -- on MLS or just verbally -- that their Seller "will consider all offers?"

Here is a rough translation: a) the Seller knows that the current asking price is high; b) but for perceived negotiating leverage, they don't want to reduce it; so . . . c) please feel free to make an offer well under the asking price.

Surprise, surprise . . . many prospective Buyers go ahead and do exactly that.

Which is why I'm not such a big fan of the strategy.

Rather than elicit offers as much as 25% below their current asking price, Sellers are usually better advised to do a smaller, incremental price cut; test that in the market for a period of time; then assess and repeat as necessary.

Listing Prices & "Leaving Room to Negotiate"

No Discount on This One

In a Buyer's market like today's, it's not unusual for gun-shy Sellers to want to "pad" their initial asking price.

Their rationale?

No matter where they set their initial asking price, aggressive Buyers are simply going to discount further from there.

So, why not pick a listing price that "leaves a little room to negotiate?"

There are three reasons that's not a good idea:

One. Self-selected peer group.

If you set your price too high, your home will be compared to more impressive homes asking the same price. And found wanting.

So, yes, you may have "left yourself room to negotiate."

But that hardly matters if there aren't any offers (or even showings).

Two. Even in a Buyer's market, well-priced homes can sell quickly, for above asking price.

Case in point: 5035 Glenwood Ave. (pictured above) in Golden Valley.

Listed in late March for $289,000, it sold -- in multiple offers -- the first week.

Ultimate selling price: $305,000.

Three. No Realtor can promise their client that they won't receive lowball offers (for all I know, the owner of 5035 Glenwood received lowball offers, too).

But lowball offers are a lot easier to repel when there is also a full-price offer -- or even better, multiple offers above list price -- on the table.

For Sellers, negotiating leverage is all about how many prospective Buyers are interested in your home.

If you price too high, the answer is usually few . . . or none.

P.S.: another fringe benefit of pricing well, and attracting broad interest: Buyers tend to pull their punches when it comes to negotiating any inspection issues.

Ignoring the Asking Price

Mispriced Properties: Exhibit A

Where: 46xx 1st Ave. South in Minneapolis

What: Bank-owned (foreclosure) 3 BR/2 BA 1917 stucco home with 2,000 square feet.

How (much): asking price -- $72,900; sold price -- $130,000

When: listed -- 4/19/2009; closed --8/18/2009

In my post yesterday (Seller's Motivation: Is it Relevant?"), I made the case that the Seller's motivation (usually) isn't nearly as important as most prospective Buyers think it is.

Often times, neither is the Seller's asking price.

At one extreme, Banks selling foreclosures have been known to price ridiculously low to foment bidding wars (at least, you'd assume it was purposeful; the other alternative is that they truly have no clue. Hmm . . . ). See Exhibit A (above).

At the other extreme, lots of Sellers today have been known to pick asking prices that reflect, shall we say, "wishful thinking."

Either they've been in their home for decades, and are genuinely oblivious to how dated it has become, or, they feel the need to "pad" their asking price, to give themselves "negotiating leverage."

Unfortunately, that's not how it works.

Realtors (and appraisers) know that home prices are set exactly one way: by identifying the 3 best Comp's (similar, nearby homes that have sold the most recently), then doing a detailed compare-and-contrast between the subject home and each of the Comp's to arrive at an adjusted value.