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.

Tax Assessed Value as Yellow (or Red) Flag

List Price = $800k, Tax Value = $400k

As I've written previously, a home's tax assessed value isn't particularly relevant for establishing a home's actual, what-will-it-sell-for market value.

Rather, fair market value is determined by: a) scrutinizing the comp's, or comparable sold properties, to set a list price; then b) testing it on the market.

While in theory the tax value should approximate market value, there are all kinds of reasons why they can diverge.

So why do Realtors still consult the tax assessed value?

Speaking for myself, I always check to see if the assessed value appears too low.

Especially if the home hasn't sold recently, that can be a sign that major remodeling was performed without the requisite permits.

If the home has sold recently, it's possible that the appropriate permits were pulled, but that the new tax assessed value simply hasn't caught up yet.

Scientifically Proven Home Valuation Formula

"Fair Market Value," Defined

I, along with thousands of other agents, have developed a scientifically proven, 100% reliable way of establishing a home's value.

Ready?

Here's how you'll know any given home is priced at fair market value:

It sells.*

Defining "Fair Market Value"

That may seem unduly glib (if not harsh).

Unfortunately, for many as yet unrealistic Sellers, it also happens to be true.

In fact, the foregoing is the very definition of "fair market value."

Until a Buyer appears who's willing to pay a given price, everything else -- the comp's, what your neighbor got, how much you have into your home (i.e., purchase price + improvements) -- is just noise.

*Of course, that isn't meant to let the listing agent off the hook. I'm presuming that the home's condition, appeal, and marketing are already optimal.

Reason for Tougher Negotations

"What's That House Cost?" -- Vol. #42

Want to buy 100 shares of Microsoft?

If the last trade was for $25.43, it's a good bet that you'll have to pay . . . .$25.43 (or maybe $25.42 or $25.44).

Want to buy a nicely updated, four Bedroom Colonial in East Edina?

That'll be . . . . $950,000. Or maybe $875,000. Or perhaps a cool $1 million.

For the same house.

Defining "Market Value"

Why such a broad range?

Because there haven't been that many recent deals to serve as benchmarks (called "Comp's," or Comparable Sold Properties," as they're known in the trade).

With fewer transactions to serve as precedents, Buyers and Sellers have more ground to bridge to reach what everyone agrees is "market value."

Selling Price as % of Tax Assessed Value

Tax Assessed Value as Benchmark

No, I don't have any hard data backing me up (and don't have the time to compile it), but at least anecdotally, it sure seems that there's a correlation between year built/last sale, and fair market value.

Here it is:

The newer the construction date/last sale, the higher the percentage; the older/less recent, the lower.

Put another way: the reliability of tax assessed value fades the older a home is and/or if it hasn't sold in awhile.

So, for example, a 2009 townhome with a tax assessed value of $200k is likely worth pretty close to that.

By contrast, a 1975 townhome occupied by the original owner, with the same tax assessed value, probably has a fair market value quite a bit lower -- as much as 20% less, or $160k.

Updates (or lack thereof); nearby competition (or lack thereof); location, etc. all affect -- but don't alter -- the basic relationship.

Did the Seller Leave Money on the Table?

Four Ways to Tell

In the history of mankind, no first-time Mother has ever under-dressed their newborn in the winter.

--Manhattan Pediatrician

So which pediatrician uttered the above line?

Mine (and my wife's).

What prompted that comment were the 3 layers of clothing my wife had already put on our newborn son (this was 10 years ago), coupled with her anxiously asking him whether he thought "the baby was dressed warmly enough?"

What's that got to do with real estate?

I've yet to encounter the Homeowner who thought their house sold for too much.

Money Left on the Table

On the contrary, a great deal of Sellers seem to believe that their home sold for too little.

So, are they ever right?

To help answer the question, here are the four, inter-related variables I'd weigh:

One. How long was the property on the market?

It's hard to argue that any home on the market listed for more than a month -- let alone six months or a year -- sold for too little.

In today's networked, 24/7 world, serious Buyers (and their Realtors) often know about properties before they come on the market.

If a home is a good fit for a serious, prospective Buyer, it's a good bet that they'll: a) know about it; and b) have gotten in to take a look.

Assuming, of course, that the home was on the market longer than 48 hours.

Two. Was the home professionally and aggressively marketed?

My checklist of "To Do's" for Sellers literally has 143 items on it.

Things like, "work with professional stager to the get the house ready; "arrange professional photography and meet them at the house"; "proof marketing materials designed by professional desktop publisher"; "do pre-list networking with other Edina agents" (all 1,600 of them); "plug new listing at various Realtor meetings"; "draft and proof (flattering) copy on MLS"; "promote the home's Broker Open."

And so on and so on.

All those things come across loud and clear to prospective Buyers.

And so does their absence.

Three. Who was the Selling agent? (representing the Buyer) -- and was it the same as the Listing Agent?

As I've blogged before, there are two types of dual agency: "broker-level," and "single agent dual agency."

In the first type, both the Buyer and Seller have their own agent -- but they work for the same Broker.

While that legally shifts the agents' duties, in my experience it doesn't alter either the negotiation dynamic or the outcome.

The second kind of dual agency-- where both the Buyer and Seller have the same agent -- is much more problematic.

In my opinion, no agent can serve two masters.

Which is why I will only represent one party in the transaction.

Four. Who was the Listing Agent? (representing the Seller).

Good Realtors have good reputations.

They do repeat business in the same neighborhood(s); are known for being thorough and hard-working; and have an established track record.

Mediocre agents . . . don't. (In fact, you're less and likely to run into mediocre agents, because today's hyper-competitive real estate market has already weeded them out.)

So, to sum up . . . . .

If the same (no-name) agent represented both the Buyer and the Seller; the house sold in 3 days with no prep or marketing campaign to speak of; and no other agents had a chance to get their clients through (or even knew the house was on the market) . . . . yeah, it's just possible that the house sold for too little.

Absent one or more of those factors, I'd be dubious.

P.S.: Note that none of the above factors include, "Sold for less than the Comp's would suggest."

While the Comp's (Comparable Sold Properties) certainly frame the owner's asking price and eventual sale negotiation, showings and actual feedback trump Comp's once a home is actually on the market.

Seller's Comp's vs. Buyer's Comp's

"East is East and West is West"

From experience, here are two good rules of real estate negotiation:

Rule #1. Never argue the "comp's" with the other side.

A comp, or comparable sold property, is a similar, nearby home that has sold recently.

To determine fair market value, Realtors and appraisers alike typically look for three good ones, then go through a "compare-and-contrast" process with the subject home to arrive at an adjusted value.

The first person to do the comp's is the listing agent, in the course of preparing a "market," or Comparative Market Analysis, for the homeowner.

Subsequently, the prospective Buyer's agent will also scrutinize the comp's.

Then, once there's a deal and the Inspection Contingency has been removed, so will the appraiser hired by the Buyer's lender (unless it's a cash deal).

In almost nine years of selling real estate, I've yet to encounter a situation where the Buyer's agent, in the course of negotiating an offer, made the case that the Seller's comp's were unrealistically low.

Nor have I seen an instance where the Listing agent, representing the Seller, readily conceded that their comp's were too high ("You got me! What was I thinking!?!").

In fact, the agendas of each side are so manifestly clear and self-serving -- not to mention transparent -- that it's almost always a waste of breath to engage on this.

Rule #2. If you're going to break Rule #1, you'd better make sure that you know the comp's -- or comp, if there's one in particular that looms large -- better than your negotiating counterpart.

I recently had a deal where the other agent was adamant that, "based on the comp's," my Seller's asking price was out of line.

He placed particular significance on one property in particular.

It turns out that the other agent had never been in the home.

Guess who had?

In fact, I'd shown the home to 3(!) clients, and knew every square foot of the house by heart.

So, I knew that the flattering Kitchen shots masked what was easily $100k in needed updating; the floor plan was off; and that the master bath was tiny -- and couldn't be expanded.

The upshot?

The Buyer significantly raised their offer, and ultimately reached agreement with my client.

P.S.: Trial lawyers have a saying, "never ask a witness on cross-examination a question that you don't already know the answer to." Good advice for Realtors "debating" the virtues of various comp's!

The "It's-All-I-Can-Afford" Offer

Buyer's Budget as Negotiating Leverage

I'm seeing and hearing more instances of Buyers, in the course of negotiating for a home, instruct their Realtors (including, sometimes, me!) to tell the Seller that "that's all I can afford."

Is that a smart tactic?

I discourage it, for three reasons.

One. Sellers tend not to believe such representations.

The only way to really prove that the Buyer's offer is 100% of their budget is to put the Seller in touch with the Buyer's lender, then authorize the lender to share confidential information.

Most Buyers, understandably, would be reluctant to do that.

Instead, the convention has developed for lenders to generate a pre-approval letter verifying that the home in question is within the Buyer's budget.

Two. A home's fair market value and a Buyer's budget aren't related.

Whether Bill Gates or Joe Middle Class is the prospective Buyer, a home's value is still the same: whatever the "comp's" say it is. That is, how much the three most similar, nearby homes fetched, most recently. Period.

That's how Realtors assign value. It's how appraisers determine value. And that's how the Seller's expectations will be framed.

Put it this way: imagine your reaction if the Seller raised their price because you could afford to pay more.

(Can this be a factor in negotiations? You 'betcha. How much do you want to wager that ex-Green Bay quarterback Brett Favre, who's reportedly house-hunting locally, is buying through a corporation or other third party?)

Three. It can spook Sellers.

Signaling that the Buyer is at the very top of their budget can just as easily make a Seller skip the deal as bring them to heel.

That's because any hiccup -- like a jump in interest rates, or the home not appraising -- can derail the sale.

In fact, when I represent Sellers, one of my favorite questions to ask the Buyer's lender (yes, I always call) is how "stretched" or "comfortable" the Buyer is buying the home in question.

Hearing that "it's a close call" would hardly be confidence-inspiring.

Better Tack

Instead of putting a spotlight on the Buyer's finances -- except to establish that they're qualified -- I've found that a better tactic is to focus on value.

Specifically, to make the case that, based on the home's location, features, condition, etc., the Buyer's offer represents fair market value. If not more.

And rattle off all the competing, nearby homes for sale and how they (favorably) compare (assuming that that's true; if not, it can boomerang).

As a general proposition, home sellers usually accept the price they think is the highest they're going to get -- not the highest they believe any particular Buyer can afford to pay.

P.S.: One exception to the foregoing can be when the home's price starts to move out of the range that can be financed with a "conforming" loan (up to $417k). Above that, Buyers need a jumbo loan, which is both much more expensive, and harder to obtain.

"Such a Deal"

Is it REALLY "Below Market Value?"

As many Sellers already know, it's a tough market out there, especially in the higher brackets.

So, to let prospective Buyers know that their home is a deal, more Sellers (or their agents) are peppering their marketing with phrases like, "asking price less than market value."

Is it?

"That's Easy For You to Say"

Without doing the "comp's" (comparable sold properties) or knowing the neighborhood, it can be hard to tell. And if it's a property that you love and want to buy, you may not to wait around to find out.

However, if a home really is under market value -- and it's not north of, say $600k -- it'll sell, quickly. Even in today's Buyer's market.

If it lingers for weeks (or months, or longer) . . . by definition, it's not "less than market value."

P.S: And no, asking less than tax value doesn't automatically make a home "below market value" these days. Depending on the part of town, I'd estimate that perhaps 50% of the homes currently listed for sale are under tax assessed value.

P.P.S.: one of my favorite New Yorker cartoons shows a father and son standing in front of a storefront covered with signs screaming "Must Liquidate," Going out of Business!!,""90% Off!," etc.

The caption: 'some day, son, this will all be yours."

"Frozen in Amber" Homes

What Does Tax Assessed Value
Say About Market Value?

In a Buyer's market like today's, more and more listings announce that the home is "selling for less than tax assessed value" -- sometimes substantially less. The inference is that the home is a bargain.

Is it?

Not necessarily.

One situation where tax assessed value can be well above fair market value is when the Seller has been in the home for decades.

While their neighbors have been steadily updating and renovating over the years, the long-time homeowner has stood pat. So, thirty years later, the kitchen, mechanicals, and decor are all quite dated.

Even worse, the floor plan and amenities may be obsolete. The upstairs may only have one, hallway bath; if the home has hot water heat, switching from window a/c units to central air may be prohibitively expensive; and the one-car garage that was fine 30 (or 70) years ago just doesn't cut it.

Unfortunately, to the tax assessors most of these lagging characteristics seem to be invisible. They assume that the housing stock in a given area is relatively consistent, and as the neighboring homes change hands at ever-rising prices, the tax assessed value of the "frozen in amber" home rises, too.

Over time, the gap between the tax assessed value and fair market value of such a home can become increasingly wide.

I've personally seen instances recently where the tax assessed value was more than 20% too high. And that was for homes that weren't foreclosures or short sales!