The biggest fear of property buyers – overpaying!
One of the highest-ranking fears among property buyers is overpaying. So what can you do to help avoid it?
Search the internet and you’ll find hundreds of posts, blogs and articles on how to negotiate and while that’s a fantastic skill to learn, most of the time when considering a property purchase, there is a more important skill. That skill is the art of evaluating, also known as due diligence.
The art of Due Diligence on a property
It’s quite often I hear of or see first hand on forums and Facebook groups where a buyer has posted “I’ve made an offer $40k under the asking price, the agent came back to me saying they would meet me in the middle at a $20k discount. Is this a good deal or should I hold firm?”. The responses come thick and fast, “Hold your position”, “Don’t budge” or “Split the difference, meet at $30k”, and initially you might think that seems like a good option, $30k under the ask is a great outcome, but how do you know that wasn’t the agent’s strategy all along? How do you know they have priced it correctly? What compatibles have they provided?
Any decent property negotiation will be backed up by some sort of evidence, otherwise, you are negotiating on something you don’t know the baseline value of. Just like when buying a car or even a new laptop, you’ll look on the internet for pricing from multiple sellers. I know when I’m at JB, I’ll whip out my phone to check the pricing to make sure I’m not getting ripped and this should be the same approach with a property purchase.
How real estate agents price properties?
When a property is listed for sale by private sale (not an auction) the agents tend to price the advertised range slightly higher than an auction, in the expectation to be negotiated down by a ‘savvy’ buyer. Whereas an auction, they will generally price it lower to attract more people on the day and hopefully ‘bid them up’ as the action unfolds and emotion takes hold.
This is where evaluating and due diligence trumps any negotiating skill because you could be negotiating on a property which is overpriced and you are being blinded by the discount instead of figuring out what it’s actually worth. I’m certainly not saying negotiating is a wasted talent because it’s not at all, but when you pair it with the skill of evaluating, the other party isn’t going to know what’s hit them. And that’s not to say we are headed into battle, as everyone should win in the process, but you’ll find more on that in one of those negotiating articles I mentioned, so I’ll leave it for them to explain.
Here’s a very brief insight into the way discussions might play out if you were a fly on the wall at an appraisal meeting between an agent and a seller.
Mr or Ms agent comes to the meeting with a bunch of comparable properties, ones which have sold nearby, some currently listed or even others the agency might have coming up. The seller will generally have a number in their head because a neighbour sold for that, and because they always think their property is better, they want more than what the other sold for.
Now if it’s a good agent they will hold true to their evaluated appraisal number, but due to the high turnover of agents, a large potion will succumb to the seller’s wishes in order to get the listing.
Let’s say the agent priced the property originally at $480,000-$520,000 because 2 doors down sold for $510,000 and it was a comparable property, but this seller wants $550,000.
The agent has two options a single price or a range. If a single price it might be advertised at $560,000 and a range might be $540,000 – $590,000. It’s a good campaign, not much stock around so lots of interest, and a buyer comes along, offers $540,000. The agent comes back with, “We’ve had a lot of enquiry, our counter is $555,000. Buyer counters back at $550,000 and BANG, the seller is happy, the agent is gobsmacked, everyone wins.
Or do they?
Some might say, but its worth that because that’s what the market was willing to pay, and yes that is true to some degree, but here’s what happens to someone who doesn’t have the financial means to cover the shortfall, which could be $50,000 based on the agent’s original valuation. The bank comes along to complete a valuation and finds the property to be worth, $510,000 just like the neighbour’s property. So what happens, the buyer now has to come up with $40,000 or they lose their deposit at worst, and at minimum, they will be completely traumatised by the even and might never buy a property, EVER. The seller and agent both lose out as well because it needs to be re-listed and now there are more properties available, so it’s going to be a tough sell.
A summary on how to evaluate a property
In summary, learn how to evaluate!
Know the numbers
Find comparable properties
Look at the land to asset ratio
Don’t take a Statement of information as the only source of research. Unfortunately, agents can manipulate these to put their property in the best light possible
Now it’s over to you, but if you did want some help, we’ve created a simplified system to help buyers with the evaluation process. If you’d like to find out more, contact us at firstname.lastname@example.org