Thinking about making a low-ball offer? Let's talk about the theory of supply and demand in real estate
Do you feel that you're in a buyer's market and the best strategy is to start low and "fish out" responses?
Or perhaps you want to delve into what a seller paid for a property in determining what your buyer wants to offer?
What a seller paid for a property HAS ABSOLUTELY NO BEARING on what the fair market value is for that property.
Let's say a property is listed for $300,000. It was purchased at a trustee sale for $195,000. The seller's purchase price has nothing to do with what the property is worth, and you cannot consider what [you think] their net profit will be in determining what the property is worth, nor what you should offer for that matter.
Let's do the reverse: What if the seller paid 3 dollars and 75 cents for the property? Or inherited the property for free? Does that mean you're justified in offering 5 dollars and 35 cents for a property that is listed for $300,000?
I don't think so. So let's just take that element of what the seller paid for the property and toss it into El Garbagio.
Determining what you feel should be a fair profit for the seller should not even be an element of the equation when determining an offer price.
Let's put one more spin on this, especially since a large percentage of the real estate market are short sales: What if the seller paid $450,000 for that same property listed for $300,000? Do you base your offer price on what the seller paid in this same case and offer, say...$425,000?
And of course, any buyer's answer would be "absolutely not, the property is not worth $425,000"
In this case, you would pull out the fair market value card and justify it then, wouldn't you?
But fair market value isn't a double standard where you can use it only when it's to your advantage. Fair market value is a solid, unwavering principle that applies to ANY product in a capitalistic economy. It's a constant that doesn't change.
It's a slave to the irrefutable economic principle of supply and demand that is as old as dirt!!
If a property shows well and is priced right, there will be multiple interest in purchasing that property, guaranteed, no matter WHAT kind of market you're in.
No matter what kind of market you're in, upward, downward or flat, there are always qualified buyers out there who are looking for homes.
You're not the only buyer out there. Interest rates are historically at an almost all-time low. And people are always looking for a place to live. Thus, the demand for move-in ready, affordable homes is out there.
Now what about the supply of move-in ready, affordable homes? Is it substantial? Well, I suppose that depends on your local area. That will vary from one city to the next, and that's where the help of a good, analytical, experienced real estate agent comes in.
In an ever-changing world of economic crisis, banking crisis, and, well, let's throw in mid-life crisis, you can always count on the age-old principle of supply and demand as your leverage of knowledge and tool for success!
Guys:
The trurth and nothing but the truth.
I do not care to remember the number of times I was asked - but what did they pay for it. My response was 'So you buy it for $1, would you sell it $1.10'? The answer as alway NO, I would want more for it.
The other question is 'How long has it been on the market?' My answer is - What that that have to do with it? Is the hosue worht what they are asking?. The answer comes back - well they should be willing to accept less if it has has been on the market for over X days. I then ask what caused you to show interest in the property - style, location, acreage, price, or days on market?
Ralph, you are so right - Supply and Demand: it's been always there and is now even more important in this market!
And I do believe there are buyers in all the market - the only problem is, buyers are looking for the opportunities!
This is a difficult concept for many buyers to grasp, Ralph. Keep teaching.
In a free market, supply and demand are the ruling factors. All the other elements combine to create that supply and demand.
Ralph, thanks for explaining this in a manner most people should be able to understand
I love the analogy Ralph, very thought provoking. I think people tie a "good deal" to what someone is getting from the sale. Doesn't make sense. Thanks.
You made your point and made it well. I was going to use the word analogy in my post but Tom beat me to it. (barely) Too many buyers try to over analyze the market and justify their low offer on false reasoning. A property is worth what a reasonable and qualified buyer is willing to pay. From the lenders view, it's worth what the comparable market appraisal says it's worth.
Very good advice. How many times have I heard they bought it for how much and want what?!!
I will say, unfortunately, short sales are being considered "arm length" sales. And, it's a pity. A neighbor sold their home in as a short sale last month for $433,000 and the bank gave the new owners $13,000 in closing costs. The neighbor purchased the home for $735,000 in 2006. Tell me who is the loser; the neigbors like us! When is the government going to do something for those of us who continue to make our mortgage but yet have seen our home value go into the toilet. Sad. I do like the points you made. I may use them when I get a chance. :0)
It is good to know how much they paid for strategy purposes. In our market how much they paid really shows buyers how lucky they are to be buying now than back then!
In our current market knowing what the seller paid usually just helps the buyer see what a great deal they are getting. Its really unfair when buyers think they should determine how much profit, if any, a seller should make based onw hat they paid.
Ralph -- Now, how many times have I been asked 'How much did they pay for this property?' Hundreds. Your analysis is excellent especially with the short sale. It's all about supply and demand and what is the fair market value TODAY! Great post.
Ralph - I have to agree with you on this one. I think buyers are trained by the media to ask stupid questions like this, and another one is how long has it been on the market. I sometimes ask them what's the right answer. If it's been on the market for 2 days will you make an offer? How about 60 days with 2 price reductions? Of course, that line of questioning just runs them off, so I try imagine that they are trying to impress me with their limited knowledge.
There are several things to consider when presenting a low ball offer....
Love the post! This is something that Brokers have been screaming to their buyers for a while now. Its just another one of those things that we have to educate the consumer about. The term "Buyers Market" is a term that is used a little loosely if you ask me. Just because it's a buyers market doesn't mean you go around low balling everyone.
I like your phrase about tossing the seller's original purchase price into "El Garbagio"!
We, as Realtors, all understand this...now if only we could get the Buyers to as well. It's us who get looked at with the "you've got to be kidding me eyes" when we present the offers they feel are worthy. As badly as I want to sell property, I try to sustain from creating a reputation as a Realtor who encourages her clients who base their offers off of the questions above that we've come to dread so much.
With low-ball offers on the rise coming from misdirected buyer clients who are reading articles online or national news bytes that say this is the time to do such a tactic, it's up to us to help shine the light on what's reasonable and what's not. I will say though that every once in a while the longshot will turn into something because we do say in my team that "if you don't ask, the answer is always no." But, it's the exception and not the rule for certain.
Hi Ralph,
We have had Buyers who lingered looking for the "perfect" home for a year. Talk about over analyzing things! It becomes inevitable that buyers like this end up buying the wrong house because they are like the dog chasing it's tail and become so weary that they lose sight of the original goal. To buy the home that best suits them for the money they can afford with what is available on the market at that time! If only buyers would stop trying to be Monte Hall from "Let's Make A Deal" and listen to their Realtor who knows the market, they could save themselves alot of time and aggravation. Greatly informative post.
I might agree if real estate was a very efficient market and if homes were commodities. But there are too many factors that go into a home purchase and sale. Timing is a big factor, for both buyer and seller. Timing and emotion play a big part in home sales.
I've just seen too many times where homes went for less than the so called fair market value. I've had several sales this year where the purchase price was less than what the appraisal came in at.
I think knowing what someone paid for the home and how long it has been on the market are very important factors when making an offer. Why wouldn't a buyer want to know those things? Maybe if they bought it at a great discount originally, they would be more willing sell it for less than think think it might actually be worth. If the home has been on the market for a year, the seller is going to be of a whole different mindset than a seller who just put their home on the market last week.
Excellent, excellent post for all buyers out there. You did a great job illustrating your point in an easy-to-understand way. Love it!
Excellent post...supply and demand says it all. Well written for all to understand!
Ralph, your analogies are spot on! I think I will print this out and include it in my info to Buyers! LOL!
Ralph - Thank you for taking the time to put together this good explanation of the situation that all buyers need to know, and many apparently don't get.
Although I would say the current fair market value is most relevant, the more you can learn about the seller's position, the better. Sometimes you need to determine the difference between can't and won't.
I just had this conversation today with a buyer. Supply and demand -- and if there's a lack of supply in any price range you're going to PAY for what is available.
I"m gonna print this post and laminate it for all my buyers! I have been in more multiple offer deals this year than my entire real estate career. Also lost out on most of those multiple offers, buyers get a clue!
Interesting analysis, but not sure I agree.
While it makes sense for economists to simplify market value into the intersection of supply and demand (and your aguments that purchase price and DOM are irrelevent make sense in this context), my experience is that for a specific property sale price ends up being the intersection between need and want.
This explains why actual sale price often differs from the abstract of “market value” (and the fiction of appraised value).
For this reason a buyer’s questions regarding prior purchase price and days on market make perfect sense - they help gauge the seller's need and indicate the likelihood of pricing flexibility.
As a thought experiment, consider the same house, the same buyer and the same seller…. Would the final sale price differ if the buyer’s offer came on the second day the house was on the market instead of day 250?
Perhaps things work differently in California however :)
Mr. or Mrs. Invisible Hand,
First of all, why are you invisible? That usually concerns me as there is typically a reason why someone needs to be covert on public blog posts.
Nonetheless, to address your scenario above, the theory of supply and demand applies perfectly to your situation.
Why is the property on the market for 250 days in the first place? Because it's not priced at fair market value.
The theory of supply and demand isn't one that is selective to buyers only. It applies to everyone, including sellers.
If it were priced accordingly to fair market value, it wouldn't be sitting there for 250 days.
In this particular case, the sellers demand [for price] is not in line with the fair market value of the home and the supply of qualified buyers in that area.
Things are the same in California as they are anywhere else when it comes to supply and demand.
What a great post and I think I have a new way of talking to those buyers that insist on looking up how much people paid for a property and offering based on that.
Thanks,