With Real Estate TV shows, blog posts and near constant news about the real estate market, home buyers and sellers are more educated than ever before. Perhaps it is surprising then, that we still see buyers and sellers making the same common mistakes because they often have preconceived notions of what a real estate transaction should look like. Join us for a webinar next month where I will lay out the top 5 mistakes that we see home sellers and buyers making:
- Starting with the Wrong Price
- Not Understanding the Current Market
- Not Preparing Your House Properly or Not Seeing the Vision
- Choosing the Wrong Agent or Lender
- Missing the Forest for the Trees
Today we will drill down on just one of these mistakes: setting (or offering) the wrong price. Of course price is a huge component of any real estate transaction, but the mistake comes when looking at price as a zero sum game. The offer is a ‘package deal’ that includes many critical terms and contingencies. Getting the highest price as a seller or the best deal as a buyer won’t matter if the deal doesn’t close. For more on the other mistakes, be sure to tune in to the webinar.
Understandably, sellers usually prioritize getting the highest price for their home, which is almost always their largest asset and comes loaded with emotional baggage. However, it’s not as simple as ‘starting high’ because ‘we can always go lower.’ With today’s easy access to data, buyers are more educated than ever and will pass on a house that is wildly out of sync with the market. Buyers don’t always value upgrades and repairs that sellers have made in the same way the sellers have and often, use different criteria and data to value a property. Here are three mistakes sellers need to avoid:
- Latching on to Inaccurate Price Barometers – The market sets the price at which your house will ultimately sell, not the tax assessor, an automated comparison site or even the price you paid plus the money you put into it. Comparable recent sales are by far the best method of determining price. Interpreting the recent “comps” is both an art and a science. An agent with experience can provide guidance and talk you through various pricing strategies based on comps. Let go of your dream price, what your neighbors got or the Zestimate and look at the hard figures.
- Underestimating the Importance of Contingencies – When reviewing offers, sellers are understandably swayed by the offer price. However, the contingencies written into the contract also affect the bottom line. Negotiating the home inspection or potential appraisal problems can derail an offer that started with the most attractive price. A good agent who has had experience with many different kinds of deals can advise how the contingencies proposed by the buyer could play out and what that will mean to your net deal.
- Squandering Time on the Market – Unlike a fine wine, your listing does not get better with age. One of the most common mistakes sellers make is pricing at the high price they want but are warned is a long shot to “try out” the market, planning to lower it later. Most markets these days move fast. Buyers are well educated and serious about their search. Think of buyers as a pool, all waiting for your house to come on the market. Once they see it, they’ll decide if it’s worth an offer and, if not, move on quickly. Often, if you get passed over because of price in a buyer’s search, you won’t come up again later, even if you lower the price simply because you’ve already been on the market for a time and have become ‘stale.’ Be aware of the typical list-to-sale price ratio in your area and price accordingly.
Buyers come with their own HGTV expectations and emotional needs. They are often unfamiliar with the basics of household maintenance, making even small projects seem overwhelming and expensive. Television shows, with their perfectly staged homes and sellers paying closing costs, have shown us a housing market that doesn’t necessarily represent the one we’re living in. Here are three mistakes that buyers need to avoid.
- Unrealistic Expectations – The biggest mistake many buyers make is falling in love with a house that they can’t afford, thinking they will make a low-ball offer. While there are certain circumstances that make negotiating successfully on price possible, many markets these days are very competitive, with list-to-sale price ratios near 98%. If a house is your dream house, it is probably on someone else’s pinterest board too. For a home to be successfully negotiated down, you must be the only party interested in it, or at least the one able to write the best deal. To a seller, this will often mean meeting their price. Again, the best indicator of price is what other comparable properties nearby have sold for recently. It doesn’t matter if the seller is making a huge profit, or that a house down the street sold for less 3 years ago.
- Not Understanding Contingencies – Contingencies are the safety nets written into the offer—the ways in which a buyer is protected against certain events or, in many cases, can even void the contract without penalty. But many buyers have a misunderstanding of what exactly contingencies do and do not protect you against. An educated seller will look at the total offer package and contingencies matter. If you are competing against another offer at the same price, contingencies will often be the deciding factor. Understanding how to maximize your protections while working within the gray area to still make the offer attractive to sellers is key. What is the right type of inspection contingency in your circumstance? What does the finance contingency protect each party against?
- Not Negotiating Wisely – Many buyers fail to start with the end in mind and get caught up in a sort of mental game. A good agent helps you stay level headed and remember your goals. Your agent should also be able to potentially assess the seller’s situation and employ negotiation tactics accordingly. Is the seller under a deadline to move? Under duress? There are several classic negotiation strategies, including: nibbling, good cop/bad cop, anchoring, etc., that come in to play between parties to a transaction. For example, nibbling is when a deal is close to happening, and one party keeps asking for more and more small concessions to keep the deal together. If the buyer has some leverage, it can be a successful strategy, especially in a home inspection negotiation. Your agent can talk through the options or you can authorize them to employ any on your behalf.
How do these mistakes play out in the real world? Take this example of a transaction where both parties were able to work through their initial pricing misconceptions to come to a successfully completed close. Sarah Seller had been holding on to a house she that intended to occupy for years but her circumstance changed and she never did. She decided to hire an agent and place the house on the market. The agent advised Sarah of the price for which the agent thought Sarah should list, but Sarah had seen an estimate on an online site that the place should be worth $30,000 more and insisted they list for that price. They had several showings but no offers after being on the market for over a month. Sarah’s agent continued to advise her that they should lower the price as the days on market ticked higher and buyers started to ask “what’s wrong with that house?” Sarah finally relented and they lowered the price to the one originally suggested by the agent, but by this point most of the initial buyer pool in that price point had already seen and moved on, so they were forced to wait for new buyers.
Bill and Jane Buyer started their search in the hot neighborhood they were already renting in thinking they couldn’t really afford it, but they would win a low-ball offer or get a fixer upper. After several outings with their agent, seeing listings sell quickly for asking price or over, and pricing out the cost of fixing up other properties, they expanded their search to the neighborhood Sarah’s house was in, just after she dropped the price. They were taken with the house, and made an offer for the new list price, but included all the contingencies, with a full home inspection. Because Sarah had never occupied the house, there were several “big ticket” problem items that popped up on the home inspection that she didn’t anticipate. The HVAC unit needed to be replaced and the large wooden deck on the rear of the home, which the Buyers fell in love with, was structurally unsound. The Buyers’ agent engaged in a back-and-forth negotiation with Sarah’s agent, using nibbling and other negotiation tactics to keep the deal together, while getting a credit for the Buyers to be able to make those repairs. Sarah knew these were items any buyer would want repaired, and still felt like she was getting what she needed out of the deal, despite perhaps underestimating the potential cost of the inspection contingency ahead of time.
As you can see, buying and selling real estate is more nuanced than most consumers realize. But with the right tools and knowledge, you can successfully reach your real estate goals. Join us next month to hear more about the other common mistakes buyers and sellers make and how you can avoid them.
Katie Wethman (’94) is a CPA, MBA, and Realtor licensed in VA, DC, MD and DE. She is a member of the national, state, and local associations and has served on the Boards of Directors of both the regional MLS and the local association. She’s been a full time Realtor for over 12 years. She specializes in first time buyers and simultaneous buying and selling. She frequently speaks at universities and organizations about the buying and selling process. Katie is a frequent participant in the market herself with a portfolio of seven investment properties.
Her website is wethmangroup.com