November 11th, 2014 10:18 AM by Taydus Taydus, AHWD, CNE, CRS, GRI
Navigating the difference between the list price of a home and the amount you offer in today’s competitive market can be tricky, and it makes it more important than ever that you work with a licensed Realtor that is familiar with the market you are looking to purchase in.
When your Realtor suggests an offer price (or range), it should be factually based; they should provide current comps for you to review, as well as some interpretation of the comps based upon their knowledge of the market. In a market that is trending upward (such as the market here in Boulder County), this can be challenging for some buyers to understand, as it requires a degree of trust in the knowledge of their Realtor. If the market is flat it is easy to look at the recently sold comps and determine a fair market offer. In a market that is declining, buyers are always happy to hear that they can offer less – sometimes considerably less – than asking price and still have their offer considered fair for the current market. However in an upward trending market it can be a bitter pill to swallow to hear that in order for a buyer’s offer to be seriously considered it will need to be a full price offer, or possibly more than list price.
This is when you need to trust your Realtor’s expertise. You hired your real estate professional for a reason, now you need to let them do their job to get you the home you want. I’m not suggesting that you blindly follow your real estate agent’s advice without question, but I am suggesting that if your Realtor provides the comps along with a valid explanation for the higher offer (possibly based on their knowledge of the market), that you listen. Remember, we are the ones that are watching the market day in and day out. A good Realtor knows the trends in the various markets and understands how to read the comps and can advise you accordingly.
Remember, we all have the same goal; to find you the right home for the right price and end up at the closing table.
Most buyers start the process with the mindset of “the list price is only the starting point. We can work down from there”. In some markets this may be true, but in an upward trending market this is not always the case. Here are a few areas that I find buyers have a difficult time wrapping their heads around:
The underpriced home: This is probably the most challenging scenario for most buyers to understand. In the Boulder market we are not seeing too many of these, and when we do it raises the question “why”? There could be a couple of explanations; 1. The listing agent is not familiar with the current market and mistakenly underpriced the home or 2. The listing agent and seller intentionally slightly underpriced the home in an effort to create a frenzy of multiple offers.
Either way an underpriced home in a hot market gathers a lot of attention. This is a situation where some buyers are hesitant to listen to their Realtor. It is very important in these situations that you focus on the market value of the home and not the low list price. The buyer’s agent will pull the comps and assist a buyer in determining a competitive offer price. The buyer’s agent will also take into consideration the location and condition of the home, as well as calculate in their knowledge of the market. The buyer’s agent will focus on the market value of the home because they know that this is the number other agents will be advising their buyers to base their offer on. The buyer however, will often focus on the list price. By focusing on the list price of an underpriced home buyers often get a set number in their head that they are reluctant to go above – even if the home is priced well under their spending budget. For example, say a home that is in a good location and in good condition is underpriced at $600,000 and the market supports a price of $725,000. Let’s say the buyer has budgeted up to $800,000; however in their head they will only pay “x” amount over the list price for a home. If “x” is nowhere near the market value of the home the odds are they will not be the highest offer on the table in a competitive market. If the home has generated a lot of interest in a short period of time, chances are someone is going to come in slightly over the market value price. This can be a difficult concept for some buyers.
The well-priced home: Again, depending on the current market even the well-priced home can create a frenzy of activity. If the current comps support the list price, the buyer needs to rely on the expertise of their Realtor to help determine an offer price that will beat out any other offers that may come in.
The overpriced home: In a market where inventory is low, it is tempting for some sellers to list their home above market value. Some sellers have an unrealistic view of their home and feel that just because it was “just right” for them it will be “just right” for someone else…although it may be in need of updating, deodorizing, maintenance, etc. These homes tend to sit on the market longer than a well-priced home, and may discourage buyers from making an offer due to concerns about an unrealistic seller. However if you do find the home of your dreams and it happens to be overpriced, again, this is where your buyer's agent can help you navigate a fair offer price based on current comps and their knowledge of the market. Here is your chance to come in under asking price – especially if the home has been sitting on the market for an extended period of time.
As you can see buying a home in a competitive market can be challenging. Hiring a buyer’s agent is invaluable as their services are there to protect you, the buyer. Some buyers feel that they can purchase a home without the assistance of a buyer’s agent. They feel as though they will “get a better deal” if they work directly with the listing agent. This could not be farther from the truth. A buyer’s agent looks out for you, the buyer, and only you. The buyer’s agent’s commission is paid by the seller. Some buyers believe that they will save on the buyer’s agent commission by having the seller reduce the price of the home by the amount of the commission they are not paying a buyer’s agent. It rarely works that way. Typically the listing agent moves to the role of a transaction broker and collects the commission on both ends (and you, Mr. and Mrs. Buyer have no one representing your interests only in the transaction), or the savings is realized by the SELLER in the way of a reduced commission being offered to the seller if the listing agent moves to a transaction broker role or only works one side of the transaction; thus making you, the buyer, a "customer" with no representation whatsoever. The savings on commission is not usually passed along to the buyer.
Keeping all of this in mind, it is more important than ever that you work with a good buyer’s agent. You need someone to look after your best interest and give you advice that will help you avoid the pitfalls of the buying process.