“The market sets the price” is an age-old adage that applies to many markets including the housing market. But what does this really mean? If the market sets the price, why don’t buyers pay that price? Don’t buyers know that the seller has researched all previous sales and set the price accordingly? Shouldn’t the home sale price simply be a matter of putting the market data on the table and letting it speak to all concerned parties? If only it was that simple!
The market data in reality simply establishes the price range for previous buyers for a given type of home. But there are at least three factors that can cause significant price variation among buyers and sellers of like properties:
1. Data interpretation: The simple fact that two people can look at the same data and come up with different conclusions is one source of variation. In real estate, that is the nature of the beast so to speak. The sellers (including the listing agent) look at market data and interpret it in their favor, and the buyers (including the buyer’s agent) look at the same or similar data and interpret it in their favor. Human nature causes us to typically over-estimate in our own favor so these different interpretations using the same data can sometimes be quite far apart. And each side will feel justified in their own position!
2. Property differences: No two homes share the exact same dimensions, features, upgrades, landscaping, decorating, etc. Each home has unique physical characteristics just like snowflakes. Formulas are normally used to adjust the pricing of one home based on the pricing of a similar yet different home. But the formulas and methodology used vary, and there is no one standard approach used by real estate agents and appraisers alike. So price determinations for a property will also vary due to different methodologies used to adjust for differences in physical characteristics.
3. Buyer perspectives: Our perspectives and the way we look at the world are based on our own life experiences and life situation. Because of this, no two people will ever have the exact same perspectives or life situation. When buyers (and sellers!) evaluate a home from their own unique perspectives, they are focusing on value, not just price. Value is defined as “benefits versus price”. The value of a home is therefore greater when the benefits (real and perceived) are high relative to the price, and lower when the benefits don’t appear to be equal to the price. Benefits are based on both the data or logic (“Look how big the kitchen is!”) and the emotions and feelings (“We can entertain the whole family in the back yard!”). The saying “buyers buy based on emotion and justify based on logic” simply shows that the purchase decision is normally made in the right brain first based on emotions and feelings, and then justified in the left brain based on logic and rationale. So the value of a given property will most certainly be different for different buyers, and also different from the seller’s valuation.
So given differences in data interpretation, different methodologies to adjust for physical differences, and different perspectives among people in general, how do buyers and sellers ever reach agreement? Through the use of negotiation skills! And not the client’s negotiation skills, but the agent’s negotiation skills! The final outcome for both clients is heavily influenced by their own agent’s negotiation skills as well as the other agent’s negotiation skills!
Each individual buyer’s and seller’s situation yields a unique set of needs and desires for each party. A negotiation is all about trying to satisfy each party’s needs. The buyer and seller both establish goals and objectives they want to achieve. The actual negotiating with the other party (persuading one side to accept the other side’s position) is almost always done solely by the agents (how many times do you put the buyer and seller face-to-face?). A well-trained negotiator will have a carefully developed plan that will increase the odds of success, and this plan can be a combination of actions both away from the negotiating table as well as at the negotiating table. Knowing how to both create value and claim value is the true art of negotiation. Untrained negotiators simply try to claim the biggest piece of a smaller pie and normally leave money on the table.
Two of the best ways to provide value to clients is through market analysis and professional negotiation skills. Visit The Real Estate Negotiation Institute (thereni.com) for more information!