We Tell it Like It Is

We are often asked by our buying clients if they should look at homes listed for more than the maximum amount they want to pay knowing they should be able to negotiate down in this market. This is a good question. I believe the answer lies in having realistic buying expectations.

According to the Minneapolis Area Association of Realtors Weekly Market Activity Report for June 23, 2008, the average percentage of original list price received at sale for residential sales in the 13 county metro area as of May 2008 is 92.6%. This means that a buyer should on average, after all negotiating, expect to buy a home for around a 7 – 8% discount off of the seller’s original asking price. Keep in mind that this is off the ORIGINAL asking price. On a home where a seller has already reduced their price by 5% from where they started, a buyer should expect only a 2 – 3% discount off of the CURRENT asking price. Also keep in mind that these are averages, so some buyers are getting more than a 7 – 8% discount and some are getting less. But using these stats as a benchmark, a buyer can reason that if they can negotiate more than an 8% discount off the original list price they have beat the market average, and if they negotiate less than an 8% discount they haven’t done as well.

Armed with unrealistic expectations driven by the media and water cooler talk at work, buyers come to us expecting a seller to give their home away for half of its market value. This leads many buyers to want to look at homes way out of their price range, expecting to negotiate the price down into their range. What often happens is that we are in fact successful negotiating the seller down, to maybe a 10 – 15 % discount which is better than the market average of 8%, but unfortunately it is still higher than the buyer can afford and they don’t get the home. By shopping out of their price range the buyer’s only chance of getting the home is praying that they will be able to beat the odds and negotiate the price down more than the market average. If the seller will only come down the 8% average, the buyer is out of the game. The buyer does not control the negotiations in this instance, the seller does.

By shopping in a price range that is no more than maybe 3 – 4% above the buyer’s maximum price, the buyer is in control of the negotiations. We can still negotiate down more than the average 8%, but if for some reason we are unsuccessful and only get them down to the average or even a little less, the buyer can still afford the home. The buyer can still choose not to purchase the home at the negotiated price, but at least it will be their choice to walk away as opposed to losing the home because they can’t afford it.

As a general rule of thumb, if a buyer can’t afford a home after a 7% discount off the asking price, they are shopping in the wrong price range. After all, the point of making an offer on a home is to actually buy the home, not to waste time negotiating with a seller on a home the buyer can’t afford in the first place.