Yesterday I posted on many sellers’ unrealistic expectations of value for their property.  Today it’s the buyers turn.

The real trouble with buyers and sellers alike is communication.  With both typically insulated by a layer of Realtor, the ability to actually understand the others’ stance is muted.  Realtors should be helping guide the evaluation of value and communicating a logic.  This logic may or may not work or even be right, but without it there is no real conversation and no movement towards a deal.  There are just random numbers jumping back and forth.  People hide behind these numbers, and I never understand it. 

Most buyers right now are looking for a deal.  They believe they should get a discount because of the market conditions.  That’s fine and in many cases true.  With so many properties under distress of some level, there are typically some deals available and they are worth seeking out.

The question becomes, a discount from what?  If you start with the presumption that most properties are marketed at too high of a price, first you need to adjust your thinking for what the real value should be, and next you need to figure in the discount you believe is fair.  Deals happen when the buyer and seller are both motivated.  It has to be a two-way street. 

Most buyers look at a property that costs, say, $300,000 and instantly chop perhaps 15% off (it may be 5% or 25% - the point is there is no real logic behind it other than hope).  Maybe they get lucky.  Perhaps $255,000 is what the seller actually had in mind anyway.  In most cases they won’t though.  They’re horse trading - not evaluating the actual value.  Horse trading can work and for many people it is the only way they know how.  If the sale price was $10 they would offer $6 and be happy at $7.

I’ve fallen into this trap before too, but now I won’t.  While there is never an absolutely obvious actual value to property there is an intellectual process that can be followed to get to a fair value.  Very occassionaly you can get there when one party is horse trading and the other is thinking, but it is rare.  My thinking may or may not be correct - that is another issue entirely - but I when I make an offer it is based on my perception of value.  When I sense that the seller is horse trading back with me, my instinct is not to.  I simply explain my logic, offer what I think is appropriate given what I want to do with the property, and hope that they’ll see things as I do.  Generally speaking my approach to buying doesn’t work. 

The good news is, it shouldn’t.  If you are an investor/developer making offers and a high percentage of them are accepted you are probably going to regret it eventually.  To be sure there is a difference in my perception of this process compared to a typical home buyer.  There is also a difference in how I can value something compared to them.  In almost all cases it can make sense for a home buyer to pay more than someone in my shoes, but I digress.

Placing fair value on something isn’t easy.  Yet there is so much information readily available - from tax records to real estate sites showing comps to Realtors and appraisers - that not trying to get it right is just lazy.  When buyers horse trade rather than evaluate they are unlikely to make a deal and even more unlikely to have it work out for them financially if they do happen to get it done. 

There are many variables to consider when making an offer: why is the seller selling, what are other comps, what are your own expectations for costs to get it to be what you want, what is your exit strategy - these are just a few of the things to consider.  That said, the best way to evaluate this is to talk.  Most buyers and sellers alike are entirely unwilling to do so though.  The act of discussing the property can and should help inform the overall process; yet people tend to hide behind their offers and Realtors. 

I am in favor of more transparency, more communication, more openness.  I believe this for deals but really just about everything else to, for what it’s worth.  I am not suggesting that there isn’t a little games-men-ship that should be played in an offer, clearly that is commonly part of it.  However, as a buyer I prefer to fairly evaluate the value and make my offer and ask questions.  If my offer is way less than asking, I prefer to be upfront about the reason, and explain my logic.  Some people won’t engage in this, and I feel it’s a mistake.  Hiding behind your number won’t help you understand the other person’s perspective.  To get a deal done you need to remove barriers, not add them.  This means using a Realtor that is willing to actually communicate, and hoping the other party does to.  It also means being wiling to talk truthfully about your thinking.  You won’t lose anything by doing this.  Really, you won’t.  At least some of the time you won’t gain anything either.  You’ll run up against a seller or agent that just won’t communicate truthfully.  Chances are there is not strategy other than overpaying that would have worked with these types anyway.  Since you don’t want to overpay, you want to deal with people who are willing to think and communicate.  This may or may lead to a deal getting done, but it will inform the process for all and ultimately save time.  Hiding behind your number - just throwing something out there and hoping - leads to wasted time and energy.  If nothing else you lose an opportunity learn more about the market and the thinking of other people in it.  When reasonable people get together and discuss things, deals that make sense happen.