What’s this thing called THE MARKET – and why is it smarter than you. I know you don’t want to hear that. Truth is The MARKET is actually smarter than everyone. However, we have learned how to work with the market to maximize your value. Lets get into it.
Article By: Neil O’Donnell
Many years ago when I went to University (God that makes me feel old) and got my Bachelors degree (in between trips to the Irish pub of course) I learned a lot of great stuff. Most of which isn’t all that useful today, (although fun at parties), some of the stuff stuck with me. For example:
A Market (normally) is a place where Buyers and Sellers meet to exchange goods for money. Yes sometimes you can barter etc but I don’t think you will do that for your home, so here we will focus on money.
In any market what helps dictate the price of those goods and what someone will pay for them is what’s called Supply and Demand. In short its the relationship between how many goods are available (supply) and how many people want to buy them (demand) and the relationship between those two things helps to establish price. To break it down a little be more we have 4 scenarios:
Increased demand = increased prices;
Decreased demand = decreased prices;
Decreased supply = increases prices.
Increased supply = decreases prices;
I always come across Buyers and Sellers who know it all – and they know they can beat the market. Here are 3 critical things to know about the real estate market:
What is Market Value:
The MARKET dictates how much a house is worth. Not just the Seller. Not just the Buyer. And certainly not the real estate agent. The price when a house sells (Seller and Buyer agree to exchange the house for a certain amount of money) is called market value.
When houses are over priced, they don’t sell. Houses that are underpriced get multiple offers. That’s the market doing its thing. Lets look at a few scenarios shall we.
First: Low Supply and Multiple Offers
Here’s a scenario we saw a couple years ago when a house receives multiple offers:
The house is priced at $499K and the Sellers set an ‘offer date’ in 7 days, in the hopes of getting multiple Buyers to make offers at the same time.
The Seller receives 8 offers.
One or two of those offers is usually below or at the asking price.
One or two of the Buyers REALLY want the house and have offered a ton of money – let’s say, around $600K.
Everybody else usually ends up hovering around one or two numbers (usually the number that’s supported by the recent sales in the neighbourhood). For the sake of this example, let’s say 2 offers are at or around $550K and 2 offers are around $560K.
The house sells for $610K.
Here’s what the market did: there was low supply and high demand. While most Buyers in this example felt the house was worth around $650K, the laws of the market drove that price higher and the Seller was lucky to find a Buyer who was willing to pay more. Good for the Seller, bad for the Buyers whose offers didn’t get accepted.
Second: The Overpriced Home
Here’s another common scenario:
A house is listed for $769K
A few days later, the Seller receives an offer for $730K and turns it down.
Two weeks later they receive another offer – this time at $725K.
A month later another offer is received at $735K.
So what is the market saying? Well, If 3 Buyers are making offers around the same number, like it or not, that’s how much that house is worth. There was low demand for the house at $769K so Buyers refused to meet the Seller at their asking price. Only when the price is lowered to what the Buyers are prepared to pay, will this house sell. Sellers who are motivated to sell will listen to what the Market (ie Buyers) are saying and eventually accept a lower price. The other option for some Sellers is to take their house off the market and wait for prices to increase. This could be months or years.
Third: Cherry-Picking Buyers and Sellers – an offshoot of the Overpriced Home
We often see Sellers justify overpricing their property by cherry-picking the comparable sales that support a high price and ignoring the comparable sales that point to a lower price. Of course Buyers are doing the same – only they’re looking at the lower comparable sales and making low-ball offers.
Truth: Neither the Buyer or the Seller is right. The most recent and most similar sales matter the most. And if its a condo, similar (if not exact) sales are easy to find.
So how does the market deal with cherry-picking Sellers and Buyers? It treats the property like its overpriced and it stays on the market and almost always sells for lower than what it could have when it first went on the market. And that cherry-picking Buyer? He makes offer after offer, losing out on good properties, while continuing to pay rent and watching prices increase.
Next week we will talk about Timing the Market…stay tuned
For a more in-depth discussion on these topics, go to: Request a FREE Copy of our latest book, “The Value-Driven Approach to Sell Real Estate: How to protect yourself from Real Estate Greed and bank extra profit by thinking like the great Warren Buffett.”