In most cases, negotiations in real estate are a big deal for both buyer and seller. Learning about the real estate market in general is a first, very important step towards successful negotiations. Here are some first steps for buyers and sellers to learn about negotiations in real estate.
Use sale data for evidence of market value
This applies to both parties, buyer and seller. Both must research the actual market value of a property. A realtor creates a CMA, a comparative market evaluation, for every seller. This CMA shows what similar homes have sold for and leads to an understanding of the current market value of a home. Eventually, the CMA indicates a fair market value for a particular home at a particular point in time. When a realtor is helping a client purchase a home, the realtor makes a similar home evaluation to learn the market value. During negotiations, any facts and data can be shared between buyer and seller to confirm a fair price point.
Understand the current market
It is important to know how the current real estate market is behaving. In a nutshell there are 3 different types of markets.
- A seller’s market means a low supply and a high demand.
- On the opposite is the buyer’s market when there is lots of inventory but a low demand.
- A balanced market is one floating in the middle.
Every buyer and every seller must act accordingly in negotiations. A buyer throwing a low offer in a seller’s market is less likely to be successful. And a seller asking much more than a realistic market value in a buyer’s market will have difficulty selling.
Different segments, different markets
Realize that in Calgary there is a range in types of homes. The Calgary Real Estate Board has divided the market in four different segments:
- detached homes
- semi-detached homes
- townhomes and
Each segment can be performing in a different type of market. For example, single family homes can be in a seller’s market, while apartments may be in a buyer’s market.
Different location, different markets
Besides the type of home, location may have an impact on the type of real estate market, as well. Calgary is divided in 4 quadrants, but the Calgary Real Estate Board divided Calgary into 8 sections. Every area can have a different type of market. The northwest section in Calgary can be different from the southeast, for example. Visit the community page to learn how the real estate board divided Calgary into 8 different sections.
Different price point, different markets
And to make it even more complicated, the price component can influence the market. For example, the price range between $400,000 and $600,000 is often the busiest market in Calgary because this segment has the biggest group of buyers and sellers. That just might create more of a seller’s market than the market of luxury homes over $1.5 million.
Know your competition
For a seller, it is important to know what the competition is. What else can a buyer purchase in that area for that same budget? Competition can change almost daily. Today, a home around the corner may sell, while two similar homes enter the market and don’t sell quickly. Usually, more competition means a lower price, while no competition may increase the sale price. These changes in competition add a dynamic to today’s asking price that a seller must keep an eye on.
At the same time, a buyer can use these dynamics in negotiations, as well. If there is more choice in similar homes, a buyer can use this as an advantage in negotiations. On the other side, if there is little or no alternative, then a buyer may have to act faster and offer a higher price.
Days on the market are a big factor
Sellers should realize that offers are statistically higher if they come in quickly after submitting the listing. With today’s technology, buyers receive a new listing in their inbox within minutes after a submission on the MLS. Buyers are ‘waiting’ for these exact properties to come onto the market. This often results in a frenzy of showings and attention right after listing. Simply put, demand is higher within the first 1 to 2 weeks after listing, and statistics show that a home then sells closer to list price.
On the other side, a buyer should realize that negotiations can be more difficult if the property has just come onto the market. Statistically, a buyer may get a better deal on a property that is longer on the market, and which is vacant.
Price it right from the start
A realtor determines a certain price range for a home backed up by a CMA, a comparative evaluation. A seller can use this evaluation to establish the asking price in the lower, middle, or higher end of the suggested price range. Statistically, homes sell faster and for a higher price if they are appropriately priced right from the start.
Pricing a property too high may cause a home to get market stale. More days on the market usually means a lower sale price. An asking price in the lower range of the suggested market value may cause a stir of interested buyers, giving buyers a sense of more competition, and usually resulting in a better sale price. Which strategy to choose often depends on the type of market the property falls in, a buyer’s, a seller’s or a balanced market.
The bottom line is this: for a seller it is important to price a property appropriately, right from the start. As well, a seller must understand that buyers are very informed these days of fair home values, mostly influenced by the internet.
Statistics are just averages
The real estate board issues a monthly report which shows how many homes in a community have sold, what the average list price was for each property and what the average selling price was. If the ratio of list price versus sold price is 2 percent lower, that doesn’t mean a buyer can use that percentage in every offer. A seller may have already priced the property very competitively, in the lower range or even below its market value. Or the opposite may occur; a seller is not all that motivated and has priced the property at the high end of the valued range. In such a case, the 2 percent average does not apply to these properties.
These published averages are great for general purposes and for one to learn the trends in a market, but not to use in negotiations for a specific property.
Negotiate on something other than price
Most often, price is the most important part of the negotiations. But buyer and seller can also negotiate on conditions, terms, the deposit, possession date and inclusions and exclusions. This can make the negotiations more dynamic.
- Conditions, such as home inspection and financing are very common for a buyer to request. A buyer or seller can negotiate these. For most sellers, fewer conditions make the offer much more attractive. However, a buyer must be comfortable and able to forgo these conditions.
- Terms are, in short, actions that a seller or buyer must take after waiving and before possession. Most often, terms are there for the seller, like fixing, repairing, or removing something. Buyer and seller can negotiate who takes on that ‘job’.
- Possession has to, preferably, work for both parties. However, if agendas don’t line up, someone has got to give. For example, one can put the ‘chip with plan B’ forward and trade this for a certain price.
- Inclusions and exclusions are always written on the feature sheet of the MLS listing. A seller can offer more than what is currently in the feature sheet and trade this for a certain price or perhaps a preferred possession date. A hot tub, a sauna, furniture; everything is negotiable. Even a little Buddha statue…
- The deposit is good faith money that shows the seller that the buyer is serious. The deposit goes toward the down payment once the transaction closes, and the home changes owners. A buyer loses the down payment if conditions are waived, and the buyer decides to ‘walk away’ from the home before possession. Then the down payment is forfeited to the seller. A buyer can make an offer more attractive with a higher deposit.
Knowledge is Power is a true cliché
In short, understanding the real estate market is important during negotiations. In particular, knowing the market of the current type of property is key because, in Calgary, the condominium market can be in a different position than that of single-family homes. Or the luxury segment can be in a different position than the average priced homes. An experienced realtor can give the correct information, so that the seller can price a home accordingly and a buyer can offer accordingly. Hence, this is a good reason for both parties to have their own representation.
Negotiations in real estate can go in many different directions. Whichever way the negotiations unfold, it is always good to learn more about tips and strategies in the following article!
Tanja van de Kamp has been a realtor since 2009, working for both buyers and sellers. Tanja was a lawyer in The Netherlands for 12 years. She has a competitive edge amongst realtors in Calgary. Tanja has an extensive amount of knowledge on how to negotiate strategically, and to work in the best interests of her clients.
Together with Ariette van Pelt, they make a dynamic and forceful team helping sellers and buyers getting the best they deserve!