Rising home prices are driving Housing Wealth higher and faster than ever. Homeowners and sellers are winning. For someone to win the home equity sweepstakes, there will be people who pay the prices.
Supply and Demand
The rise in home prices is a supply and demand problem. The pandemic may be a contributing cause but not the only factor. Emily Badger and Quoctrung Bui writing for the New York Times Where Have All The Houses Gone? put the spotlight on multiple factors.
Fair Market Value and Price. They’re Not the Same.
Home value means something different to all players when we’re talking about houses. The assessor and the appraiser, buyer and seller, listing agent and buyer agent all have a perspective, and they all matter. My opinion of value and pricing is different today than five years ago. Today I see homes as having a fair market value determined by a licensed appraiser bound by strict comparison rules and prices determined by no rules or rhyme or reason of home sellers and people who want to own. Today, a typical sale begins with a house on the market priced in line with recent sales. Then buyers show up. And they keep coming. They know they’ve got competition. If equity matters, fear of loss will make a person spend more than they planned to and more than they should.
Keep Your Equity
We lose equity when we pay prices greater than fair market value (FMV). Let’s say FMV is $420,000, and we know that because we can see similar homes sold for that price. The owner puts the house on the market and receives five offers. None are below the asking price. One is for $430,000, and the other is for $431,000. These five buyers are typically motivated by this market. They will pay the asking price and maybe a little more. It’s safe to say the house has an FMV of $425,000.
But a sixth offer comes in. The buyer knows she’s competing with multiple buyers. She knows she has to make her best offer. She doesn’t know the prices of the proposals, but she expects a typical buyer will pay the asking price or a little more. There are more typical buyers than extraordinary ones. Our subject is unique. She doesn’t care about FMV; she wants that house. Her offer is $465,000,
Our buyer paid the asking price. She spent the FMV, giving the seller a $20,000 incentive to accept her offer. The house did not become $465,000 because one person paid that much. The FMV is still a typical buyer’s price, not the price an extraordinary buyer would pay.
Overpaying for a house is spending equity you haven’t made yet.
Not everyone can afford to spend money they don’t have. Those who can afford to overpay have a good chance of winning the accepted offer contest. But, those who can’t or won’t still compete with a reasonable price and safer terms. Price and security matter most to home sellers. A great price with many risks is sometimes less attractive than an affordable price with safe terms.
Commissions are Negotiable
Homeowners spend about 100 billion dollars annually on real estate commissions. If given the opportunity to negotiate, one-third of that amount could easily remain with the seller or be used to lower the rising cost of buying the home.
Closing Costs are Negotiable
The seller pays closing costs in Wisconsin because the State wrote the standard form that way. Who says the seller has to pay for title insurance and transfer fees?
Contingencies are Negotiable
Every contingency risks the buyer coming back for a concession in price after the offer is accepted. Contingencies cover insignificant and significant factors in every offer. Decide the difference.
Buyer Agency Fees are Negotiable
Home sellers pay the fee of real estate agents who represent the buyer. Some people have a problem with that. As a home seller, I have a problem with that. To the seller’s disadvantage, the buyer agent is working on structuring the transaction in favor of their client.
Wise buyers are figuring this one out. The time to negotiate a buyer agent’s commission is when you see his offer or all proposals. An offer for the asking price with high-risk contingencies where the buyer agent wants 3.0% of the sales price for working against you might be the best offer you have. But better terms at another price (higher or lower) might cost you less if the buyer pays their broker or the buyer’s broker accepts a lower commission. To have that option to negotiate lower or higher buyer broker fees, you want to be careful with what you promise to pay when you sign a listing contract.
How Much Equity Can You Save
We guide our clients to use these ideas when negotiating. Some of our buyers have won the accepted offer without being the highest price offer on the table. Security for the seller is valuable. If our client won’t or can’t pay an extraordinary price, we find ways for them to make their offer safer and more acceptable. Sometimes it works.
The average home sale price is about $400,000. Clients of Essential Real Estate are shown how and when to negotiate commissions. We show them which closing costs they can shift to the buyer’s side. For the average home selling client, we help them save about $8,000.
Your home equity is your treasure. Keep it.