Determining price
Determining the price of a property is not simply a matter of a vendor deciding on a figure at the start of the sale. Any sale will commence with an “asking price” and conclude with the “
best price”.
The final selling price of a property is determined by a combination of factors, including a fair and
transparent negotiation process, unbiased advice, and the legal expertise to conclude with a fair and binding written contract.
What is price?
Few people, including
estate agents, really know how to properly establish an asking price in order to finish with the “
best price”, and most go about it the wrong way:
Estate agents
Estate agents tend to be commission-driven, and prone to
commission rage. They have to fight for
listings in order survive. Asking price is often derived through processes related to the winning of the
listing. Thus, the
estate agent may:
Vendors
Vendors often approach the initial pricing of real estate in a variety of ways, including:
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Looking at the asking prices of other similar properties. |
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Collating the actual sale prices of similar properties. |
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Relying on estate agents’ 5 minute "appraisals". |
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Calculating how much is needed to purchase another property. |
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Converting happy memories to dollars. |
Setting the asking price is not simply a matter of asking for more, while being prepared to accept less, and consumers have grown tired of having to deal with baseless “ambit” asking prices.
The asking price must be set with precision, and according to a process or formula that purchasers, as well as vendors, can understand. In other words the process must be fair and
transparent.
The safest, fairest and most
transparent method for setting an asking price is to start with an independently determined figure, and to use it as the basis for a
pricing range.
Why is a price range best?
It starts negotiation "in the ball park"
In order to obtain the “best price” for a property the price and the terms of the sale must be negotiated. By inviting interested parties to choose a point within a price range to make their first offer, the vendor establishes negotiation as the means by which the sale will be finalised.
By way of contrast, a single fixed figure may suggest that the property must sell for that figure and no less, which may deter some purchasers. Alternatively, purchasers may believe that the fixed figure is an “ambit” figure and automatically offer less, perhaps very much less. And if more than one person is prepared to pay the fixed price, it may be argued that the property should be sold to the first buyer, without the other having an opportunity to offer more.
It encourages the "knock-out" offer
Purchasers know that negotiation involves all interested parties. This means that each purchaser must compete with others, and risk losing the property to a competitor who is prepared to negotiate a higher price. The making of a "knock-out" offer becomes an exciting option for a purchaser who wants to secure the property quickly and decisively, to the mutual benefit of themselves and the vendor.
It invites the vendor's counter-offer
As mentioned above, the price range always suggests to potential purchasers that the price is negotiable. A purchaser who makes an initial offer within the price range fully expects that the vendor will make a counter-offer; that's exactly what negotiation is all about. This gives the purchaser a degree of flexibility, while ensuring that negotiations commence at a reasonable level.
Purchasers are comfortable in making an offer within a price range, and may make their initial offer at the lower end of the range. The vendor is then in a position to make a counter-offer at the higher end of the range. The making of offer and counter-offer is an essential part of the negotiation process. In conjunction with negotiations regarding the terms and conditions of the contract, the negotiation process leads to the best price.
Integrity of the price range
Price ranges have always had problems in terms of the manner in which they have been established. Estate agents have been known to manipulate price ranges for reasons similar to those mentioned above, and some extreme examples of improper conduct have attracted the attention of the media and Consumer Affairs Victoria.
A price range is the safest and fairest approach to real estate pricing, provided it is established transparently, in accordance with a specific formula. Here's why:
Transparency
Anyone who knows the formula can follow it, and determine precisely how the price range was set. Thus, the vendor, the purchaser, and those representing the parties can independently determine whether or not the pricing process has been fair.
Acceptance by both parties
When all parties know the price range formula, they are more likely to accept the range as set, and commence negotiations on mutually agreed terms. In other words, a purchaser who can see that the process is fair and objective is more likely to make an offer within the established price range.
Determining the market
The “market” is comprised of those people who have an interest in the property, and are prepared to negotiate a price within the established price range. Where a potential purchaser can see that the price range process is transparent, and accepts that the price range is fair, he or she is likely to proceed to the next stage and commence negotiations by submitting a well-considered offer.
At the same time, those who are unable or unwilling to make an offer within the price range are less inclined to make low or otherwise unacceptable offers. Thus, potential purchasers present as “qualified purchasers” because those who are not “qualified” will have disqualified themselves.
Formula for a fair price range
The formula for establishing a fair
price range is really quite simple in itself:
The role of the valuation
In order to establish the
price range, a vendor must first determine what the property is likely to fetch in the current market, and secondly, whether or not to sell in the current market. (The vendor may decide to postpone the sale until the market becomes more favourable if the
valuation indicates that the current market is unlikely to meet the vendor’s expectations.)
It must be remembered that the
valuation does not tell the vendor what price the vendor should accept. Rather, the
valuation is simply a means by which the vendor can "test the market", to see what the market is likely to pay for the property. It is also important to bear in mind that the
valuation is an estimate, an indication, an opinion. No purchaser will pay a price based on a
valuation unless the purchaser wants the property. Similarly, if a purchaser wants this property and no other, he or she will not be constrained by the
valuation, and may offer well above the
valuation in order to buy the property.
Because the
valuation is an estimate, tolerances are needed before it can be used as the basis for an asking price. This is the purpose of the
price range. Allowance is made for the possibility that the
valuation may be a little too ambitious, or a little too conservative. A reasonable tolerance is established by setting the
price range at figures that are 5% below and 5% above the
valuation.
Here's how the
valuation is used:
| 1. |
Obtain your valuation. |
| 2. |
Decide whether the valuation is acceptable to you as a fair and accurate indication of the current market value of your property. |
| 3. |
If you regard the valuation as accurate, decide whether or not to sell in the current market. |
| 4. |
If you have doubts about the accuracy of the valuation, have the valuer explain why the valuation differs from your estimate of the property's value. |
| 5. |
We will advertise a price range that is 5% below and 5% above valuation figure to provide buyers with a "ball-park" indication of price. |
| 6. |
Offers will be invited within the price range. |
| 7. |
You should revisit the valuation if offers fail to meet expectations, and repeat steps 1-6. This is particularly important during times of market instability. |
Does the vendor have to accept an offer made at the higher figure?
No. It is possible that that a first offer, made at the upper end of the
price range, is just the start of a spirited competition between keen purchasers, and the vendor is entitled to
negotiate with all interested parties. The vendor is entitled to the "best price" the market will bear, and there are no constraints on
negotiation, even if it does take the parties beyond the
price range.
NOTE:
It is misleading and deceptive for a vendor or agent to invite offers within a price range if the vendor has no intention of accepting an offer within that price range.
A vendor who is disappointed with the
valuation and wishes to set a minimum price which is higher than the 5% upper figure will be advised not to sell at all. If, at any stage, a vendor forms the belief that the market has shifted, and requires us to alter the
price range, an amended
valuation will be required. Alternatively, the vendor will be invited to end our retainer.
It is unfair, unethical and illegal to attract interest in a property by advertising a
price range if the vendor does not genuinely intend to consider offers made within the
price range.
What is "best price"?
Ask any vendor what they hope to achieve through the sale of their property, and the answer usually comes down to a concept known as the "
best price".
Note the difference between “
best price” and “asking price”. The “asking price” is a notional figure arrived at by the vendor at the start of the sale, whereas the “
best price” is the final figure arrived at during final
negotiations.
While the "
best price" may initially appear to be a matter of money, a careful analysis of a sale transaction reveals that the dollar value of the property is not the only factor to be taken into consideration.
As stated above, the “
best price” (the final price as it should be called) is determined at the close of the transaction, but it is just one component of the sale. When determining the best price it is necessary to also consider the
terms and conditions of the sale.
Look at it this way. Is an offer of $310,000 with a special condition requiring the vendor to spend $15,000 on repairs better than an unconditional offer of $300,000? The answer to this question is easy. But the possible
terms and conditions a purchaser may insert into a contract are many and varied, and can have an enormous impact on the “
best price”.
Negotiation is crucial to the achieving of the “best price”.
Negotiating price
The myth of the estate agent negotiator
Our first comment on
negotiation is that, contrary to popular belief,
estate agents are not skilled
negotiators. In fact,
estate agents are not
negotiators at all.
Estate agents are simply facilitators. They bring two parties together and thereby facilitate the sale, but they cannot
negotiate the sale.
Why can’t
estate agents negotiate? First, the
estate agent is commission-driven on a needs-to-win basis. If there is no sale, there is no
commission for the
estate agent. This, in turn, means that the
estate agent cannot include a “No sale” in his or her set of possible outcomes. According to the authors of the leading book on negotiation
"Getting to Yes: Negotiating Agreement without Giving In" knowing and developing alternatives to reaching an agreement with the other party in a
negotiation is an important source of power.
Every sale through an
estate agent trumpets to the purchaser, “Vendor MUST sell!”
Given that the
estate agent must bring about a sale in order to have been “successful”, there is a high potential for one party to emerge as a “winner” and the other as a “loser”. For example, if the
estate agent talks the vendor into accepting a low price, in order to satisfy the purchaser and to bring about a sale, the vendor may be the “loser”.
The problem is that
estate agents act for BOTH parties in a sale transaction. First, the
estate agent acts for the purchaser by acting as the purchaser’s only means of contact with the vendor. The
estate agent usually “assists” the purchaser to fill in the contract, and then presents the purchaser’s offer to the vendor. The
estate agent will try to get the purchaser’s offer to the point that it looks attractive to the vendor, and then the offer is presented to the vendor for consideration.
Who receives the purchaser’s offer on behalf of the vendor? That’s right, the same
estate agent. The
estate agent receives the purchaser’s offer, determines whether or not the vendor should accept it, then advises the vendor. The result is likely to be a sale for the vendor and a
commission for the
estate agent.
But has the vendor achieved the “best price”?
In most real estate transactions the
estate agent achieves not the “best price” but the “acceptable price”. This is because the
estate agent cannot
negotiate on behalf of both parties.
Reducing the negotiated agreement to writing
Concluding verbal
negotiations is only the first step in
negotiating a real estate sale. The crucial stage is production of a written agreement through the creation of a written contract.
A contract drafted by an
estate agent is often simply a standard set of rules that bind both parties. In most cases neither party fully understands the
terms and conditions, and they only discover their rights and obligations after the
estate agent posts a copy of the document to the solicitors.
Estate agents are not trained to draft contracts. In fact, it is illegal for an
estate agent to deviate from the standard form document.
Standard form documents were introduced in order to bring a degree of uniformity into real estate sales. Unfortunately, the use of standard documentation has resulted in a one-size-fits-all mentality. It is quite common for
lawyers to find that a party whose contract has been drafted by an
estate agent is stuck with a very standard contract, when the agreement reached verbally was not standard at all!
The contract is not simply a document that dictates terms to the parties. The contract should the final written agreement, as worked out by the two parties.
Negotiating the "best price" in the circumstances
So, when we talk about the "best price" we're really talking about "the best price
in the circumstances".
It soon becomes apparent that pricing a property is no easy task, as the circumstances of the sale can change for a variety of reasons:
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Opportunity cost - by holding out for a higher price an opportunity to purchase another property may be missed. |
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Same market exchange - selling low and buying low in the same market may be better than selling high and buying high. |
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Interest rate increases - fewer purchasers in the market for a particular type of house. |
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Personal circumstances - too numerous to list. |
The "best price" cannot be determined at the start of the sale; it is a flexible concept, depending on timing and a variety of other factors. The "best price" is actually determined at the time of sale, after open and
transparent negotiations have determined a sale price and sale terms which are acceptable to both parties.
How the market affects price
The real estate market is extremely complex, despite the efforts of industry and the media to describe it as "booming" or "flat" etc.
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The market for a property offered for auction may be confined to the group of bidders standing in front of the property on a Saturday afternoon, or it may be as wide as the reach of internet over a period of months. |
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While the market for single room units in the inner city may fall flat, demand for new 3 bedroom brick veneer homes in the growth areas of Melbourne may be booming. |
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A property with contamination problems may never sell, even though demand for similar but non-contaminated properties can't be satisfied. |
Conclusion
Determining the price of a property is not simply a matter of a vendor deciding on a figure at the start of the sale. Any sale will commence with an “asking price” and conclude with the “best price”.
The final selling price of a property is determined by a combination of factors, including a fair and
transparent negotiation process, unbiased advice, and the legal expertise to conclude with a fair and binding written contract.
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