How To Make Sure You Don’t Overpay For Your Home
(Scroll to the Bottom to watch the YouTube video for this episode)
#1 Get Educated about the market (Or Find Someone who is!)
If you aren’t educated about the current state of the real estate market, or if the Realtor you are working with isn’t knowledgeable about the current real estate market, this could potentially cause you to overpay for a property.
Being aware of what’s generally going on in the real estate market, and more specifically, being aware of what is going on in that region or that neighbourhoods’ real estate market are important pieces of information to consider when making a purchase.
Some of the metrics that matter:
1. Sales to List Price Ratio
2. Average Days on Market
3. The Absorption Rate, or the Months of Inventory
If you understand what these metrics mean and how to calculate them, you will have a much deeper understanding of the real estate market. Deeper than some real estate agents to be honest.
When evaluating the market, you want to look at these metrics and stats for the city you are shopping in, as well as the neighbourhood, or region if the neighbourhood is too specific. If you only look at the city and try to use those metrics as backup in your negotiating arguments, you’ve got it all wrong.
Sometimes what is going on in the city is completely different from what’s going on in a neighbourhood or region of the city. It’s possible to have a neighbourhood or region that is a Sellers market, even if the city is a Buyer’s market. (As it is right now)
So, one of the things that happens, is people get the idea that the market is down right now and it’s a buyer’s market, so they think that every seller should be willing to sell their property for less because they think the market is down right now. These people can be in for a rude awakening if they go into one of the neighbourhoods that is still a seller’s market because of low inventory and high buyer demand.
That’s why it’s important to look at these market metrics at both the city level and the region or neighbourhood level. If you do that, you now have something to compare the neighbourhood to, which gives you a deeper understanding of what’s really going on. You can compare that neighbourhoods’ average days on market, sales to list price ratio and its absorption rate to the city, and now you will know if that neighbourhood is doing better or worse than the city in terms of whether it’s a buyer or a sellers market for example.
With this knowledge, you will have an edge when evaluating how aggressive you can be on price when making offers on a property, especially if it’s in a neighbourhood that is currently performing worse than the city.
So that’s the first thing that can prevent you from overpaying for a property. Not being educated about the market. I know that can be a little complicated to understand, but you really don’t have to worry about that stuff if you are working with me because I’ll do all that analysis for you.
#2 Don’t Fall in love with a property where you just have to have it
If you fall in love with a property, you might end up overpaying for it. Plain and simple. I’m not saying you will overpay for it, but you’ve increased your risk of overpaying for it. The reason you’ve increased your risk is because you are going to make your negotiating decisions differently if you’ve fell in love. Now you might be afraid of losing the property to someone else, or you might be willing to pay whatever it takes to get this property, because you need it now.
For some, there isn’t much you can do to prevent yourself from falling in love with a home. It’s human nature, we all make buying decisions based on how we feel about a property, not just if it meets our needs. Some people think you should only buy a home if you do fall in love with it at first site, and they believe that’s the best criteria for picking a home. I think there is some merit to that, but I also believe there are a whole bunch of things you can do to make a home your own with the way you paint, decorate, and furnish it. Sometimes what causes people to fall in love with a home is that they love the style of the current homeowner.
#3 Give yourself other purchasing options
If you have other options, you automatically put yourself in a better negotiating position. You are less likely to be motivated by the fear of losing a property or being stuck without a home if this one doesn’t work out. By giving yourself options, or broadening your search horizon if there isn’t much in that specific neighbourhood, or that has that specific thing you “Just had to have”, you have protected yourself from overpaying for any one property if it’s priced too high.
#4 Don’t assume the list price is a fair price or the market value of the property
What a property is listed for isn’t always a good indicator of what it’s worth. Every home seller and real estate agent prices properties differently for many reasons. Sometimes people intentionally price their homes above market value because they want to leave themselves “negotiating room” because they have a belief that everyone wants to negotiate the price down on a listing. Sometimes a property is priced above market value because of a stubborn seller who believes their property is worth more, or the real estate agent who listed the property thinks it’s worth more, or they told the seller it was worth more to get the listing.
There are a whole bunch of possibilities here, but the point is that you can’t take the list price at face value, further investigation of the value is required. Which brings us to the next thing you can do to avoid overpaying for a property.
#5 Evaluate recent comparable sales to establish the market value of the property
Hands down, one of the best ways and easiest ways to make sure you don’t overpay for a property is to evaluate the most recent comparable sales with a comparative market analysis (CMA) on the home you’ve got your eye on.
To complete a CMA on a property, you are going to need the help of a Realtor (Call me maybe? ????) who has access to the backend of the MLS system. When I complete a CMA for a client, I’m looking at homes that are as similar as possible to the home in question that have sold recently. That means they are the same type of home (SFH, Duplex, Townhouse etc.), the same style (Bungalow, 2 stories, Split Level etc.), close to the same size, and have similar finishes (Flooring, Kitchen, Bathrooms etc.). The best comparables are the homes that have sold in the last 3 months.
By analysing this information on recent sales, you can get a pretty solid idea of what a home is worth, and with this information in hand, you can walk into a negotiation with confidence and make legitimate arguments about the value of the home.
#6 Be patient, sometimes a seller needs time to reduce their price
Not all sellers are willing to part with their home for a price that you think is fair. You might end up in a situation where you think a higher price would be too much for a property and the seller thinks any less would be too little for the property. And sometimes the attitude of the seller will change if their property has spent more time on the market without a sale. This sort of situation is most common when a property is first listed on the MLS, when the property hasn’t had as much time to be exposed to buyers and the sellers are still testing the market or seeing if they can get a better deal if they hold out for longer.
Sometimes they do get a better deal if they don’t come down on price for you and another buyer comes along who is willing to pay more. And sometimes they don’t get another buyer and become more motivated to reduce their price as time goes on. It can go either way, nobody has a crystal ball, and it’s going to depend on a lot of different factors.
The question you should ask yourself is, are you willing to wait and risk losing this property to someone else? How bad do you really want it? Is the difference in price really going to make much of a difference to you in the long term?
#7 Be willing to walk away from a property if the seller isn’t willing to come down to a fair price
This one is almost an extension of #6, but I decided to keep it separate because this one can be used as a negotiating tactic as well as a protection mechanism in cases where you can’t come to a fair agreement on price with the seller.
If you aren’t willing to walk away from a property, and the seller isn’t willing to come down to a fair price, you are going to pay for it. You are motivated by the fear of losing the home and the desire to get the home and make it yours. The seller has you if you aren’t willing to walk away, no matter how unreasonable you might think they are being. Sometimes it doesn’t matter what you tell the seller, or even what their agent tells them, they might not be willing to budge on price.
That’s where you need to decide if you are willing to walk away and go for another property. Sometimes just being willing to walk away from a deal is enough to make a seller come around and reduce their price, because now they are afraid of losing you as a buyer and afraid no-one else will come along and their home will sit on the market for longer. Again, this can go either way, so whatever you do decide to do, you need to be willing to accept the consequences of your choice. That could mean moving on to another property if they still won’t adjust their price or if another buyer comes along. There is no way to predict this 100%.
#8 Work with a competent Real Estate Agent who can do all these things for you (Hint! Hint!)
The best and simplest way to make sure you don’t overpay for a property is to work with a competent REALTOR who can guide you along the way and do most of these things for you. Not all real estate agents take the same approach or have the same level of skill. To help you determine how a real estate agent might handle themselves, I suggest you ask them the same question. How do you make sure your clients don’t overpay for a home?