The short answer is that buyers determine the value of real estate. Any commodity is only worth what someone is willing to pay for it. Sellers of real estate establish an asking price, which may be considerably more than what an informed buyer should be willing to pay; there are some typical errors that sellers make in projecting what their property is worth. Buyers who choose to be represented by average traditional real estate brokers also sometimes pay too much based on faulty analysis, lack of guidance, and/or flawed methodology. Appraisers determine the value of residential property primarily using the comparative market approach, which uses data from what other buyers paid for similar homes as the basis of the valuation.
If a seller significantly over-prices their property, well informed and represented buyers will normally not make an offer to buy because they perceive that the gap between what the seller wants and they are willing to pay is too large. There will usually not be an offer until the asking price gets reasonably close to or within the value range, which is range that the final sales price should fall within based on what other buyers have recently paid for similar properties.
There are a number of common mistakes that sellers make is pricing their home. Some base their asking price on what they need to pay off their existing loan, closing expenses, and to have acceptable proceeds at closing. Others add the cost improvements they have made to the selling price of a neighborhood home without similar improvements. Sometimes, sellers think that the value of the lot plus the cost to build a new home is what buyers should be willing to pay. The bottom line is none of these methodologies matter, Buyers will pay what they feel is a reasonable price based on what other buyers have paid for similar homes in the recent past – PERIOD.
Because there is a value range as opposed to one value for any home that a buyer is considering for purchase, the goal for any informed buyer is to choose a broker who will negotiate on their behalf to get the price as low as possible. My goal is to always to get my clients a price at or below the low end of the range; in the present Buyer’s market, I rarely recommend that a buyer accept anything but a ridiculously low price. Many buyers end up paying too much because their ordinary broker just goes along with the asking price, doesn’t want to be embarrassed with an offering price substantially lower than the asking price, and/or doesn’t have adequate knowledge, experience, or negotiating skills.
If you or someone you know is thinking about buying real estate now or in the future; I’m available to sit down and discuss the options and financing alternatives. If a short-term purchase does not make sense, I can help put together an action plan to put you, your friend, co-worker, or relative in position to buy when the time is right.