Friday, November 1, 2013

Buying a house

For many years Cindy and I have been on the hunt for a weekend/vacation home. We recently discovered a promising property. We love the location but the house has numerous "issues" that need to be investigated. For example, part of the deck is on the neighbor's land  - and there is no formal agreement about this. There are also limitations regarding the ability to remodel the house (which desperately needs work).

After viewing the house with our broker I told him that I would be up for making an offer for the house before any of the issues were resolved. I would simply factor the issues into the offer price, and tell the sellers that I would make a higher offer if the issues were addressed. My broker suggested a different approach: making a (higher) offer that assumes the issues can all be resolved, but make it contingent on resolving them. I explained to the boys this morning why I preferred my approach:

1) Offers have inertia and create "anchors". If I start with a high number it would be difficult for me to negotiate a lower one, even if some of the issues remain unresolved. Much easier to start with a low number and raise it as issues get resolved. In negotiations you are better of if the other party is the one that needs to work to change the offer - while you are OK with the terms as they are.

2) Related to the last point, I want to put the onus on the seller to resolve the issues so that I raise my offer.

My broker argued that a higher offer that is accepted would lock out other potential buyers while we look into the issues. Yet this would likely put me in a weak negotiating position. Why? In all likelihood some of the issues will be resolved and some won't. So I would be faced with the option of paying the higher price even though not all issues were resolved, or withdrawing my offer altogether. Much better to be ready to raise my initial offer when issues get resolved.

Unfortunately a real estate broker's compensation is not aligned with the interests of a buyer. Since they earn a commission based on the sale price their economic incentive is for the sale price to be as high as possible. Furthermore, since they only get their commission in the event of a transaction, their economic interest is for a transaction to occur, regardless of whether it is good or bad for the buyer. When someone is helping you, it is important to keep in mind their motivations and incentives, particularly when they might not be aligned with yours...

No comments: