What Should I Bid on a House?

Let me revisit a classic home buyer's question ("What should I bid on a property?") with some insights for today's modern, love-to-bargain, Internet data-filled world. It's a re-examination of home buying in a Groupon world.

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James Surowiecki’s piece about eBay in this month’s issue of Wired  is a fascinating study of consumer behavior and how we have been transformed into a nation of hagglers. He quotes Harvard’s Nancy Koehn as saying “consumers now know that prices are not something that you just have to say yes or no to.” Yet Surowiecki doesn’t address how our collective Groupon addiction translates to behavior when buying or selling property. So let me revisit a classic homebuyer’s question (“What should I bid on a property?”) with some insights for today’s modern, love-to-bargain, Internet data-filled world.

Let me start first by saying that we have more real estate data available than ever. I’m an agent, and when my boss started selling property 25 years ago, property information was kept on index cards. Now, most consumers have access to some kind of aggregate property statistics (whether from the local real estate board or an outside data service) as well as computerized listings complete with photos. However, data is not brokerage, and just because a potential homebuyer can see 10 recent sales prices doesn’t mean that he or she knows which ones are most applicable to the current market. (I see this fallacy online a lot, where people comment on recent property sales without knowing if they were elegant renovations or complete wrecks — a big difference!) If you’re a potential buyer, realize that you will, however, get the best pricing if you:
1. Know the micro-market. That means basing your sense of pricing not only on statistical data (which can be for a large area, such as a county, and thus possibly throw too wide a net) but also on recent transactions. If you’ve got the time, start watching your micro-market a few months in advance of actually buying, just so you learn what’s hot and what’s not. If, for example, you go to the first open house of a new property and it’s packed, you’ve got a pretty good idea that that property is either underpriced or that inventory in that particular market segment is thin — and possibly both.

(MORE: See three Hot Real Estate Markets That You’ve Likely Never Heard Of)

2. Find a real estate agent you like. While I think buyers who want to go it alone can be fine, I think that for most people, it’s worth it to have someone less emotionally involved analyzing the market’s pricing and picking out the most relevant comps. The key is finding someone good. According to Gallup, 48 percent of people in the U.S. rate the real estate industry negatively, placing it 21st on a list of 25 professions (more reviled were oil and gas, the federal government, banking, and healthcare). Yet that high level of dissatisfaction doesn’t always trickle down to individual customers, who tend to like their real estate agents. According to a National Association of Realtors survey, two-thirds of homebuyers would use the same realtor again. (As an aside, with sellers, the satisfaction is even higher, with 84 percent of sellers indicating that they would recommend their agent or use the same agent’s services in the future.)

(MORE: Read about how Americans’ equity in their homes has neared a record low)

3. Don’t work off the seller’s number. Ascribing too much power to a property’s list price is a fallacy known as “anchoring.” Certainly, it can be very helpful to have a general sense of the market’s “listing discount” — that is, the percentage difference between last listing prices and closed sales. (Example: a home that was listed for $800,000 and sold for $750,000 sold at a 6.25 percent listing discount.) But use that number as too hard-and-fast a guide at your peril. If a seller has a home that “should,” according to comparable sales, clear at around $800,000, and she lists it for $900,000, you don’t want to offer her 5 percent less than her price just because you believe her number. Always work off your own sense of what a home is worth, informed by #1 and #2 above.
4. Realize that sometimes prices fluctuate over time, even for essentially the same item. Think airline seats: you’re going to Fort Lauderdale just like the guy next to you, but maybe he bought at a time when the airline wanted to move the seat, and you bought at the last minute, when demand was higher. Similarly, home builder/developers have points when they really, really need to sell units and points where they are willing to hold them. The most obvious “tipping point,” real estate reporter Candace Taylor of The Real Deal has noted, is when a building is nearing 70 percent sold, the threshold for Fannie Mae approval. If you’re a buyer who wants a condo unit in a building near that threshold, you have better potential to strike a deal than if you’re one of the very last buyers in.

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