A key factor when working with a buyer is their budget, what do they want to spend? I try to respect my clients' budget wishes, and am pretty upfront when I don't think a budget is sufficient for what they're looking for.
The question I face all the time is how far above that budget, in terms of asking prices, should I go when suggesting houses to see? Generally, I'll look 15% to 20% above a budget range, particularly if that will sweep in some houses that I think that will encompass some properties that the buyers may especially like. But that's risky, because it's a crap shoot as to whether those sellers will do a deal within the buyers' budget range.
Buyers often want to look at houses that are quite a bit above their budget range, believing that in this 'buyers market', sellers will take 60% or 70% of their asking price. But that's not really the case. Over the last three months, the average "bid-ask ratio" (the ratio between the closed sales price to the last asking price) was 90%. Of course, there were sales with lower bid-ask ratios. Of the 71 closed single family sales for the 3 months ending April 30th, one sold at 67% of asking price, and there were another 11 that closed between 70% and 80% of their asking price. That adds up to just 17% of the sales closing at less than 80% of their asking price. 35, or 50% of the total, closed at 90% or more of their asking price. (The average bid/ask ratio has hovered pretty closely to a range of 88% to 92% over the last six months.)
The odds are against a $300,000 buyer getting a house listed at $400,000 for $300,000. Possible? Maybe. Likely? No. A house listed at $349,000 for $300,000? Much more possible.
I seems that sellers pretty consistently set their asking prices about 10% above their "bottom line." If someone lists their house at $349,000, they're probably expecting to get a deal above $314,000. The number in their head may be higher than this, but it's unlikely much lower. If their "bottom line" number was under $300K, they would probably list it at $329,000, not $349,000.
The "90% of asking bottom line" isn't a hard and fast rule. As a buyer, if you end up holding in the counteroffer process at, say, 85% of the seller's asking price, that can be awful tempting to a seller who then faces the decision about whether they drop another 5% or risk waiting for another buyer willing to pay a little more. But holding at 75% pay be a little too far out of that tempt range.
Listing agents are always encouraging me to "please show the house, and if your clients like it, have them make an offer." And I hear over and over "the sellers are motivated." But I think there's often a breakdown in communication between the listing agent and the seller, and such entreaties are often more a function of wishful thinking on the part of the listing agent than any real indication of motivation on the part of the seller. If the seller were truly motivated to accept an offer well below their asking price, they probably would lower that asking price.
Part of the communication breakdown may be in the interpretation of the term "motivated". When I hear it, I think "20% or more." But I think it's often used when the listing agent perceives that the seller might agree to a deal at 10% below their asking price. For me, I see 90% of asking as just the normal course of business to get the deal done, and not any evidence of super-motivation on the part of the seller.
Caught up in the buyers' market psychology, and hearing all the "mnotivated sellers" and "make an offer" comments, I've been pushing the envelope of what I've been showing a bit higher, sometimes 25% or 30% over a client's budget. I've had this attitude that it's worth taking a look and making an offer. But the numbers aren't supporting that, and I'm beginning to question whether it's fair to buyers to set that expectation, even subsconsiously. Because when you see more expensive houses with "better" features, it can be difficult to pull back to more modest properties. So, do I show a $349,000 lake cottage to a buyer who's indicated their budget is $275,000, or a $435,000 renovated farmhouse to a buyer looking in the low $300's? It's a question I don't quite know how to answer.