Negotiation Phase 1: Property Analysis
When I work with a buyer agent, I like to think of our collaboration in the Negotiation Process as consisting of three phases: 1) Property Analysis, 2) Home Viewing, and 3) Agent Negotiations. Over the next three columns, I will lay out a framework for each phase from the perspective of the buyer and renter.
The main objective of the Property Analysis phase is to re-engineer the seller’s Listing Price and estimate the Negotiation Gap. (Note that this framework also applies to rentals. However, for the sake of brevity, I will use seller to mean both seller and landlord.) Once we understand the Negotiation Gap, we can start to devise a strategy to try to negotiate the seller down from the Listing Price.
It is relatively straightforward for a qualified agent to help you re-engineer the Listing Price. Let's walk through the process.
Listing Price = X-Value + Professional Adjustments + Valuer Adjustments + Negotiation Gap.
Start with X-Value. Review the comparables that went into X-Value so that you can use them to justify your offer price at a later date.
X-Value Plus = X-Value + Renovation Adjustment + External Area Value
Your agent should be able to get renovation information from the other agent or estimate its cost. Here is an example of how to calculate the renovation adjustment.
Your agent should also be able to determine if the home has an external area not taken into consideration in computing the X-Value. Here is an example of how to calculate the value for external area.
Now your agent is ready to calculate X-Value Plus.
The next step is to calculate the SRX Valuation Price.
SRX Valuation Price = [1 + (+ View + Orientation + Market Factors)] * X-Value Plus.
View is subjective but it can be quantified by an SRX valuer. For example, a sea view captures a premium of up to 20% over comparable homes without a sea view.
Orientation can be quantified by a valuer. In general, an east-facing orientation captures a 3-5% premium over a west-facing home.
Market Factors = 1 + Property Performance, which equals appreciation or depreciation based on the last three-months of the most relevant property index.
Your agent can obtain the view, orientation, and market factors from SRX Valuations.
Now it is time to identify the Negotiation Gap.
Negotiation Gap = Listing Price - SRX Valuation Price.
The Negotiation Gap consists of Goodwill and Strategy. Goodwill arises when a buyer acquires an existing business, but pays more than the fair market value. In other words, goodwill amounts to the excess of the SRX Valuation Price. Goodwill is either zero or positive. Strategy is the judgment by the negotiating agent and seller as to whether to price the property above or below the SRX Valuation Price as a matter of negotiating strategy.
The Right Price is the price agreed upon between a willing buyer and a willing seller. Arriving at the Right Price requires some serious negotiation and gamesmanship supported by solid research and analysis.
Now that we have estimated the Negotiation Gap, we need to test it. We will do this at the Home Viewing, which is phase 2 of the negotiation process. (See Planting the Seeds of a Property Negotiation for phase 2.)