FREE MARKET
A free market means that the price of the commodity isn't regulated by some kind of index or governmental regulations. The value of the commodity is whatever the number that a buyer and a seller eventually agree. That means that the price can set at whatever as long as the seller likes. Real estate market is one of these type of market. But before I go into real estate market, let me first you a good example of another free market that most of us are familiar with:
Used car market
Have you ever bought an used car from somebody before? I am sure most of you have, or know someone that have. Its a perfect example of free market at play.
You see a car, you know the make, the model, the year, the mileage and the asking price on craigslist. How do you know if its priced too high or too low? The first thing you do is checking the KBB value. If the seller is a dealer, most likely it will be priced higher than the KBB. Their reason? "I have done all of the improvements."
If the seller is an individual person like you and me, the asking price could be higher or lower depending on their justification. However, the point is that every seller is going to ask for a different price of the car even if the features are the same and they are opened to negotiations. You can't do that when you are buying gas or shopping at bestbuy.
So at the end, you and the seller are going to come to an agreement on what the final price will be. Using the KBB value as a reference, the final price is going to be based on the condition of the car and a bunch of other emotional decisions. You might end up paying a higher price than the KBB value or lower depending on the negotiation. Either way, that final price is going to be what the value of that particular car is, no more no less.
Housing market is very similar
The difference in housing market, however, is that there is not a simple way of referencing the home value like KBB for cars. Zillow and Redfin offers value estimate, but they are not just a rough reference, not an authority figure. The bank won't look at the zillow estimate to determine whether the home will appraise or not, they have to hire a licensed appraiser to do the work. So when it comes to establishing a good reference price for a particular home, buyer has to do their own price comparison. It all comes down to this:
Know your market
You have to know how much the similar homes in nearby areas are selling for recently, and how many days they are on market in average. This requires some effort to gather all the data. The homes that are pending nearby are great source of information. Contact the listing agent of those homes, ask them how much is the offer that they accept. Most agents will give you a bulk part so you know what it is.
The listing price can be deceptive sometimes
The listing price is what the seller is willing to sell the home for. Like I said, this is a free market, seller can name the price however they like, nothing is illegal. While a lot of homes are listed in reasonable range, it is not uncommon for homes to list way higher or lower than the average homes sold for nearby. Therefore, doing market comparison research is absolutely the first thing a buyer should do in order to make a better decision. Don't just look at one recently sold home and come to a conclusion, you have to look at all of the homes that can be referenced in order to determine the trend, that's how you determine whether the listing price is within reasonable range or not.
Just like cars, once you established a based reference price (like KBB value for cars), you then look at the condition of the home and the location and curb appealing of this particular house. So the real value that is closer to appraisal has to be based on the condition of the home as well, just like the condition of the cars. The floor plan, any improvements, any liens, any fixes needed for the home, how about termite damage, water damage? Does the furnace combustion chamber has cracks? Is it in the flood zone? Does the carpet smells terribly? The list goes on. But don't worry, all of the information will be provided by the seller as part of the disclosure. If not, its always a good idea to do your own inspection, and guess what, that's where the room for negotiation comes in.
The point is, before you even try to negotiate, you need to know what to negotiate for. By doing your own research, you are going to know what the reasonable market price. By understanding the condition of the home, you are going to know how much more additional money it will cost you to improve the house, if any. With these information, you can then have a meaningful negotiation with the seller.
In summary, establishing a fair market price of the home you are looking for is the first thing you need to know before deciding how you approach this opportunity.
