The Power of Choice when Buying a Home
Since we are deep into the home sale and purchase process right now, I figured it would be a good time to get into some posts about real estate and some lessons I’ve learned along the way of the last 20 years of home ownership.
This post is actually going to be about a lesson that I recently just learned and it relates to choice. In the US, we are very keen on choice and having our freedoms. I’m definitely not going to go political on you here, because the only choice that we’ll be hitting on here is the choice of where to live and how the fact of having choices can potentially save you a lot of money. This specific choice here would be on the home you plan to purchase or rent, but we’ll hit a bit on the selling part too.
First let me say that if you are looking for housing in an area that has few options for you, perhaps from high demand or low supply in the market, the bulk of this post may not apply to you since you have very little choice, but who knows, there may still be a few nuggets for you.
Finding the One You Love
No, I’m not talking about finding the one person you love, but let’s talk about what happens when you find the house or apartment you love.
Hopefully when you start your house hunting process, you are looking at many different options that could work for you and your situation. On our most recent house hunting adventure this past month, we looked at 50-60 homes online and then narrowed it down to 25-30 that we actually wanted to look at in person. Of those that we looked at in person, we found only 1 that we liked on day 1. Then fortunately on day 2, we found 2 more we liked. Initially I wasn’t thinking that we would pick 2 or 3 “finalists” for any particular reason except that it is good to have options. But then it dawned on me. If we have options, it could really help when it comes to negotiations.
As the seller of a house, it is rare that you get multiple offers at once. If that is the case, then the situation is completely reversed and the seller has the advantage and can choose which offer is best. Hooray for you! That hasn’t been the case in any real estate transactions I’ve been involved with so let’s talk about how the buyer can have the advantage in negotiating when they have choices.
Choice and Time Can Be Key Factors in Negotiating the Best Price
Particularly in one past home purchase we made, we really only had one choice. In that case, we knew the neighborhood where we wanted to live, the owners of vacant lots were not willing to sell (we did contact them all though) and homes were just not coming available. So when we found the one house that was available, we put an offer in and unfortunately had very little room to negotiate. The homeowners were not easy to negotiate with in general in that case, but that could have been because they felt they had the upper hand or they were just firm negotiators. Regardless, the point was, we had very little room to negotiate since it was really the only choice we saw. We ended up going for it since we had no other options…or so we thought. Hindsight being what it is, had we just been more patient and waited a bit more time, one of the vacant lot owners came back around and asked us if we were still interested to buy. Sorry, too late, we already bought a home.
So I guess I can boil this down a bit more and say that if you are not under pressure to buy, you can negotiate and get a good price. If we are in a time crunch to buy a house (maybe before school starts for our kids) you may not have as much freedom to choose houses and you may have to go for the best that is available at that time. Time can create that pressure to buy, but also scarcity (or perceived scarcity) can cause that pressure as well.
On our most recent home shopping trip to Ohio, we essentially had 4 days to look at as many available homes as we could. Initially we weren’t going put in an offer on that trip, but realized that a couple of the homes we really liked went under contract while we were there, which created a bit of sense of urgency and us thinking thoughts like “If we don’t put in an offer on this one, it will be gone” or “this is the only one we really like, if we don’t put in an offer and it goes to someone else, then what”. I’ll admit I didn’t get much sleep the first night we were in Ohio due to this very fact. I’m not proud of it, but it was true. On day one we looked at almost 20 homes and only found one that we really liked. Plus we had seen a couple of other “contenders” go off the market with contracts. Needless to say I feared the worst. We might not get this house. We didn’t have any other options. Fortunately on the second day, we looked at more homes and eventually found 2 more options for the total of 3 that I mentioned earlier.
I talk a lot about how our emotions play into our financial life and it was definitely true in this case. If that was the only house we found, we likely would not be able to negotiate much at all, but at least we would get the “only” house we liked and our family would be in good shape. This was also one of the few times in our four previous home purchases that I wasn’t truly “in love” with one particular house. Each of our 3 finalists had some high points and some low points. Each was priced differently and had different features. Two of them had high charm factor and the third was not charming, but functionally had just about everything we could need. So, you may be wondering how it all turned out.
We put in an offer on a house that was very high on the charm scale as I like to call it. It had some good size rooms and features, was Tudor style and was indeed charming. The interesting thing with this house is that it had just come on the market. We put in an offer and had an idea of where we wanted to end up. The great thing was we were not completely head over heels in love with this house to where our judgment was clouded, nor was it the only option we had. It turned out the seller (or their realtor…you never know who) didn’t want to negotiate much on the price which gave us a bad feeling about the transaction, so we walked away. They felt that since it was new to the market they would get an offer much closer to the asking price. Maybe they will, maybe they won’t. Either way, we decided to walk away.
Then we went on to the next house which was also in the “charmer” category. It was a nice updated colonial that had a lot of great things going for it. We put in an offer and the seller also didn’t want to come down much on his price and certainly not to the point that we felt it was worth in the market place. We chose to move on from this one as well.
Then we went to house number three. This was the house that was not as charming as the others but definitely had all the functionality we would need and my favorite part is that it was $45,000 to than the 2nd house we offered on. At this point our realtor is not super excited with us, but hey, if we don’t get the price we want, we’re going to keep on moving. That’s the power of choice, right? So, we put in an offer and the seller made a good counter offer which we accepted. I just finished all the inspections and such on the house and went back and got a few more repairs or considerations from the seller, so this one looks like it should be a keeper.
Of course I’d be remiss if I didn’t point out that $45,000 savings with 30 years of compound interest would be $194,000 at 5% return or $785,000 at 10% return. I’ll take the less expensive house thank you very much and reap the financial benefits years down the road!
Recap
All these offers and counter offers took place over just about one week. Had we fallen in love with any one of these, it might have hampered our negotiating ability and likely had us paying a higher price. We did however have a little bit of the pressure of time that was working against us since we did need to get settled in Ohio soon to get our son in his new school and also to get my wife settled in her new job. Lucky for us though, we did have choices.
Another interesting thing that happened was that both sellers of the first two houses we made offers on came back to our realtor a week later and eventually offered to sell each home to us at the price we were seeking. Since we already had a contract on the 3rd house, we were not going to back out of it (plus we were getting this house at a much reduced price), but it was an interesting turn of events. You can reference all kinds of clichés here like “a bird in the hand is worth two in the bush” or those kinds of things. The fact is the seller only had one choice in front of them at the time when we really had three choices in front of us. They didn’t know that we had choices, so they were trying to negotiate hard and call our bluff that we wanted a particular price or we would walk away. It’s OK to a negotiate to a certain point, but they each lost a possible sale over what was really about $5,000 to $10,000 (1.5-3% of the price) for each house. In this case, I think it worked out for the best for us.
