BiggerPockets

How To Determine If A Seller Is Motivated

People in general take great pleasure in speculating about what's going on inside the mind of the person on the other side of the transaction. Each party would love to know that information because we think it would give us a leg up on negotiating. Buyers love to guess at why a seller is selling, how much they'll take, what their reaction will be to the offer, and most of all, "How motivated are they??" In most situations there's no easy way to answer that question, and the ironic thing is that the answer almost doesn't matter. At all.

Take, for instance, the following statements made by buyers which all sound pretty valid:
- "These sellers can't afford the house anymore so they HAVE to sell."
- "This seller has no mortgage to pay off, so they have lots of wiggle room."
- "The seller is relocating to a new state, so they want to get rid of this house as soon as possible."
- "This house is a foreclosure, so the bank really wants it off its books."
- "This house is an estate sale, so the estate probably just wants to dump it."

These are all seemingly logical statements that have been made thousands of times by thousands of buyers. Unfortunately, none of them carry much weight. Here's why.

Homes in Chicagoland sell for an average of 95% of their asking price. That goes for houses, townhomes, condos, all residential real estate. That goes for the city, the suburbs, and the satellite cities. In good times and bad, in hot markets and cold ones. That goes for foreclosures, non-distressed property, estate sales, relocations - everything. That rule applied ten years ago and it will still apply ten years from now. It might sound crazy, but believe me - I've done the research myself. It's completely accurate.

The reason that 95% rule applies across the board is because it has nothing to do with the housing market. It's psychology.

If you put your house up for sale at $200,000 and I offer you $150,000 for it, you won't consider it. You'll consider offers below your asking price, but not that low. You're a little (or a lot) insulted by an offer that low. You're willing to take maybe $10k off your price if a buyer comes along, but you think you can get about $190,000 or more - that's why you're asking $200,000. If you get no action and you are willing AND able to accept less than $190,000, then you will drop your price to $190,000. Who knows, maybe in six months your asking price has slid all the way down to $160,000 and you WOULD accept an offer of $150,000. But that's only because you've learned the hard way that you can't get $190k... or $180k... or $170k... When I made you that offer of $150k, you still thought you could get more for it so you weren't ready to consider an offer that low yet.

The 95% rule is a result of human nature: In a grander sense, we are willing to be reasonable and consider getting a little less than what we want or think we should get in life, but not a lot less. As it turns out, "a little" in real estate terms works out to about 5% of a house's value. And it doesn't matter if you're an asset manager at a bank, an investor, a regular seller, the executor of a will, or anybody else - you're a human, and the 95% rule applies.

So about those "motivated sellers" - how do we know who is motivated and who is not? It's all in their asking price. The seller determines their asking price given all the information they have on hand and given their particular circumstances. They've priced it according to the current market conditions, the existing comps, and how quickly they need or want to sell it. If they're going to be convinced they're wrong, it's going to take proof. That proof only comes in the form of a persistent lack of interest in their house.

Let's check out a quick real-life example to put the 95% concept into practical terms.

Buyer: "Alex, this house is a foreclosure and it's been on the market for 421 days - that's well over a year. The bank HAS to be dying to get rid of this thing. They're asking $100,000. Let's offer them $72,000."
Alex: "The bad news is that they originally listed the house for $105,000. They've only dropped the price by $5,000 in over a year despite the fact that they obviously have not found a buyer at that price. They may have some minimum amount they need to sell it for, and they would rather hold onto it than sell it for less for whatever reason unknown to us. The sure reality is that they are simply not motivated. If they were willing to let it go for $72,000, they'd only be asking $75,000."

Buyer: "What about this one? It's in the same neighborhood, just came on the market for $75,000 and it looks like it might be a great deal. What do you think?"
Alex: "In the past 6 months, four other homes that are the exact same model and in very similar condition have sold for $85,000 to $90,000. The seller must be motivated because this house is truly underpriced. In fact, they've priced it low enough that they will probably receive multiple offers and sell for list price or higher."

As much fun as speculation about a seller's motivation may be, and as much as it plays to our burning curiosity of the unknown, in almost all cases it's a moot point. We already know how motivated the seller is - just look at the list price.

Comments

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  Tim Johnson — 7 months ago

  If this is the case wouldn't the real estate investing industry not exist as there wouldn't be any way to invest for profit?

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  Alex Fenske — 6 months ago

  Tim, Investing for profit (and I'll assume your talking about equity position as opposed to cash flow) is merely a matter of buying something for less than its market value - which may be wholly unrelated to the seller's asking price. Although I see this occasionally with traditional sales, it's distressed property sales that have made this opportunity possible and downright common even in a down market. One example would be a house in my area that came on the market in July for $49,900. Homes of the same model are selling for $60,000-$80,000 in distressed condition and $150,000 after rehab. This house was actually move-in ready with a lot of updates, so it attracted about a dozen offers immediately. My client bid $55,500, but someone else won at $56,250. Had this house come on the market at $75,000 it probably would have sold for that much or more. But for whatever reason the bank priced it WAY below-market, and someone walked into about $20k of equity *despite* the fact that they paid OVER the seller's asking price. If, however, that same house came on the market at $125,000 and the seller was only willing to come down the average 5%, as a buyer you simply wouldn't buy that house. You would wait until the price drops to $90,000 or less, or you would just let some other chump buy it!