Asking Price Versus Sales Price

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Hard as it may be to believe, I've never done an article comparing asking price to sales price. It's way past time.

Asking price is quite simply, a written representation of an offer the seller would be willing to accept. It's amazing how many agents have forgotten that, if they ever understood it. If the seller would not be willing to accept that price, they are committing an intentional misrepresentation when they enter the number as the asking price. In short, fraud. This violates the legal requirement of "fair and honest dealing with all parties" which agents agree to upon commencing the practice of real estate. It isn't fraud on the scale of which many were guilty during the Era of Make Believe Loans, but it is still fraud. By entering an asking price of $X, you are representing in writing that the seller would be happy to accept that offer. But if there are already higher offers from qualified buyers (as is very often the case in the current market) you are defrauding those who come to investigate that property based upon the misrepresented asking price.

Why do agents do this? Some of them hope to generate a bidding war. Bidding wars are certainly nice, but they are unlikely to bid the property back up to the price it could have gotten by setting the asking price correctly in the first place. In such cases, it's the obviously lower than comparable properties price for a valuable asset that attracts potential buyers, and if the low price is no longer applicable you can expect them to lose interest.

Most of them do it as a way to make contact with prospective buyers who don't know any better, so they get a chance to act as that client's buyer's agent. Never call the listing agent to show you a property. Their loyalty should be given first, last, and always to the seller of the property. If it's not, they are failing in their primary duty as an agent and you definitely don't want an agent who would hose their client so they can get more money. If their loyalty is so given to their listing client, it isn't being given to you, the buyer. Either way it's a bad situation you should know to avoid. Because it happens and it isn't rare or even uncommon. In fact, it is disturbingly pervasive, especially when the market is hot, like it is now.

Sales price is the price at which two unrelated parties decide to willingly exchange a property for money, because both of them believe they are made better off by the exchange. You need to understand that, too. If you don't, petition the courts to appoint a conservator for you, because it is the basis for all economic transactions other than the ones that flow from the point of a gun. If two parties are related - whether parent and child or corporation and controlling interest in that corporation or any other permutation - it is not a true sale because the goods being exchanged on the record are not the only ones being exchanged, and it should not be used for comparison for other properties. Related party transactions are tough to do correctly, and many people don't understand that until they get bitten by it. In fact, an awful lot of what appears in MLS for two days or less is quite likely a related party transaction pretending to be a regular "arms length" transaction. Some are because an agent is hosing their clients, others are because someone wants a loan and therefore is trying to make it look like a legitimate arms length transaction when in fact it is not.

There are still plenty of reasons why both parties can agree on a sales price that leaves each of them better off in their own opinion. One of them needs a place for their kids to grow up, while the other no longer has that need being the classic reason. Perhaps one of them needs to buy another property somewhere else, and the proceeds from this property enable them to do that. I can go on all day, and I'll bet most of you can, also, if you try. The point is that in order to be a viable transaction with a hope of actual consummation (In other words, the exchange of property for other valuables actually takes place), both parties to a purchase contract must believe they will be better off after they make the exchange. Otherwise, one of them is going to find a reason to not actually carry through.

Sales price is generally lower than asking price. Not always, and certainly not now where everything on the market is seeing multiple offers within the first week, but in general this is so. As we are experiencing now, there are exceptions to that rule. Just because someone would be content to accept an offer if it were the only one does not mean they will feel compelled to accept that offer in the face of better ones. My objection to the abuses of the process detailed above is in asking prices that everyone involved knows are not anything like the price the seller can expect to receive.

Nor does the act of putting a certain asking price on a property mean that you're likely to actually get that price, no matter how long you wait. I don't know how and why the urban legend about "if you wait long enough, someone will meet your asking price" got started, but it is pure myth. The longer a property is on the market, the less desirable it is perceived as being by most buyers, because what buyers really think is "It's been on the market for sixty days and everybody else passed on it. What's wrong with it?" The longer a property is on the market, the more you are likely to have to reduce your price in order to actually sell.

The numeric relationship between asking price and sales price is complex, and governed by many variables. The ones that leap immediately to mind include the economic target market, the ease of qualifying for a loan, interest rates on loans (The mortgage market controls the real estate market), sales prices of similar properties under prevailing conditions, and most importantly, general economic supply and demand. In other words, how many people want to buy versus how many people want or need to sell. If the first number is higher than the second, expect prices to rise. If the second number is higher, expect them to fall, at least in terms of affordability if not absolute numbers. If you don't believe me, consider how fast real estate market conditions change when a relatively small number of people drop off one side of the equation at the same time a few more jump onto the other.

Caveat Emptor

Article UPDATED here


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This page contains a single entry by Dan Melson published on August 5, 2009 7:00 AM.

State of The San Diego Real Estate Market August 2009 was the previous entry in this blog.

Two Things Sellers Need To Understand About Buyers is the next entry in this blog.

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