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Three Main Sources of Power in Real Estate Negotiations

Suze Cumming | April 23, 2020

Understanding the power balance in any negotiation is crucial to obtaining a successful outcome.  In Real Estate, the three main sources of power are:

  • Information and knowledge. The more you know, the more power you have.
  • BATNA – Best Alternative to Negotiated Agreement
  • Market – Buyer’s, Sellers, or Balanced market – Supply and Demand.

Today we are going to take a look at Market power because it is the number one source to look at right now while helping your clients make important decisions and is likely to be in a near constant state of change in the coming weeks.

The premise is simple:

  • More Demand than Supply = Seller’s Market.
  • More Supply than Demand = Buyer’s Market.

When it’s a Seller’s market, prices rise and when it’s a Buyer’s market, prices decline.  A balanced market is exactly that; a balance between supply and demand and prices remain mostly unchanged.

For most of the past 20+ years, much of Canada has seen a strong Seller’s market.  There was a brief time during the ’07 – ’08 recessions and another brief time during 2017 when some markets saw a short-lived buyer’s market.  The last significant Buyer’s market was 1989-1996 when prices decreased over those seven years.

We are all uncertain about what is happening in the world right now.  We are also uncertain about what is going to happen to the economy and the real estate market.  Economists are predicting a deep recession but the speed of the recovery seems to be unpredictable.  The Bank of Canada took the unprecedented step of not making an economic forecast in its most recent report.  No one knows what is going to happen.

So how do we advise clients?  We can’t help them know whether the market will rise, fall or remain stable because no one knows this yet.  This will depend on the relationship between supply and demand.

Right now, there are few buyers but there are also few sellers and so we have a fairly balanced market with prices holding steady.

As we begin to emerge from the first wave of the health crisis, we need to be carefully watching how many buyers and how many sellers come into the market.   If a whole bunch of people decide they want to buy and few people list their homes for sale, the seller’s market will prevail and houses prices will increase.  If on the other hand, we have a large number of listings come on the market and only a few buyers feel confident or capable to buy, a buyer’s market will ensue and prices will decline.

The basic premise is simple to understand but the factors that affect the people who will make the decision to sell or to buy are not.    These include economic conditions, employment, availability of mortgage money, confidence and psychology.  All of these things are in a state of uncertainty such as the world has never seen before.

For us to help our clients make decisions today and in the coming weeks, we want to look at the very recent micro data about the balance between sellers and buyers.  This is where their power lies or doesn’t and is important in the decision-making process for them.

Example:  You have someone who needs to sell their townhouse as they can’t afford to make the mortgage payments since they lost their job recently.  When you look at the micro information for the immediate market area, you see that there have been 5 new listings in the past week and there are currently 18 properties on the market at a similar price point as your client’s home.  You also notice that only one property has sold since the health crisis first affected the market in March.  When you compare these numbers to the same period in 2019, you clearly see that it is a strong buyer’s market and your client won’t have much power in any negotiation. Your only chance to sell is if your client’s property is the most appealing to any buyer that might show up.  You’ll need to strategically prepare and price the property to ensure that it is the best opportunity.  While this won’t guarantee a sale, if a buyer shows up you’ll have a good chance of negotiating a deal for your client.

Three Main Sources of Power in Real Estate Negotiations

Suze Cumming | April 23, 2020

 

Understanding the power balance in any negotiation is crucial to obtaining a successful outcome.  In Real Estate, the three main sources of power are:

  • Information and knowledge. The more you know, the more power you have.
  • BATNA – Best Alternative to Negotiated Agreement
  • Market – Buyer’s, Sellers, or Balanced market – Supply and Demand.

Today we are going to take a look at Market power because it is the number one source to look at right now while helping your clients make important decisions and is likely to be in a near constant state of change in the coming weeks.

The premise is simple:

  • More Demand than Supply = Seller’s Market.
  • More Supply than Demand = Buyer’s Market.

When it’s a Seller’s market, prices rise and when it’s a Buyer’s market, prices decline.  A balanced market is exactly that; a balance between supply and demand and prices remain mostly unchanged.

For most of the past 20+ years, much of Canada has seen a strong Seller’s market.  There was a brief time during the ’07 – ’08 recessions and another brief time during 2017 when some markets saw a short-lived buyer’s market.  The last significant Buyer’s market was 1989-1996 when prices decreased over those seven years.

We are all uncertain about what is happening in the world right now.  We are also uncertain about what is going to happen to the economy and the real estate market.  Economists are predicting a deep recession but the speed of the recovery seems to be unpredictable.  The Bank of Canada took the unprecedented step of not making an economic forecast in its most recent report.  No one knows what is going to happen.

So how do we advise clients?  We can’t help them know whether the market will rise, fall or remain stable because no one knows this yet.  This will depend on the relationship between supply and demand.

Right now, there are few buyers but there are also few sellers and so we have a fairly balanced market with prices holding steady.

As we begin to emerge from the first wave of the health crisis, we need to be carefully watching how many buyers and how many sellers come into the market.   If a whole bunch of people decide they want to buy and few people list their homes for sale, the seller’s market will prevail and houses prices will increase.  If on the other hand, we have a large number of listings come on the market and only a few buyers feel confident or capable to buy, a buyer’s market will ensue and prices will decline.

The basic premise is simple to understand but the factors that affect the people who will make the decision to sell or to buy are not.    These include economic conditions, employment, availability of mortgage money, confidence and psychology.  All of these things are in a state of uncertainty such as the world has never seen before.

For us to help our clients make decisions today and in the coming weeks, we want to look at the very recent micro data about the balance between sellers and buyers.  This is where their power lies or doesn’t and is important in the decision-making process for them.

Example:  You have someone who needs to sell their townhouse as they can’t afford to make the mortgage payments since they lost their job recently.  When you look at the micro information for the immediate market area, you see that there have been 5 new listings in the past week and there are currently 18 properties on the market at a similar price point as your client’s home.  You also notice that only one property has sold since the health crisis first affected the market in March.  When you compare these numbers to the same period in 2019, you clearly see that it is a strong buyer’s market and your client won’t have much power in any negotiation. Your only chance to sell is if your client’s property is the most appealing to any buyer that might show up.  You’ll need to strategically prepare and price the property to ensure that it is the best opportunity.  While this won’t guarantee a sale, if a buyer shows up you’ll have a good chance of negotiating a deal for your client.

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