Evaluating The Price of The Property

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HOW THE SELLER SETS HIS ASKING PRICE

The seller usually arrives at his asking price by combining four factors: [1] the value of the property and the improvements; [2] the costs of selling the land; [3] the bargaining margin and the profit; [4] the psychology of numbers.

THE VALUE OF THE PROPERTY AND THE IMPROVEMENTS

The seller may determine the value of the property and improvements by using the same methods as those explained above. However, he naturally will tend to estimate the value higher than you, the buyer, because of his sentimental attachment to the property. He will tend to emphasize appreciation due to a greater demand to live in the area or to improvements made on the land, and overlook depreciation due to physical deterioration of the land and improvements, the obsolescence of structures because of stylistic trends and technological advances, or the decline in the demand to live in the area. The seller usually considers the price he paid for the land and adds on whatever he spent to get its actual value. But it is possible he paid too much, so don't assume you automatically have to pay him at least whatever he paid.

THE COSTS OF SELLING THE LAND

Once the seller determines what he believes the actual value of the property to be, he will add on the costs involved in selling the land. These could include the real estate agent's commission, attorney's fees, escrow charges, taxes, and survey, appraisal, and title insurance costs. By figuring them into the asking price, the seller passes these costs onto the buyer. This is standard procedure, and brokers generally advise sellers to set their prices in this manner.

THE BARGAINING MARGIN AND THE PROFIT

The seller then adds on a bargaining and profit margin figure, usually anywhere from 10 to 50 percent of the property's value as he sees it. Part of the purpose of this additional figure is to give the seller room to negotiate with the buyer. When the buyer offers a low figure the seller can "compromise" by coming down in his asking price and still realize a profit. He might allow the buyer to talk him down in price several times, giving the buyer the illusion that he is getting a "steal." If the seller finances the purchase himself; he will realize an additional profit in the interest over the years so he might reduce his initial profit margin by quite a bit.

The real estate agent often plays an important role in setting the price because sellers rely on his appraisal and judgment. One common practice is for the agent to set the price high in order to convince the seller to give him an exclusive listing. He makes a few attempts to sell the property, then tells the seller the market is bad and he should lower the price. The seller almost invariably follows the agent's advice. Then the agent tries to get a quick sale and commission. He will lower the price according to how desperately he needs a sale. Competition is so cutthroat in the rural real estate business that most agents would rather sell the property and take a small commission than risk losing the seller to another agent when his contract expires. You might come along at just the right time.

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