The art of the property deal is mostly science

In every property deal, be it residential, commercial or otherwise, there is inherent conflict. The seller wants to maximise the price while the buyer wants to minimise it. Resolving this conflict to find the right price is the art of the property deal.

Let me explain by way of a real-life example. Not too long ago a property agent faced a typical problem in real estate sales: Her client wanted more for his condominium unit than its computer-generated valuation.

SRX’s computer algorithm X-Value generated a value for his condo at S$1,090,000. Meanwhile, banks indicated they would consider financing the home at a purchase price in the range of S$1,080,000 to S$1,100,000. The agent showed her client the comparable sales transactions that went into calculating X-Value but the seller was insistent. He believed the view of his home was superior to that of comparable properties and worth an additional S$100,000. He was determined to ask for S$1,190,000.

The seller’s expectation for a sky-high price is by no means uncommon. He had lived in the home and he liked its view. He sincerely felt the view was worth S$100,000. In technical terms, this premium of S$100,000 is called goodwill. Goodwill is the excess price to be paid above the valuation.

There is nothing wrong with asking for goodwill. It is a legitimate part of pricing that is in place to account for an intangible value that cannot be captured by the strict methodology of a formal, expert valuation. A valuer can factor the view of the property into the valuation but he cannot quantify the emotional value of the view to that owner.

It is the job of the agent to manage her client’s expectations and set the right price, but it is not always possible. Ultimately it is the client who approves the listing price. Once the decision on pricing is made, it is the agent’s job to try to promote the goodwill in marketing the home.

In this case, the client had to justify the view in the hope that the agent could find a buyer who agreed with the seller that it was worth a premium of S$100,000. Over the course of 1.5 months, the agent showed the home to prospective buyers more than 20 times. Each time she had to inconvenience the owner to open the house to strangers who would then tour his home and infringe on his privacy, looking in every nook and cranny. Each time, though, the agent would spend much of the tour on the balcony promoting the home’s view.

None of these 20-odd visits resulted in an offer to buy the home. Eventually, the owner came to agree with his agent that the home was overpriced, but he was unsure how much goodwill to price into the property.

The agent engaged a valuer to do a field inspection of the home to help the owner resolve his desire to maximise his price with the market’s desire to pay a fair price.

Technology has made it inexpensive to purchase a full valuation and complete it within 24 hours of the field inspection. As such, agents can use valuations to help manage seller and buyer expectations and close property deals efficiently.

The secret to closing a property deal is to set a realistic listing price that both buyer and seller believe is reasonably close to its true value.

The secret to setting a realistic listing price is to obtain a neutral valuation, whether it is computer-generated or done by an independent expert valuer.

A neutral valuation mitigates conflict. The seller no longer assumes that the agent is underpricing the home to move it quickly. The buyer no longer assumes the seller has overpriced it.

In this case, the agent engaged a valuer who was indifferent to the seller’s desire to maximise the price and the buyer’s desire to minimise it. He went about his field inspection in an objective and professional way and determined that, in his opinion, the home should be worth S$1,100,000 or S$10,000 above X-Value.

Since the valuer was neutral and independent, the seller accepted his opinion and the agent relisted the condo at S$1,100,000. Within two weeks, the home was sold at S$1,092,000 or S$2,000 above the X-Value.

In November, it took the property market an average 159 days to sell a private condo. It took an average 89 days to sell an HDB unit. This is way too long in the age of property portals and affordable, fast, and transparent valuations. In a matter of minutes, buyers can survey the entire stock of available homes within their budgets. Therefore, there are only two reasons a home is not selling.

Either (a) there is no buyer who likes the home, or (b) the buyer and seller cannot resolve its price. In the past, it was difficult to resolve price. Pricing information was not readily available. It was not possible to get a transparent valuation quickly and affordably.

Thus, the art of negotiating a property deal was mostly art.

In the era of Big Data, resolving price disagreements is a matter of applying science.

Start the negotiation by reviewing a neutral, transparent valuation and then discuss whether goodwill should be paid. If all property deals take this approach, the average time it takes to sell a home in Singapore would drop significantly.

Today, the art of the property deal is no longer art but a computer-backed, valuer-backed listing price that all parties to the negotiation can trust.

ABOUT THE AUTHOR: Sam Baker is Co-founder and Chief Executive Officer of SRX Property. For more information on how to use digital technology to buy, sell, or rent property, visit SRX.com.sg.