Incentive

Ask yourself this question: who is the seller working for?

Is he working for YOU, the buyer, or is he working for himself?

Quite often, buyers think that they are doing the seller a favor by offering on the buyer’s property.  But they’re forgetting that the seller doesn’t have to sell, and if he does sell, he’s going to need some incentive

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In my fourth-year Business Law course, I often argued with my professor while the rest of the class rolled their eyes and wondered where I got my nerve.

I much preferred the qualitative material to any courses which dealt in all quantitative subject matter, and Business Law presented a forum to freely discuss (argue) the grey areas in law, and thus sharpen those skills which I hoped to use later in life.

One of my major quarrels with my professor came on the subject of the “elements of a contract.”

My professor always used to say, “What if I tell you, ‘I’ll buy your text book for ten dollars.’  How do you distinguish between that being a genuine offer or merely an invitation to treat?  What forms the contract?”

He would go on to ask, “What if I said, ‘I’ll paint your house.’  If the other party accepts this offer, is it binding?”

The answer, is “no.”

Why?

Because there has to be some considerationfor the contract to be binding, ie. some form of payment, not necessarily monetary.

This is why you see transactions for $1; because there must be some consideration present.

I went on to argue with my professor that perhaps the definition could be expanded and/or simplified by adding an element, or replacing consideration altogether.  That element, is “incentive.”

There must be incentive present for both parties in any contractual arrangement.  Otherwise, why would they enter into the contract?

Both parties must get something out of the deal, and thus they must have a reason or an incentive for making the deal in the first place.

In the past two months in our real estate market, I’ve seen a growing trend.  Buyers, who are probably upset that they didn’t buy at the market bottom in December or January, are making offers without any regard to the seller’s position, and giving the sellers absolutely zero incentive to accept the offer.

Case in point, a friend of a friend of mine.

Two weekends ago, I was having drinks on the Danforth with some friends, and Jen’s boyfriend, Paul, informed me that he was “buying a condo.”  I congratulated him and inquired as to the circumstances.

He told me that “nothing is final yet,” but that he had submitted an offer that day for a condo at Bay & Bloor.  The condo had been on the market for two days, listed at $399,000, and he had offered $345,000.

I had just met Paul, so I tried to keep my reaction as calm as possible and smile and nod.

But then Paul asked me, “So, David, in your professional opinion, what do you think?”

I looked over at Jen for some guidance, wondering if I should be honest.

But when I asked Paul, “Do you want the truth or, the truth,” using my fingers as quotations, he asked me to be honest.

So I was.

I told him that if I were the listing agent, I would take that offer, rip it up into a hundred pieces, put it in an envelope, and mail it back to him.

The condo had been on the market for two days.

It was listed at $399,000.

Why, oh why, oh WHY would you offer $345,000?

You have to put yourself in the seller’s position and ask WHY they would entertain that offer, let alone accept it.

Ask yourself, what incentive does the seller have to accept your offer?

After only two days on the market, there is zero incentive for the seller to look at the offer.

Forget about what the property is “worth” or what it could, should, or would sell for.

Just consider that after two days on the market, the process has only just begun.  Not everybody knows it is available, not everybody who wants to see it has, and the property has barely been exposed to the market long enough for the seller and the listing agent to try and gague any sort of response.

Assuming the seller doesn’t owe money to the mafia and needs to sell the house tomorrow for any amount of money, there is no circumstance where this lowball offer should be accepted, reviewed, entertained, considered, or not ripped up and put in an envelope which is then mailed back to the buyer.

Oh yeah – I’ve been there!

The phrases “put yourself in their shoes” and “playing devil’s advocate” must come to mind.

Use role-reversal, as a buyer, and consider if you were on the selling end, would YOU consider this offer?

Most buyers would immediately argue, “Well I don’t care what the seller does, what the seller wants, or what the seller is thinking.  And we’re not talking about ME as the seller; I don’t care what is fair.”

Well that’s not the point I’m trying to make.

I’m not talking about what is “fair.”

I’m talking about what is reasonable; and reasonable in the sense of what is “rational.”

Offering $345,000 for a condo priced at $399,000 after two days on the market is completely irrational.

It makes no sense, and it serves no purpose.

Buyers say things like, “Well, I just want to try it and see what happens.”

Wow, I’m so busy working 70 hours a week that I only wish I had the ability to waste time by “trying” irrational, unreasonable offers; not to mention wasting the time of 2-3 other people…

To conclude the example above, the property listed at $399,000 sold for the full asking price as there was another offer on the table.  Paul was quite upset that he “lost” the condo, but as I explained to my friend Jen, it was never Paul’s condo to lose in the first place.

There was a bona-fide offer on the table that gave the seller all the incentive he needed to sell, and then there was a useless, lowball offer which probably only served to help jack-up the price on the other offer.

A receptionist at my office recently told me that her husband went on a weekend-long fishing trip with three friends, and only one of them caught a fish.  That meant that three of them spent two days with their reels in the water, and came up with nothing to show for it.

Many buyers go on these proverbial fishing-expeditions and make low offers on all kinds of properties until they finally catch a seller that works with them.

I have never understood this method.

Surely there are other factors in purchasing a property than the price, and wouldn’t you rather find a property you absolutely LOVE and purchase it, than submit lowball offers on ten condos you are indifferent towards and see which one you end up with?

4 Comments

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  1. Krupo says:

    I know the point you’re getting at, but I remember that lecture too – that was just legal talk – the requirement to have $1 or “a button” for the courts to endorse your deal… but I know that wasn’t what you wanted to get at here. I just wanted to applaud the short-term nostalgia trip it generated. 🙂

    Once more, I find some interesting parallels between full-on real estate and ebay bidding logic… only ebay is in many ways more ruthless and efficient in discarding the fishing.

  2. David Fleming says:

    Paul – I agree 100% with your logic.

    Perhaps I could have expanded my post to include the other side of the equation, where the actual product the buyer purchases does not matter.

    But for the end-user who wants to call the property “home,” I’ve never understood how somebody could be so unemotional and irrational in their approach. Unless you truly don’t care where you live and what you live in…

    Regardless, I certainly strayed from the point of the post which was how sellers need incentive, in this case, monetary incentive, to sign on the dotted line.

    Buyers on fishing expeditions never stop to consider “what’s in it” for the seller, and quite often, they’re surprised when their worthless offers don’t pan out.

  3. Hon says:

    The buyer should know these things before he makes an offer:

    a) the value of the unit base on some measures and benchmarks

    b) the market condition at the time he made the offer – whether it’s a seller’s market, a balance market or a buyer’s market –

    c) how much he really desire the unit

    Otherwise, he’s just blindly fishing and hoping.

  4. Paul says:

    What if I am an investor and I put 10 lowball offers on 10 identical units in a condo project which has a thousand units spread over a few buildings and there is not much to separate between those units. Do you think that would make sense? Even if its *only* a 5% price-reduction that can be achieved by this method, on a modest 300K condo, that comes to a saving of 15K. To put that in perspective, for someone who makes 40K a year, that is 6 months of his after-tax income!!

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