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October 20, 2008

In Which Price Ranges Have Negotiations Been the Toughest?

I regularly provide average discount from asking price statistics in my monthly and quarterly reports.

These statistics help me follow the relative tightness or looseness in the market for a particular city or the county as a whole.

The average discount has a close correlation with the number of months inventory for an area. When the inventory is high, there is typically a higher average discount. When the inventory is low, the discount is typically low as well.

In an effort to understand and better prepare for negotiations, I decided today to analyze the discount rates from another direction.

Rather than just looking at the county as a whole, I decided to look at the average discount rates for multiple price ranges.

In doing so, I created the following chart, which tabulates the average discount from the asking price that was negotiated on Placer County residential properties sold in Metrolist MLS  between October 1st, 2007 and September 30th, 2008 in specified price ranges.

Discount from Asking Price by Price Range 

I have no way of proving it, but based on my own experience, the low end of the scale starts with a relatively high discount range, because in that price range you will find fixers and functionally obsolescent homes. These properties are not as highly desired and can at times be difficult to price, because they have some glaring issue, such as a bad location, strange layout or numerous repairs needed. 

The tightest price range over the past year was between $200,000 and $300,000, followed closely by $300,000 to $400,000. These were also the price ranges where most homes were sold in Placer County over the past year and where the inventory is at its lowest level relative to sales. Interestingly enough, during the past 3 months between July and September 2008 there was an average discount of 0% for homes between $200,000 and $300,000 and an average discount of only 0.7% for homes between $300,000 and $400,000.

Between $400,000 and $800,000 the average discount rises to around 4% and then climbs to almost 5% for homes between $900,000 and $1,000,000.

Once homes get over $1,000,000 the average discount almost doubles to 8%. Once again, I have no proof that it is the case, but I suspect that this is due to the large inventory of homes in that price range, relative to level of current buyer activity. It may also have to do with the larger amounts of equity and financial stability that home owners have in that price range and the fact that there are far fewer sales to use when establishing an asking price for high end properties.

It is relatively straight forward process when pricing a home in the average neighborhood where many similar homes have sold recently. When pricing a large, one of a kind home, it can be much more complicated to establish an asking price. Because of this, high end home owners typically decide to list on the high end of their estimate and will then consider lower offers when they are made.

In summary, low end home buyers and investors can expect to have some wiggle room, if the property has issues. Home buyers in the $200,000 to $400,000 price range should be prepared to offer near what is being asked on average. For those looking in the mid to lower high end range, you can expect a little more cooperation from sellers. For those select few searching above$1,000,000, you should at least take a shot at a relatively large discount from asking, you just might get it.

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