How Much Should You Offer on a House? This Study Has the Answer
You’ve finally found the home of your dreams. Now, you just need to put in an offer. Sounds simple, but it may be the most difficult part of the already stressful home-buying process. (In a ranking of anxiety-inducing life events, buying a house came in second, just after getting a divorce). Like Goldilocks, you’re trying to find an offer that’s “just right” – not so high that you risk overpaying, and not so low that the seller is offended and you lose out on the property.
Ideally, you’re working with a trusted, experienced real estate agent who can help you put together an offer that works for everyone. You also want to be negotiating from a position of strength, and a new study from researchers at Leuphana University Lüneberg in Germany offers insight into how buyers can do exactly that.
A very precise bid for a house – say, an offer of $369,134.50 rather than $370,000 — gives you leverage over sellers in certain situations, the researchers found.
“Our research shows that more precise opening prices can yield you a significant negotiation advantage, but you have to know whom you’re negotiating with,” David D. Loschelder, one of the study’s authors, said. “With amateurs, this number should be very precise; with experts, however, negotiators should either choose a moderate level of precision or back up their highly precise number with a compelling reason.”
The power of precision
Less-experienced sellers interpret precise bids as a sign of the buyer knows what they’re doing. “Interestingly, amateurs seem to think: ‘Oh, this number is so precise, my opponent must have thought quite a bit about a fair price. He or she must be really competent,'” Loschelder said.
Experienced sellers aren’t usually taken in by super-specific offers. A too-precise price will cause them to “denigrate their opponent’s competence,” Loschelder explained. But if the buyer includes an explanation for their precise bid, such as specific repairs that need to be made to the home, sellers will think the buyer is more competent.
To reach their conclusions, the researchers had 230 novice negotiators and 223 real estate agents evaluate a real estate listing. The pictures, floor plan, and other information about the home was all the same, but the listing prices were different. Listing prices started at two precise digits (e.g., 980,000 euros) and gradually got more specific until reaching eight precise digits (e.g., 978,781.63 euros). Then, they were told to make a counteroffer and also name the maximum price they’d pay for the house.
The more precise of a bid inexperienced individuals saw, the more they increased their counteroffer and maximum price. Real estate agents also increased their counteroffers as the initial price got more specific, but only to about five precise digits. At that point, real estate experts actually started to decrease their counteroffers.
The lesson for home buyers
The German researchers aren’t the only ones to have noticed that avoiding round numbers in a negotiation can give you an edge. When a different group of experts analyzed actual cash offers made for the majority of shares in a publicly traded company, they found round number offers ($20 vs. $19.80 a share) were less likely to succeed.
“[T]the precision of the initial offer seems to suggest how confident the bidder is of the value of the target company’s shares — but the company can interpret a round offer as an indication that the bidder has estimated the value of the shares imprecisely,” Matti Keloharju wrote in the Harvard Business Review. Though the research looked specifically at company share prices, the same logic likely applies to other situations, including negotiating a salary and buying a house, Keloharju noted.
What’s the ulitmate lesson for home buyers trying to get their offer accepted? Know who you’re dealing with on the other side of the negotiating table.
“Whenever something is listed at a price, whenever someone opens a negotiation, price precision can come into play and you should pay close attention to your opponent’s negotiation expertise,” Loschelder said.