The Economics at Work in Your Transaction

Knowing the market factors that affect real estate decisions can help you better serve your clients and improve your business.

Why do people buy and sell houses? The answer is more complicated than wanting a new place to live. Your buyer and seller clients’ behavior is often influenced by emotional and economic principles.

“All real estate is local, but understanding how and why decisions are made is certainly impactful,” says Brent Lancaster, who teaches the Texas REALTORS® course Talk Nerdy to Me: Economic Concepts for Your Business.

You probably know more about economics than you realize. There are economic terms to describe things you work with all the time. Knowing the factors at play can help you better serve your clients and improve your business.

Pay the Opportunity Costs

At your first meeting, your buyer client says her top priorities are a short commute and a swimming pool. She’s narrowed it down to two homes: one is 10 minutes from her work but has no pool, and the other has a 40-minute commute and a huge in-ground pool with built-in hot tub. Your client must decide which is more important: car time or pool time.

In economics, opportunity costs are the cost of not picking the next best alternative. “Opportunity costs are why buyers don’t buy the first house they see,” Lancaster says. “They wonder what else is out there. Very few buyers are going to get everything they want. They’ll need to make concessions somewhere.” Your client may be thrilled with her new pool, but she will have to accept the opportunity cost of not having that shorter commute.

You can help your clients understand this concept by talking through the pros and cons associated with the properties they’re considering. Ranking priorities can help bring clarity to decisions. Even if a buyer has multiple items at the top of a must-have list, that will provide valuable information to help make important decisions.

Say Goodbye to Sunk Costs

Your seller client loves aquariums—he has permanently installed large tanks all over the house. When he puts his house on the market, he’s surprised to learn the market does not value his aquariums as much as he does. Sunk costs are costs you’re never going to get back.

“If you spent $80,000 to put in a pool, it’s no longer worth $80,000 when you go to sell,” Lancaster says. “You may be able to get some of that money back when you sell, but most of it is a sunk cost.”

Lancaster predicts Texas buyers and sellers will have to come to grips with a lot of sunk costs in the next few years. Homeowners refinanced when interest rates were low and made home improvements—some of which will not add to home values. “Obviously, if I remodel a kitchen, I’ll see some return on that. If I permanently installed a $5,000 coffee maker, I’ll enjoy it until it’s time to sell.”

Explaining sunk costs can help set seller expectations and give homeowners more information about what adds value to homes.

Pull at Elastic and Inelastic Demand

Your new clients want their children to start the next academic year in a specific school district. They need to close on a house and start living there before class begins. Your clients have an inelastic demand for a house in the district. They are not tied to a particular price point or fluctuation in cost.

Conversely, another client wants to buy a home for under $300,000. No houses that she wants are available in her price range. She decides to continue watching the market until a better option comes along. Your client has an elastic demand because she has the latitude to wait.

You can use these concepts in your marketing materials. For example, if your listing has eager sellers and a highly rated school district, you could advertise that you could close before school starts.

Solve the Local Knowledge Problem

Your client says he saw on the news that the real estate market is red-hot. Homes sell in hours and multiple offers are commonplace. But where? You tell him that your local market does not follow the national trends. It’s possible the local market isn’t even in sync with what he heard about Texas or your city, or that there are different trends within one ZIP code. Houses may be staying on the market longer or shorter and selling for more or less than what your client heard on the news.

The local knowledge problem is that the information on how to make the best economic decisions depends on many factors. What’s true for some or even most scenarios is not true for all. This situation is an opportunity for you to educate clients and show your value with specifics for your market. Tools like MarketViewer from Texas REALTORS®, REALTORS® Property Resource from NAR, and your MLS statistics can give you the information your buyers and sellers need to truly understand what’s going on with real estate in your area.

Count the Marginal Costs and Benefits

Your buyer clients have gone back and forth with the seller several times. Tensions are running high. Your buyer clients want to ask for one more revision.

The buyer clients could get what they want, but their request might also scuttle the deal by annoying or offending the seller.

Marginal benefits and costs are the pluses and minuses of taking one more action. It’s a way of looking at risk and reward, Lancaster adds. What are the marginal costs of listing a house at $400,000 versus $390,000? It’s a $10,000 question. On one hand, the sellers might make more money. But could that additional amount in the price shrink the pool of buyers to a level that makes any sale less likely?

Knowing this concept can help your client better understand the other party’s position. “From a negotiation standpoint, it helps when thinking ahead. The seller might not like a lowball offer, but it is an offer. He has a fish on the hook and he’s wondering whether it’s worth it to get it into the boat.”

Economics Makes You Look Like an Expert

If you understand what is influencing buyer and seller decisions, you can tailor your approach to get out in front of any concerns or barriers. Doing so makes you look like you’re several steps ahead of the game.

Lancaster suggests keeping tabs on how national market conditions affect your market. He talks with lenders about mortgage applications and other big-picture indicators. If you’ve observed that national or statewide trends reach your market two to four months after it makes the news, you can start preparing. Or maybe your market usually moves in the opposite direction from most other Texas markets.

“If you can answer a question a buyer or seller didn’t ask or was scared to ask, all of a sudden you have made an impact,” Lancaster says. “That’s how you get a client for life.

“When you start looking at real estate from an economic perspective, you can know where things are going to go based on current conditions. Your clients may not even know why they are doing what they’re doing. But you might.” And with that kind of insight, you will be well-positioned to succeed.

Source: Texas REALTOR® Magazine