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The 4 Laws Affecting All Real Estate Transactions

You’re thinking about selling your home and, naturally, the first thing that comes to mind is, “How much money am I going to get?”

Determining the value and list price are easily some of the toughest parts of any real estate transaction.

This isn’t because home values are hard to figure out – Realtors® do this all the time – the issue arises when you, the homeowner, disagree with the Realtor’s recommendation.

This is what we call a price objection.

While nobody, not even the world’s best Realtor®, knows the true market value of a home before it’s sold, there are clues that we can use to help us estimate.

Market Value: The highest estimated price that a buyer would pay and a seller would accept for an item in an open and competitive market.

Market Value: The highest estimated price that a buyer would pay and a seller would accept for an item in an open and competitive market.

In addition to a price and market analysis from your Realtor®, there are four laws that govern all real estate transactions and they’ll determine the price you ultimately get.

I’ll explain with a story.

Suzie Seller is selling her Bellevue, WA home and has been keeping an eye on her local market. Prices are soaring and she is looking forward to finally cashing in on her equity. She calls up her trusted agent, Realtor Randy, and schedules a listing appointment.

A few days later Realtor Randy arrives, walks the property, and delivers his price and market analysis. To Suzie Sellers surprise, it’s lower than some of the similar houses that have recently sold in the area.

She asks herself, “How could a house down the street that’s similar in size, beds, baths, and age sell for more money than hers?”

Realtor Randy, picking up on her price objection, jumps in and says, “The reason I valued your home less than the similar properties in the area is due to the first law of real estate.”

Law of Deferred Maintenance: Pay now or pay later, but you must pay.

You see, Suzie Seller hadn’t been keeping up on the home like she should and, truth be told, it needed a lot of work. She’d either need to pay now to spruce up her home or she would pay later with increased holding costs and lower offers.

Realtor Randy provides Suzie Seller with some home prep recommendations and a list of all his approved vendors. Unfortunately, he does not leave with a signed listing agreement.

Excited to maximize the value of her home, Suzie Seller begins tackling all the items on the seemingly endless list. Once done, she stands back, takes a look at her home and declares, “Boy, all the time, money, and effort I put into my home really has paid off, I’m going to get top dollar!”

Finally ready to sell, she begins looking for other ways to increase her net proceeds. After some research, she decides that the 6% commission from Realtor Randy is far too expensive and she is going to do a For Sale By Owner (FSBO).

As she starts day dreaming about what to do with the 6% saving; she’s interrupted by a call from Realtor Randy looking to see if he can secure that listing agreement.

Confidently, Suzie Seller tells him about her plan to sell the home herself and all the savings she’s going to get.

Worried that she is getting in over her head, Realtor Randy begins to tell her about the second law of real estate.

Law of Transaction Costs: You can cut out the middleman but you cannot cut out the middleman's job. 

You can cut out the middleman but you cannot cut out the middleman's job.

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Thinking he is only looking out for himself and his commission check, she writes off Realtor Randy’s warnings and begins the processes of getting her house listed as a FSBO.

However, as she begins thinking about all the things involved in the sale of her home, she begins having doubts. “Who should I hire for the marketing photos, how am I going to draft the contracts, can I confidently negotiate the sale, and who coordinates the closing?”

Feeling anxious about all the moving parts, handling the kids, and being productive at work she quickly realizes she doesn’t have the time to effectively sell her house. Overwhelmed, and concerned she wasn’t going to be able to get the same results as Realtor Randy, Suzie Seller begins to understand that Realtors® are well worth the 6% commission.

Suzie Seller quickly calls Realtor Randy and signs his listing agreement. She could now go about her life knowing that he would not only take care of everything but also get her the best price and terms.

They advertise the home using a strategic digital marketing plan and begin to see the offers come in. Suzie Seller quickly tells Realtor Randy to choose the highest offer and wrap up this sale.

However, Realtor Randy begins to tell her that, according to the third law of real estate, there is much more to consider than just the sales price.

Law of Price vs Terms: The get the best price, you must offer the best terms, and, to get the best terms, you must offer the best price. 

To get the best price, you must offer the best terms. To get the best terms, you must offer the lowest price.

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Confused, she asks for more information.

Realtor Randy goes on,

“Well, there are a lot of ways to structure real estate deals. For example, a buyer could offer the full asking price but state that you need to cover closing costs and pay for some new appliances. On the other hand, we could get a below asking offer that doesn’t require any seller concessions. The law of price vs terms tells us that there is an inverse relationship between the two. To get more of one, price or terms, you must give up some of the other.”

With a better understanding of the third law, they look at the two best offers they received.

After determining that the lower offer with less seller concessions would net Suzie Seller the most money, Realtor Randy let the buyer’s agent know they had a deal.

As they move into escrow, Suzie Seller becomes worried that the deal might not close and calls Realtor Randy. He assures her everything is going to plan and guides her through each step of the process. Relieved, she can now take care of the move without having to worry about navigating the unfamiliar terrain of real estate closings.

All contingencies are met and the final walk through is approved by the buyers. As Suzie Seller and Realtor Randy review the closing statement he tells her about the fourth and final law of real estate.

Finally, closing day.

Law of Gross vs Net: Gross Sales Price - Transaction Costs = Net Sales Price. 

As he begins to explain more, Suzie Seller interrupts him and exclaims, “I get it, I finally get it!”

As Realtor Randy sits back in his chair, she continues,

“Earlier, before I listed with you, I wanted to increase my net sales price by decreasing the cost to sell (transaction costs). However, I now understand that this thinking is incorrect. If you want to get the best price and terms, you need to spend MORE money upfront to get everything done right.”

“Bingo!” calls out Realtor Randy, “That’s exactly it, that’s the secret to the fourth law and how to sell your home for the best price and terms."

To get the most money on the sale of a home you need to:

1) Price accurately and aggressively using a professional opinion and the law of deferred maintenance.

2) Apply the law of transaction costs and hire a professional to broker the deal.

3) Negotiate with your buyers using the law of price vs terms to arrive at a wise agreement.

4) Maximize your profit by understanding “the secret” of the law of gross vs net.

1) Price accurately and aggressively using a professional opinion and the law of deferred maintenance.

2) Apply the law of transaction costs and hire a professional to broker the deal.

3) Negotiate with your buyers using the law of price vs terms to arrive at a wise agreement.

4) Maximize your profit by understanding “the secret” of the law of gross vs net.

Sincerely, Suzie Seller thanks Realtor Randy for all that he has done and how happy she is to have had his help. Knowing some friends who are looking to sell, she gives him their contact information and her positive referral.

And that’s the story of The 4 Laws of Real Estate. Which teaches us all we need to know to understand how real estate transactions work.

But, what about actually getting it done?

For that, I’ve created an All Inclusive Guide to To Selling Your Home for the Best Price and Terms.

As always, if you have any questions or concerns regarding your real estate needs don’t hesitate to give me a call, I answer my own phone. 425-205-0791

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