Real Estate Negotiators Have Option to Set Price

In a real estate negotiation where nobody is sure what the property is really worth, the buyer and seller aren't just reduced to an argument. They have options beyond "I think this" and "he thinks that."

The problem comes up with properties that don't fit the mold. Comparable sales may be hard to find. The people involved may not be real estate professionals and neither may have engaged anyone to represent them.

Commercial buildings are sometimes in this category. If the owner is using the building or it has been vacant for some time there may not be a rental history. Without fair market rents for the actual property, an income approach to valuation has to rely on rental estimates.

Properties needing repair or environmental remediation have valuation problems. It's hard to know in advance what these costs might be.

It's also hard to evaluate a property when the new user plans a different use than the building's current use. Will the new owner's spending add value? Has the building reached the end of its economic life as presently configured? If so, does the need for conversion subtract from what one might otherwise assume to be its value?

Rental properties can leave buyer and seller scratching their heads. Is this a big duplex with fancy owner's units and double garages and there aren't many sales to consider? Is this an apartment complex of one bedroom units, an unusual property?

Non-residential land sales have been sluggish here. Comparables may be hard to obtain. Is the property significantly larger or smaller than comparable sales? Is the best comparable sale in a distinctly inferior (or superior) location?

Even a house can be puzzling. An old, small home on a great lot in an out-of-the-way Hillside location is a problem, for example. So are log homes, because there are so few of them.

In each of these cases the buyer and the seller need to have an equal level of comfort with the value before the sale is going to happen. One technique to consider draws from the field of arbitration.

When there is a business dispute, management and the union (or whichever types of parties) create a list of neutral third party experts whom they might give the power to come up with an answer. They can obtain a list from the American Arbitration Association. AAA keeps lists of people who have prequalified in various business fields, and labor relations. The parties can also create their own list. Each side contributes a pre-agreed number of names.

Next, each side strikes a name, then takes turns. The last name becomes the arbitrator, unless the agreement is that either party has the right to call for a new list when the last name emerges.

In a real estate negotiation one could picture doing the same thing with lists of appraisers, consultants, agents and others with real estate expertise. The buyer and seller agree that the contract sales price is whatever the expert decides. If that seems like too much of a blank check, they could agree that the final price is what the expert decides if it is within, say, ten percent of some agreed amount.

Another formula takes off on one that is popular with corporate relocation companies when they acquire a property from a transferee. Relocation companies do two appraisals. They offer the transferee the average of the two, unless there is a variation of about five percent or more. If the gap is that large, sometimes the relocation company obtains another appraisal, or factors in the opinion of its broker.

In a real estate negotation each party might hire its own appraiser or other expert. The final price could be the average of the two. There could be a mechanism for dealing with a large variation. Obviously there's more cost this way.

If the parties spend money on even one appraisal it would be nice not to have to do it over again for the bank that's financing the purchase. Check with the lender to be sure each name on the list would be acceptable to the lender for financing purposes. If he or she is, everyone can avoid the cost of that second appraisal.

A last method that might work would be to leave the contract sales price to the determination of the lender's appraiser, if the price falls within agreed limits. Sellers may be less inclined to agree to this formula A seller will assume, perhaps correctly, that an appraiser working for a lender is more likely to be conservative about value.