Is real estate zero sum? It’s a question that deserves its own post. We probably need to make some basic assumptions: the buyer and seller both want to complete the transaction; neither is desperate to do so. If the ultimate goal is the closing of the transaction then the answer may be “no”, it is not zero sum. But if we look within the transaction, the answer is going to be “yes” in many aspects of it.
- The offer and negotiation: As far as the dollar flow goes, this is zero sum. What is good for the buyer isn’t good for the seller. Somebody is leaving money on the table or giving it to the other side. This is also where dual agency breaks down. If there is one agent representing both sides in a negotiation I see very high risk for someone losing. The seller is only obligated to sell under the original terms of the signed contract.
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Changes within the contract that only affect one side but require other side approval: This can be a win for one side leaving the other neutral. An example would be a buyer asking for closing costs to be paid by the seller but increasing the sales price. The seller’s net doesn’t change but it changes the financing for the buyer making it better for the buyer. Buyer wins, seller neutral.
My shot at Keller Williams “win/win or no deal” philosophy in yesterday’s comments came from a personal experience where we were personally buying one of our 1031 Exchange properties from the Keller Williams agent that owned it. A change in the contract would have saved us in taxes. She wanted compensation for making the change (a share in our savings), quoting the philosophy. I think she misinterpreted her own company philosophy. The contract was not modified. Proof of how one experience sours an outlook. ***Also note that I am working with a Keller William agent now in a transaction and it is going smoothly.
- The protection of a home warranty during the listing period: Prudential Northwest Properties listings are all covered by an AHS Warranty during the listing period at Prudential’s expense while it is listed with Prudential. If something covered by the warranty goes wrong during the listing period the seller pays the AHS deductable and it is repaired. Instead of the buyer demanding a $750 (and probably getting) ahot water heater, the seller pays about $55 for the deductable. Win/win. Our office alone had $58,000 in claims last year. ***Disclosure: AHS is part of our risk reduction and AHS pays a referral fee for selling a warranty.
- Closing early: Property is vacant, buyer wants to move and everything is ready to close ahead of schedule. Seller avoids making a payment or gets refunded part of a payment already made, buyer gets their keys (don’t forget to change the locks). And, of course, the Realtors get paid early Win/win (win/win).
- Buyer’s financing falls apart: Something happens: lending rules change, a lien or judgment is discovered that can’t be cleared, etc. Lose/lose.
Buyer is entitled to their earnest money back but has paid for an appraisal, inspections, etc. Seller has no claim to earnest money for having the property off the market, may have made an extra payment and another interested party that moved on and bought a different property.
In yesterday’s comments, JP says, “I have not been able to answer this question: If real estate is a zero sum game, who loses in a market that is going up?” If the seller gets out of the property and does not reinvest it in an equally appreciating asset, aren’t they the loser? But if they bought that dream boat, maybe it is a win for them too. Buy at the bottom, sell at the top, anywhere in between you lost?
Overall the answer to me is “it depends.” The measure of zero sum can only really be done in dollars. If a seller is at the brink of foreclosure and the buyer gets a sweet deal is that a zero sum loss to the seller or a win/win because the buyer got a great deal and the seller doesn’t have a foreclosure on their credit? The metric of success is different for each party and we result in another common theme: real estate is personal.