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Is Real Estate Zero Sum?

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.

  1. 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.
  2. 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.

  3. 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.
  4. 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).
  5. 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.

13 Comments on “Is Real Estate Zero Sum?

  1. Charles-

    One of the problems of the negotiation is that true market value must be established before we enter into the zero sum game. I’ll give you an example of how retail stores like to infer the zero sum game. The other day I went to a store and I passed by a bunch of stuff that was marked 90% off. In other words this was stuff that did not sell at a higher price. When I checked out with my ~$12 item the cashier said, “Congratulations, you saved $111 today…” I replied, “How does my spending $12 produce a savings of $111?” If the item was priced over $15 I would not have purchased it. I personally placed a value of about $15 on the item, and it cost about $12.

    The same is true in real estate. There are times that sellers start at an unrealistic asking price. In this case the individual negotiation is not zero sum until some lower price point is reached. There are some sellers that might recognize this, but then there are others who do not.

    Now let’s consider the macro level. Excluding some social conditions, such as homelessness, in an up market I don’t see any loser. How do those who do not own lose? Are you talking about the loss of “alpha” realization?

    Most people recognize that some real estate markets are declining, such as many in Florida. When the market declines to a buyer’s purchase point, I have a hard time thinking that the buyer just realized a gain, just as I had a problem with the store suggesting that I just “saved” $111 by spending $12. I think the seller (store) made the assumption that I was willing to pay the full asking (retail) price, but this is a failed assumption.

    Maybe I am looking at this wrong?

  2. JP is right, there has to be a point that is zero to determine if there is a loss or gain. I do think that we can still talk about the theory of zero sum and real estate though whether we make that point the listing price, the appraised fair market value (exactly what is that?), the accepted offer price before any repairs, concessions, etc.

  3. I am surprised that agent did that. Classless in my opinion.

    Win-Win is just list the price of the home depends on willing participants. I sold a home recently that I was lucky enough to have the right people come by and fall in love with it. The Seller thought the price should be where it was and finally found a Buyer who agreed. The house was on the market for a very long time and multiple offers came in low but at a consistent price.

    Your foreclosure example is dead on.

    The zero point most likely cannot be determined otherwise doing a CMA would be easier.

  4. there is no way real estate is a zero sum game.

    there is no way to establish a universal value to a piece of real property, so how do you establish gains and losses?

    i can think of a million scenarios where something that is considered valuable by one party is considered valueless by the other.

    a house is not a pound of sugar or an ounce of gold. i think that is where everyone is making a mistake.

  5. a house is not a pound of sugar or an ounce of gold. i think that is where everyone is making a mistake.

    I don’t think you give us enough credit. I think we all understand that.

    The same thing applies to the SWOT. The tools and theories weren’t designed to test markets. But in doing so and being flexible to the limitations that creates, we’ve had some pretty good discussion.

  6. true enough. nice jumping point to talk about how buyers and sellers of real estate think of value.

    but i noticed in some other comments someone mention that “real estate is a zero sum game” as if it were established fact.

    and actually, a gold or sugar transaction isn’t even a zero sum game. shows what i know…

  7. As I ponder two-party negotiation, I think a necessary condition to establish the zero sum game is:

    “Both the buyer and seller place the same monetary value on the property.”

    Then we have both who are willing to transact at a given price, but each one gains just as much as the other from a deviation from how much each values the underlying property.

    If there is a gap between the two, then it seems that we don’t have a zero sum game.

    Example: Both buyer and seller value a property at $500,000. If the executed sale is $520,000, then the seller gained $20,000. If the executed sale is $475,000, then the buyer gained $25,000. If the buyer values the same property at $550,000, then what price does the buyer offer the seller? Case 1: What if the asking price is $600,000, even though the seller only values it at $500,000. Case 2: What if the asking price is $550,000? Case 3: What if the asking price is $525,000? Case 4: What if the asking price is $500,000?

    The issue of imperfect information is quite interesting.

    When time enters into the picture, such as a deal that will not execute, then we probably need to consider the difference between the buyer’s and seller’s discount rate. In the case of a foreclosure, the seller has much more to lose than the buyer, so the discount rate of the seller is (or at least probably is) much greater than the buyer.

  8. george-

    For a good example of zero sum games, look at futures and options. Commodities are the underlying issue, but the situation is crafted such that it really is zero sum. Another zero sum game is going long or short on an equity instrument.

    Finally, since this is a real estate forum, interest rate swaps are also zero sum, but such are very rarely done by individual homeowners.

    With that being said, it should be noted that these games are all about the differences in expectations between different parties. For example, I might think a stock is going down, so I short it, but you might think it is going up, so you go long. One of us is going to win, and one of us is clearly wrong. The more interesting issue is who is going to be the winner…

    As far as the interest rate swaps go, which way do you think interest rates are headed? Up or Down? It would not be too hard to find people on different sides of the aisle on that issue.

  9. JP lobbed me a soft pitch to hit dual agency with. The dual agent knows the $600k listed house has a value of $575k to the seller. S/he also knows the buyer will pay $625k. Uh oh…

  10. Dual Agency: Even with perfect information it seems we live in an imperfect world.

  11. are futures markets really zero sum? i get that they are “set up” to be so, at least mathematically. but lots of individuals use futures markets as hedge bets, so when they lose their money, they are often quite happy with the results.

    if anything, the more i think about zero sum games and economics, its interesting how rare they are. or perhaps even impossible?

  12. Personally, I think we control the selling or buyer’s market. That’s our task. Ofcuose, we know what we have to do. Sometime the game of zero sum is happend because of our.

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