Cross Price Cultural Anomalies in the Prague Residential Real Estate Market

What a foreign buyer should know about Czech negotiation tactics on the residential property market

The Czech residential property market dates back to a time before many Western nations were even formed, meaning that the market here has been influenced by a far wider range of political regimes than most Western ones.

That long history has also influenced Prague's diverse and evolving architecture, creating a cityscape that will inspire awe in most Western visitors, and giving each neighborhood its own unique character and identity.

In 1989, the Velvet Revolution helped bring in a new political economy that changed the property market significantly. The fall of communism led to a free market economy, which the Czechs were quick to adapt to.

What may not seem obvious to foreign investors, however, is that significant cultural differences exist between foreign investors and Czech citizens.

One significant difference is between the investment tactics that a foreign buyer would typically use and those of a Czech seller. The offer price that a Czech seller expects from a buyer, for instance, may be a non-negotiable final realization price. This can be attributed to lack of experience under this new political economy.

The differences between Czech nationals and foreign investors may not be obvious to the foreign investor. In an immature free market, a variety of undesirable outcomes could spoil a well prepared deal.

In many cases, Czechs are selling their property in a free market for the first time, and without a frame of reference or familiar historical experience. As such, foreign investment tactics may result in less desirable outcomes. Czechs, for instance, may have significantly different expectations about the asking price to that of foreign investors.

How mature property markets work: Table 1
In developed property markets, the early stages of purchasing a property usually involve buyers offering a price well within the market trading range but below the asking price (in Table 1, this point would be A).

It's typical in many mature property markets for buyers to put in an offer price that is below the asking price in order to negotiate a deal with the seller and come to an agreed, perhaps, middle realization price (in Table 1, this is point C).

For instance, Table 1 represents a residential property transaction between a seller and a buyer in a foreign developed property market, where a mature free market is common. Points A and B are the initial communication points, either through an agent or on a one-to-one basis. Point B is the seller's asking price for a property. Point A is the buyer's offer price.

After negotiation and investing tactics both the seller and buyer come to a realization point, C. The realization line is at 45 degrees and assumes neither a buyers' nor a sellers' market. Point C is merely a point of arbitration that is solely dependent on the buyer's and seller's negotiation tactics and knowledge of the market. In some instances, of course, it may not be a perfectly equal relationship, perhaps because a buyers' or a sellers' market exists.

How the Czech property market works: Table 2
Generally speaking, Czechs who are selling their apartments for the first time may not be accustomed to traditional Western negotiation tactics, nor even a domestic market where negotiation is common, and may be offended that their asking price isn't accepted. They could even be insulted when a lower offer price is stipulated.

One advantage that a Czech seller in Prague has had for a number of years is that the demand for private ownership in housing has been increasing since 1989, thereby creating a sellers' market.

In some instances a Czech seller may verbally accept an offer from a foreign buyer without any intention of following through with the deal, using foreign interest as leverage with other interested parties. In this instance the Czech seller can likely "gazump" the foreign buyer or accept an alternative offer.

"Gazumping" is charging a property buyer more than the originally negotiated price, usually after receiving a better offer from someone else. This results in either a failed deal, acceptance of the third party's offer, or a skewed outcome whereby the foreign buyer will increase their bid (point C in Table 2).

In the instance where a Czech seller is an inexperienced first-time seller, the Czech seller will agree to the original offer price put forward by the foreign buyer but not change their original asking price. As a result, the foreign buyer is "gazumped" or the deal fails.

Point C in Table 2 is a graphical representation of the point where a Czech seller's initial asking price is also their expected non-negotiable realization price.

Table 2 shows a Czech seller who is selling for the first time and isn't familiar with foreign buyers' negotiation tactics. Point C is the Czech seller's initial and final asking price. Point A is the foreign buyer's initial offer price. B is the potential realization point if the Czech seller was willing to negotiate and come to terms with the foreign investor's negotiation tactics. Due to a lack of selling experience and a relatively new political economy the Czech seller will reject the offer or accept the offer with no intention of moving to realization point B.

If the Czech seller accepts the offer, the foreign buyer will be "gazumped," resulting in a situation where each party loses out, a failed deal, or the Czech seller accepting a higher bid from another interested party. The only possible successful solution in this case would be if the foreign buyer accepts the Czech seller's non-negotiable price, point C, thereby reach a realization point, C, that skews away from the equilibrium of the 45-degree line.

A foreign investor should be aware that the Czech property and financial markets are not as mature as many Western nations with developed property markets, and certain negotiation and investment tactics may lead to different results than they would in their home country.

Cultural difference between Czechs and other nations exist for many reasons but in this instance it is the immaturity of the free-capital property market that creates the most problems for a foreign buyer.

The lack of experience in selling a property, lack of historical references to selling property, and a relatively young free market can all lead to different outcomes. Foreign strategies used in this cultural environment may fail in the short term, with deals struck at below-market prices ruining potential deals that would result in above-market prices being paid.

Table 1
This trading box is a residential property transaction between a seller and buyer. Points A and B are the initial communication points. Point B is the seller's asking price for a property. Point A is the buyer's offer price. After negotiation they both reach realization point C. The realization line is at 45 degrees, assuming neither a buyers' nor a sellers' market. Point C is merely a point of arbitration solely dependent on the buyer's and seller's negotiation tactics and their knowledge of the market.
Open Table 1 in a new window

Table 2
This example is based on the situation described above, where a Czech seller is selling for the first time and isn't familiar with foreign buyers' negotiation tactics. Point C is the Czech seller's initial - and final - asking price. Point A is the foreign buyer's initial offer price. B is the potential realization point if the Czech seller were willing to negotiate and come to terms with foreign investor tactics. Due to lack of selling experience and a lack of familiarity with the new political economy, the Czech seller will reject the offer or will accept the offer with no intention of moving to realization Point B. If they accept the offer the deal the foreign buyer will be "gazumped," or an imbalance will occure where each party loses out. A possible solution would be if the foreign buyer accepts the Czech seller's non-negotiable price, point C, leading to a realization point, C, that is skews away from the 45-degree line.
Open Table 2 in a new window

Marcus Fuchs is the senior economist at Property in Prague, s.r.o.

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