Cross Price Cultural Anomalies in the Prague Residential Real Estate Market

The residential property market in the Czech Republic has a property market dating back into history long before many western nations were formed of which the development of the Czech property market was influenced by a variety of political regimes. With a long history there comes a dynamic and evolving architecture through out the city of Prague that will bring awe to the western eye. As such, each neighbourhood has its own unique character, and this has defined each neighbourhood with its own unique identity. In 1989, the velvet revolution helped bring about a new political economy that changed the property market significantly. The fall of communism was replaced by a free market economy. The Czechs were quick to adjust to this free market economy; however what may not seem obvious to foreign investors is that significant cultural differences exist between foreign investors and Czech citizens. These cultural differences tend to vary at many layers but one significant difference that will be discussed in this analysis is the investing tactics between a foreign buyer and Czech seller. For instance, the expected offer price that a Czech seller expects from a buyer may be a non-negotiable final realisation 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 a free market where private ownership lacks free market maturity a variety of undesirable outcomes could spoil a well prepared deal. In many cases, Czech’s are selling their property for the first time under this free market and without a frame of reference or a familiar historical experience, as such, foreign investing tactics may result in less desirable outcomes.

In many instances a Czech national may experience the sale of their flat for the first time and have significantly different expectations about their asking price to that of a foreign investor. This will result in a difference of perceptions between a vendor asking price and buyer offer price. In developed property markets, purchasing a flat in the early stages usually results in buyers offering a price that are well within the market trading range but below the asking price (in Table 1, this point would be A). Note: It tends to be customary 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 realisation price (in Table 1, this is point C).

For instance, the trading box, Table 1 below, is a residential property transaction between a seller and 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 individually. Point B is the seller asking price for a property. Point A is the offer price from the Buyer. After negotiation and investing tactics both the seller and buyer come to a realisation point C. The realisation line is 45 degrees and assumes neither a buyers nor sellers market. Point C is merely a point of arbitration that is solely dependent on the buyer and seller negotiation tactics and know-how of the market. In some instances it may not be a perfectly equal relationship. This would partly be due to what one would call a buyers market versus a sellers market.

Generally speaking, Czech’s who are selling their flats 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 is not accepted. They could even be insulted that a lower offer price was stipulated to that of what they asked. 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 the change in political economy thereby creating what many people would call a favorable ‘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, but keeping the offer open thereby maintaining interest in the property using foreign interest as leverage to inform other interested parties that other interest exists. In this instance the Czech seller can likely “gazump” the foreign buyer or accept an alternate offer. Gazumping is to charge a buyer of a property more than the originally negotiated price, usually after receiving a better offer from someone else for the property, thereby resulting in either a failed deal, acceptance of the offer from another party, or a skewed outcome whereby the foreign buyer will increase their bid (point C in Table 2 below). In the instance where a Czech seller is an inexperienced first time seller, what will happen is that the Czech seller will agree to the original offer price put forward by the foreign buyer but not change from their original asking price. In realisation the foreign buyer is gazumped or the deal fails. The dis-equilibrium point C in Table 2 below is a graphical explanation where the Czech seller’s initial asking price is also their expected non-negotiable realisation price.

Table 2 shows where a Czech seller is selling for the first time and is not familiar with the negotiation tactics of foreign buyers. Point C is the initial and final asking price from the Czech Seller. Point A is the initial offer price from a foreign buyer. B is the potential realisation point if the Czech seller was willing to negotiate and come to terms with foreign investor negotiation tactics. Due to 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 the realisation Point B. If the Czech seller accepts the offer the deal will result in Gazumping, resulting in a dis-equilibrium where each party is at a loss, a failed deal, or a 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 having a realisation point C that is skewed off of the 45 degree line resulting in dis-equilibrium.

A foreign investor should be cautious 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 present different results to that of their home country. The cultural difference between Czechs and other nations exists for many reasons but in this particular instance an immature free capital property market will present a number of hassles to 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 lead to different outcomes and foreign strategies implemented for this different cultural environment may fail in the short term and ruin potential deals that are considered to be above market deals with below market prices.

Table 1:

This trading box is a residential property transaction between a seller and buyer. Points A and B are the initial communication points of introduction. Point B is the asking price for a property that is asked by the seller. Point A is the offer price from the Buyer. After negotiation they both come to a realisation point C. The realisation line is 45 degrees, assuming neither a buyers nor sellers market. Point C is merely a point of arbitration that is solely dependent on the buyer and seller negotiation tactics and know-how of the market.

Table 2:

This example below is based on the assumption of the argument above: Where a Czech seller is selling for the first time and is not familiar with the negotiation tactics of foreign buyers. Point C is the initial as well as the final asking price from the Czech Seller. Point A is the initial offer price from a foreign buyer. B is the potential realisation point if the Czech seller was willing to negotiate and come to terms with foreign investor tactics. Due to lack of selling experience and new political economy the Czech seller will reject the offer or accept the offer with no intention of moving to the realisation Point B. If they accept the offer the deal will result in Gazumping or result in a dis-equilibrium where each part is at a loss. A possible solution would be if the Foreign buyer accepts the Czech seller non-negotiable price, point C, thereby having a realisation point C that is skewed off of the 45 degree line.