Selling Right! You Don't Know What You Don't Know!

Recently I had a client prospect request a value analysis of their property.  After spending about 7 hours total, inspecting the property, evaluating the market's property values and completing my opinion of the value range, a competitor apparently "bought the listing." This is not the first time this has happened over the 30 years I've been in the business, it's quite common.  What the innocent seller doesn't understand is that it's usually a costly proposition for THEM.

What these "agents" do is: rather than thoroughly evaluating the property and informing the seller of the REAL price range in the market, they ask questions like: "What did YOU think it is worth?"  If they don't get an answer initially from the seller they will try several more questioning "tactics" to get that number from the seller...even if it has no realistic relation to the current market value.  Why would they DO that?  Because when you "buy the listing" you take the price the seller "wants," ADD your commission fee to it, and often add another 10% or so to the price, and tell the seller "The market has been good lately, let's test the market at this price."  They have just told the seller what they want to hear.  The seller is now thinking: "Oh my, our property is worth even more than what we THOUGHT!"

So you THINK!

Actually, it's usually bad news!  Almost always this is bad news for the SELLER.  Here's an example.  Let's say the REAL value, as determined by market sales is $300,000.  Adding a 5% margin to "test" the market realistically, would mean an initial listing price of $315,000 to see how the market responds. If there are no offers in the first 30 days, the price should be reduced to the $300,000...actually, good marketing would be to price it at $299,900.  Here's how a rookie agent or less-principled one attempts to "buy" the listing. 

Let's say the seller has said, "I won't take less than $350,000."  They have no factual basis for the number in the market place, it's just what they "feel they need to have."  I may feel I "need to buy a new Mercedes for $20,000," but that's not going to happen, and neither is a home going to sell for $350,000, when the market clearly defines it as being worth $300,000.  What the unprincipleds agent or broker does is takes the $350,000 and adds, let's say a 6% commission to that number, which brings the price roughly to $370,000.  So it doesn't look TOO suspicious, this broker might then say, "Gee I THINK it could be worth as much as $385,000...though that may be reaching a little, but I definitely think you ought to TRY it at $379,900."  The seller is pleased.  After all, that OTHER broker said it was only "worth $300,000, and he might try it at $320,000 for 30 days. We can always come down."  Makes sense right? Wrong!

What Else You Don't Know

Here's what REALLY happens in the real estate market.  When a property first hits the market, real estate agents who are currently working with buyers who have yet to buy, as well as buyers who just have begun to look in the market, clamber to look at every new listing that vaguely approaches the parameters and price range of what they are looking for.  Today, with the advent of the internet with services such as Zillow, Trulia, REALTOR.com, FSBO.com and a number of other sites, property information is readily available.  The savvy buyer can also determine pricing trends, look up recent sales in the market and neighborhood of interest, obtain the tax values and even view the deed and mortgage in much of the country.  There really are no secrets about housing any more.  While at it, they can use free services like Google Earth, Google Maps, or similar products from others, to see overhead views of properties, streets and even the neighbor's houses.  With all that information, buyers and their agents alike know what is happening in any given market almost as soon as the data hits the web, and it all does.

When a property is overpriced a certain segment of the market rejects it out of hand because the price range is out of their affordability spectrum.  When $300,000 is at the top of a buyer's range, they will reject automatically anything over it.  Once buyers and agents begin comparing square footage data, features and amenities, buyers will reject a property on that basis too.  It doesn't take a "rocket scientist" to look at the square footage of one property and divide the price by it to get a "ball park" value, and make their own "guesstimate" as to any lot value and other improvements described. Buyers AND sellers have ready access today to the prices of SOLD properties over the past couple of years on Zillow and Trulia, as well as through the local municipality's tax record data.

Agents however view overpriced properties somewhat differently, ESPECIALLY those of a competitor.  An agent who has been working with a buyer and trying to position what s/he feels is a good buy for their buyer will USE and overpriced property to demonstrate what a "bargain" their preferred property is compared to the overpriced one.  Here's how that conversation might transpire: "Mrs. Buyer, I know you liked that home on Smith Street, but are waiting for something to come up.  Well we're in luck because another property just came up this week, and though it is in a different price range I think we ought to look at it because the description says it's so GREAT!"  Don't all property descriptions say they're great? They pretty much do, unless they're "basket cases." The appointment is made to view the new property.  The savvy buyer agent previews the property first, then goes back to the one the buyer had some initial interest in.  When the buyer and agent get together to view the new listing, the buyer discovers that the property is "nice" but not $50,000 or more nicer than the other one they "liked."  The savvy agent brings Mrs. Buyer BACK to the Smith Street property "just to compare."  The buyer agent already knows what they are going to say, it's something like: "You know Mrs. Buyer, this Smith Street home is really a good buy compared to the OTHER one, I think you could make this property work for you better for less money, or even put in another $30,000 IN and STILL be a better buy than the other one."  That's how a buyer's agent utilizes an overpriced property to sell the one(s) they want that are more realistically priced.  Sometimes, they can use the same property to sell several OTHER houses.  After all, in a Buyer Agency situation, the Buyer Agent has a fiduciary responsibility to the BUYER and NOT the seller.

So, What's the Problem?

There are several problems.  The overpriced property owner has begun to hear in earnest from "their agent" that they "may have priced the property a little over market, because all of these other properties have been selling."  Then, in order to not take any of the blame themselves, they intimate to the seller, "look WE KNEW the property was a little high, but WE AGREED to test the market for you, and it looks like the market is REJECTING it.  Maybe we ought to reduce it a little to catch-up to the market."  Smart sellers are beginning to remember how encouraging their agent was about "even being worth as much as $385,000," but they "can't remember for sure," and so they ask what the agent "suggests."  The agent then suggests, "well why don't we drop it to $350,000 this month and if it doesn't sell in 30 days, let's move it to $320,000." The startled seller will quite often have nothing to do with "such a drastic reduction," so they "settle" on reducing the price to $350,000. 

The house doesn't sell of course. The market moves on, and worst of all time creeps along.  Time is the motivator this type of agent relies on.  The seller is selling for a REASON and they hope that the reason begins to provide the type of motivational PRESSURE they need as an ally to get the price reduced "for the market."

By the time the price gets down to where it should have been in the first place maybe 8 months later, the market has changed.  Not only that, but now agents are reluctant to show it, and buyers who have been looking and seeing the property still for sale after 8 months begins to say to themselves, "I wonder what's wrong with that property...it must be overpriced, or have something wrong with it.  I wonder what it is?"  At this point the 1st or 2nd listing extension is beginning to run out and the listing agent for the overpriced property begins to fight hard to get the priced reduced to any price it will take to sell, because they know they are about to lose the listing.  So, this agent who took the property knowingly at too high a price may begin to get overly aggressive. They know what the real price is now, but the problem is that many agents and their buyers have rejected it for months, so in order to get them interested, the price will need to get below the fair market value because of the "market-worn stigma."  That might mean a price of $280,000 or so.  That's when this kind of listing agent will start "encouraging offers," from competing agents and brokers often saying something like, "hey make an offer, " I'll try to help you get the seller to see the light."  Now, that's not really working for your client, but they now know the only shot they've got is to get it sold and quick.  If they DO get a lowball offer at this point they tell the poor unsuspecting something like, "Look we've had the property now for 8 months. We took it at YOUR price." Notice how the dialogue went from their initial certainty in pricing, to a "we collaborative" price agreement, to YOUR price mentality. "We tried everything, but the market rejected it.  "It's NOT MY fault.  It's the MARKET.  I think you ought to take this one.  This way you can get on with your life. After all real estate value is based on location, location, location and for some reason while you have a nice house the market just doesn't seem to like this location enough to warrant the price we were asking."

Who loses?

So the seller LOSES in several ways. First, they are likely to have gotten more than they finally settled for in the beginning IF they had priced the property properly.  Second, the equity they have lost is the value of at LEAST an equivalent investment rate of return if they were going to invest the equity in an alternative investment, or in an increasing market, they have lost the inflationary effect on the house they want to buy because THAT property (or similar one available) has likely increased by $40,000 plus or minus in a robust increasing market. 

In the worst case scenario, let's say the seller after 8 months takes -$35,000 less than what they should have received, and the type of property they would have bought (or equity they would have invested in an alternative investment) is another lost -$25,000.  That's a total of -$60,000, most of which should have been in the owner's pocket.  That's what you WON'T hear from the average "let's-take-your-price-and-add-the-commission-agent." They alter the conversation during the process to switch the "blame" early on that it wasn't THEIR idea to overprice the property, it was YOURS. By the time both your desperation and theirs sets in to get it sold, they are counting on YOUR motivation to sell. "Look we're within $20,000 of what that other broker told you...at LEAST we TRIED."  It sounds reasonable doesn't it? But they never complete the conversation about the lost "opportunity cost" of YOUR investment, or the rising cost of the new one. However, they "made the sale." In a declining market the losses are even worse, but that discourse we'll save for another day.

How does that make you feel?  Probably not very good. We don't like it either.  We believe it reflects badly on the profession.  Actually, we wonder if in this scenario it would actually stand the legal test of fiduciary responsibility and client advocacy?  Is it possible that by demonstrating "overpricing losses," that agents could be held liable for the market price erosion of artificially inflating property values to this degree?

AcceptanceGroup.com