Published on 03-02-2017
The following is written by Louis Guillama, VP of Real Estate Operations, Daymark Realty, a subsidiary of Coastal Credit Union. Thanks for sharing your expertise, Louis!
By now you may have heard of the widespread shortage of available homes for sale. For some, this represents a great opportunity to sell a home that would otherwise be deemed less desirable (e.g. a home located next to a major roadway), and for others it means that their home will likely take just a few short days before they receive an acceptable offer. Recently, one of our Daymark Realty listings received 28 offers on a newly listed property. Twenty-eight! But despite this seemingly frenzied activity, there remain hundreds of homes for sale that just seem to languish on the market for months and, in many cases, never receive a single offer. Why is that?
Simple economic theory dictates that the value of a commodity rises when supply is low and demand is high. That’s perfectly understood. What happens, however, is that some sellers use fuzzy logic to set a higher price on their home thereby committing the biggest mistake in real estate. By fuzzy logic, I mean the old, “We want to walk away with ‘X’ so we’ll price the home at ‘X’ plus a factor for negotiating.” This is called pricing by feel and that’s a big no-no. Combine this with an already too high perception of value and you end up with a home that is priced far higher than competing properties. For more than one reason, it’s important that your price be based on empirical evidence to ensure it reflects current market conditions. As we’ll see, pricing a home above its fair market value does a lot more harm than good.
Unlike the typical home seller, your average homebuyer is very aware of the value of homes in the area. Sure, a home seller may have been familiar with homes that sold in the area, but homebuyers spend their days researching active listings, spend their weekends visiting open houses and drive around for hours visiting properties with their agent. That’s a much more engaged participant than your average seller. Having this knowledge, a homebuyer will recognize an overpriced home right away. But if they like the home they may write an offer that they feel is fair but too low for the seller to even consider it. And who could blame them? With ten showings a day what motivation would the seller have to consider a low offer?
Unfortunately, it’s a situation that feeds on itself. Buyers make a low offer but the seller, encouraged by regular showings, isn’t interested in conceding on price as they wait for the ‘right buyer’ to appear. Eventually, the showings diminish and the listing starts to become stale. What happens next only makes matters worse for our hopeful seller. The more days go by, the more apparent it is that nobody is biting. With the sense of urgency gone, the remaining homebuyers are emboldened to make lower offers. And that will only worsen with time. Unless the seller makes a significant change in strategy, their home will become one of the few expired listings in a hot market.
The most critical concept that a seller should understand is the importance of the first two weeks of market exposure. Let’s think for a minute about the dynamics of the real estate market. Each week there are a number of new homebuyers that enter the market. Not all of them will find one so their home search will “roll over” into the following week, where another group of new homebuyers joins them. When you have this effect of “bunching up”, where new buyers add on to an existing population of buyers, you have the perfect recipe for what we see today - rising prices and competitive early bidding.
Let’s say, for example, that an average of four couples enter the market this week and only one actually wins a bid on a home. That’s three couples that will roll over into the next week where they’ll be joined by four new couples just entering the marketplace. Now we have seven couples vying for the same limited inventory of homes. Just considering these two weeks, you can see how this creates a substantial population of competitive buyers; imagine what happens over a period of a month?
There’s also a psychological component at play. Each time a homebuyer loses in a multiple offer situation, they become more comfortable with the idea of offering more for a home to secure the winning position, and as their lease expiration date approaches, the situation becomes more critical and they will likely offer even more.
Eventually, the overpriced seller realizes their error and lowers the price - only nothing seems to happen. The natural question that many sellers then ask is, “Why does my home stay on the market even though I’ve lowered my price?” Let’s consider another situation that closely resembles the dynamics of today’s market. Have you ever fed captive fish from a dock or a pier? What you see is that the fish focus on each toss of food pellets and ignore those few pellets that float away uneaten. Why is that? Because each new toss is a new opportunity. Take your focus away and you may miss out. It’s somewhat similar with home buyers. They don’t want to miss their next opportunity so they chose to ignore what’s already been passed over.
Another effect of time is the impression it gives that there may be something wrong with the property. Buyers may think that, “If we’re in this highly charged market, why hasn’t anyone bought it?” Unfortunately, that’s a reality for many sellers and the reason why pricing your home from the start is so important.
But let’s say that you priced your home higher than recommended and were fortunate to have found a buyer willing to pay your price. Congratulations! Now, you just need to convince a lender to loan your buyer the money to complete the purchase. This is where setting the right price really pays off. If the contract price is higher than recent sales, the appraiser will have a difficult time supporting the price. Multiple offers have no impact on the valuation process. Lenders only care about sales that have closed and had sufficient exposure to the market. When this happens, the celebration comes to an abrupt end as the buyer faces the reality of paying cash for the difference in sales price and appraised value. Sometimes, this difference could be tens of thousands of dollars.
You can imagine how unpleasant this situation is for both parties. In many cases, especially those involving first time homebuyers, the buyer is cash-poor and thus the seller is left the option of either placing the home back on the market or conceding a lot more on price. If things were only that easy. In reality, the seller may have already entered into their own purchase agreement and are counting on this money to buy their next home. If this sale falls through, the seller not only finds themselves returning to the undesirable routine of showings but they lose their purchase also. More importantly, the seller also lost the pool of buyers they had because those individuals have moved on to newer homes (the next toss).
As a buyer’s agent, I advised my clients that if they wanted to avoid multiple offer bidding scenarios, and have more secure footing in a negotiation, skip the new inventory of homes and focus on homes that have been seasoned at least 14 days. Those are the ones where the sellers are more prepared to negotiate. If you have a home to sell and want to avoid that situation, it’s advisable that you carefully price your home based on the latest market data. A Daymark Realty professional can help you with their in-depth market analysis and experience. To learn more visit us at daymarkrealty.com/selling.