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Fear Factor – Who Makes a Real Estate Market?

What factors contribute to price declines in a downward trending market? Interest rates, affordability, demand, and consumer confidence to name a few. Today, I have a new one: Crappy agents.

My beef of the week is the confidence crisis I see among agents, at least in my local market, and there are two camps cast in our realty reality version of Fear Factor.

“We fear things in proportion to our ignorance of them”. Titus Livius

First, there are the newer agents who haven’t experienced anything but a flying-off-the-shelf listing environment. Their training and mentoring has been focused entirely on getting the listing, the listing being the Holy Grail of real estate. Listings are King, they are told, and once that listing is secured, the check is in the bank. And the future checks are just around the corner. Use the listing to populate your marketing copy, snag those sign calls, and spawn new listings. Keep the car warmed up, because off to the bank you will again be – very, very soon.

“The greatest mistake you can make in life is to be continually fearing that you will make one”. Elbert Hubbard

Even veteran agents have seemingly forgotten that markets change, and with that, our approaches to the business need to adapt. Speedy-quick contracts, contracts proferred and negotiated without breaking a sweat, contracts which are all but guaranteed to make their way to the County Recorder’s office in 30 days with narry a hiccup, are a thing of the past. Unlike the new agent, they once lived a time when the hard part wasn’t “winning the listing”, but when the real work ensued once the contract was inked. Many seem to have forgotten.

Listings are becoming a dime a dozen, and it’s what you do with the listing and the trust the client has placed in you that now separates the men from the boys, the “salesmen” from the “professionals”. What does it take for an agent to successfully represent a seller today? Hard work, time (a lot), money (a boatload), and patience.

“Time is money”. Benjamin Franklin

I often tell sellers that I don’t make the market; I market. This week, I wonder. Fear.

What we our seeing in our local market is far too many agents still approaching a listing with the “slam it home” mentality. Price reductions are coming fast and furiously. One home which was in my opinion properly priced just fell victim to a $100,000 price reduction after two weeks on the market. Too many others in our area are being listed at laughably low prices and, while these sell in a matter of nano-seconds, they do so at great expense to the seller… and to the overall market.

Agents are contributing to a downward spiral. Their panic posturing results in our next “comp”. Whether it be through ignorance, ignorance of what a more normal market is like, or fear, fear that they have over-priced, fear that their listing will not sell, fear that an average market time will be perceived by the seller and the community as a failure, many agents simply lack the courage, commitment and wisdom to best represent a seller in today’s market. And they lack the patience.

Haste Makes Waste

When average market times are 60 days, what would possibly lead one to believe that a 14-day market time is cause for a freak-out moment? It’s simple math: More listings + fewer buyers = More time required to sell. It is true that distress sales (REO’s, short sales, troubled loans) are putting downward pressure on the market, but a case can be made that, though the numbers have varied, these distress sales have existed in all past markets. The resulting “comps” can be easily explained.

What is difficult to explain is the typical discretionary sale that falls victim to fire sale pricing due to the agent’s lack of market knowledge, grit, confidence or patience. I am personally working with several sellers at the moment who have felt the repercussions of a outrageously mismanaged neighborhood listing. They have seen their “value” diminished and not due to a declining market but at the hands of a crappy agent.

Granted, our market has more than its share of overpriced listings, but panic seems to be the new pink for Spring. It is time to buck the trend and dust off the classic suit, the one that never goes out of style. Stop seeing yourself as a salesperson, know your market, check your self-doubt at the door, and do what you were hired to do – Advise and represent your client and assist them in achieving the best price the market, not you, will allow.

22 comments

22 Comments so far

  1. Athol Kay July 14th, 2007 12:49 pm

    “When average market times are 60 days, what would possibly lead one to believe that a 14-day market time is cause for a freak-out moment?”

    Here’s the rationale. When a house comes to market, all the serious ready to buy buyers get spammed emails from their realtor/MLS etc that something came on the market that they might like. People go look at the house online and either get a showing or don’t.

    NAR tells us that Internet buyers spend just two weeks actively looking for homes. So the serious buyers willing and able to make an offer generally only work in a two week window of serious looking.

    So the theory goes that if a house comes to market, and doesn’t get decent interest and/or offer inside the first two weeks, that the serious buyers have passed on the property. Pricing usually being the sticking point.

    So you promptly “reposition the price in the marketplace” hoping to snag the serious buyers before they buy something different. The worry being that if you miss the first batch of buyers, that you have to wait for more ready to buy buyers to develop. Which could be a while.

    It’s not meant to be a freak out slash and burn on the price, but a meaningful drop to generate interest. Specially in a declining market the intent is to get the house sold as soon as possible rather than taking a bunch of chicken shit reductions and riding the market all the way to the bottom.

    Oh….

    And this was a good post Kris. Just thought I’d respond to the two week thing. It’s been drummed into me from a couple trainers I’ve been too.

    -Athol

  2. Chuchundra July 14th, 2007 2:30 pm

    I wish there were more of those “slam it home” agents out by me. Mostly what I see are overpriced houses, some ridiculously so, and agents who seem to think that buyers can be bluffed or fooled into biting on a bad price.

    The agents you criticize are doing what they’re paid to do, selling their client’s house. If I were an agent, I’d tell my client that we want to do whatever we can to sell before September, because once the fall hits, a lot of people who can’t sit on their house anymore are going to do just that. There’s going to be a rush to the exits and anyone still in the game is going to run the risk of getting trampled.

    That’s the choice, give a discount, sell now and maybe leave a little money on the table or wait on your price and hope that somebody comes along who wants your house badly enough to pay it.

    There’s a lot of whistling past the graveyard these days from Real Estate pros. Your comment about REOs and how those comps “can be explained” is a perfect example. As a buyer, I don’t care how you “explain” those comps. If these distressed properties are on the market and I can buy one for significantly less than the house you’re selling, no explanation you can provide is going to make me buy your house.

    And make no mistake, there’s going to be a lot of those properties on the market in the next six months to a year.

  3. The Feed Bag July 14th, 2007 3:55 pm

    […] Kris Berg ponders how much of an effect crappy agents have in a falling market. I’m in mild disagreement with Kris on some of this as you can see in the comments at Fear Factor – Who Makes a Real Estate Market?   Hopefully this post doesn’t get lost on the weekend. Required Reading. […]

  4. This Old Code July 14th, 2007 5:05 pm

    Are Real Estate Agents partially to blame for the depreciation of real estate?…

  5. Steve Berg July 14th, 2007 6:26 pm

    Athol and Chuchunga – I’ll start by saying (again) that Kris needs no defense, particularly from me. However, it’s worth clarifying a few things. The essence of her message was not to overprice a listing, as many have done. Nor was it to not sell a listing in two weeks if the price is right. What she is describing is the delicate balance in pricing that a true professional recognizes. If you know what a home should sell for, you need to stick to your guns for more than just two weeks. In no way does that suggest riding the market down. To the contrary, it shows the huevo’s that Kris suggested is lacking from too many agents who either don’t have the experience or are too thin in their financial state to properly carry the listing and market it the way it should be.

    Suggesting that a seller should bail and leave potential thousands of $$ (or worse 10’s of thousands) on the table because September is nearing just doesn’t hack it, if you’re a pro. That’s just taking the easy way out. Last year in our little market we had 158 active listings at the end of July. By the end of January, the active listings had shrunk to 69. That’s a boat load of sales during the so-called holiday season.

    Too many agents have forgotten that 6 months (or more) used to be a “normal” market time in many cities. In San Diego in the early ’90’s, 9 months was not abnormal. The point is, if you know your market, including the current trend direction and you price your listings accordingly, it will sell. But you must have the patience and the financial resources to back your confidence. Sadly, we are now seeing too many blatant examples of agents just trying to collect a paycheck by bailing on their pricing too soon and in a big way and at the considerable expense of their clients, who placed their trust in them. And, yes at the expense of the overall market, as well.

  6. Robert Kerr July 14th, 2007 7:15 pm

    Kris, you call it fear but a lot of people think that this downturn has quite a few more years left before the market turns back upward.

    As the realtor, you’re risking nothing. If the house doesn’t sell this year, you won’t be paying the mortgage or the property tax bills.

    If you think a house is underpriced by $100K, why not buy it and sell it for what it’s really worth? Put your money in the fire, walk a mile in the seller’s shoes.

  7. Robert Kerr July 14th, 2007 7:23 pm

    By the end of January, the active listings had shrunk to 69. That’s a boat load of sales during the so-called holiday season.

    Sales? Or withdrawals? Show the monthly sales and inventory figures from October to March.

  8. Brian Brady July 14th, 2007 9:18 pm

    Question for the Bergs. Is it possible that because of the meteoric rise in prices that the stakes have changed? Perhaps the “normal” market time has shrunk because of those high stakes?

    In the securities biz, they had to “mark to the market” daily which increased volatilty. Could 4S Ranch be up 12% one month, down 18% another, and back up 8% the third because of the leverage involved? Leverage tends to induce panic and exuberance.

  9. Phil Hoover July 14th, 2007 10:36 pm

    Real estate is an extremely simple business with a very simple business model:
    1) Find motivated clients
    2) Show up (on time)
    3) Tell the truth
    4) Return phone calls and e-mails
    5) Let the clients figure out what they want to do!
    If you have a good client, you don’t have to talk them into doing anything, including pricing their home to sell.

  10. Aaron Dickinson - Edina Realty MN July 14th, 2007 11:05 pm

    There may be other reasons that a home has a dramatic price drop right away… maybe the seller needs to move quickly due to relocation, another purchase, etc. Further, maybe the agents that did show it thought it was overpriced!

  11. The Feed Bad - Refried and Served Again July 15th, 2007 7:14 am

    […] Kris Berg ponders how much of an effect crappy agents have in a falling market. I’m in mild disagreement with Kris on some of this as you can see in the comments at Fear Factor – Who Makes a Real Estate Market?   Hopefully this post doesn’t get lost on the weekend. […]

  12. Kris Berg July 15th, 2007 8:32 am

    Whoa Nelly! That will be the last time I post and run. For the record, while my b-hiney was being handed to me on a platter, I didn’t go into hiding – I was not-so coincidentally off getting signatures yesterday on one of those “average” listings (actually, below average in market time) where patience paid off. Now I’m back to face the friendly fire.

    >So the theory goes that if a house comes to market, and doesn’t get decent interest and/or offer inside the first two weeks, that the serious buyers have passed on the property. Pricing usually being the sticking point.

    Yes and no, Sock Man. I am well aware of the two-week rule, or rather the “early in the listing process” rule. And I do not disagree. My issue here was not with over-priced listings; there are admittedly plenty of those. My issue was with underpriced homes, and I see more than a few of those in my neck of the woods, a reaction to mass hysteria, ignorance of one’s market, or shear timidity on the part of the agent. Sock – Do you remember what the mid-90’s were like? Six months was a not unusual market time, and for many, six months wasn’t enough. The two week rule was more of a two month (or more) rule. Absent a sense of urgency on the part of the buyer pool, buyers truly enamored of a home would spend a month just thinking about it before pulling the trigger, and those days are upon us again.

    I emphatically disagree that after two weeks today, serious buyers have “passed” on a property. Five years ago, we had a single day where listings in Scripps Ranch, a community of 8000 single-family homes, totaled 8 – Yes, 8! The two-week rule was a two-hour rule then. Buyers did not have the luxury of time, and there did not exist a true inventory of choices to distract them from the decision process. The process went something like this: See home, buy home. In those days, I literally wrote a dozen offers on the hood of my idling car. Time is of the essence indeed.

    Today, in this same community, buyers have choices, about 20 times the choices. The process now involves: See home, like home, see 120 other homes, see home again, go on family vacation, see home again, think about it some more, write agressive offer, spend a week or more negotiating price. If the seller stands their ground, the entire process is repeated and, often, with the same buyer, several weeks later.

    >As the realtor, you’re risking nothing. If the house doesn’t sell this year, you won’t be paying the mortgage or the property tax bills.

    Robert, several thoughts here. As the Realtor, I have enormous risk. I risk my paycheck, of course, and my marketing dollar and my time, but I also risk my reputation. And I do not want to leave the angry mob here with the impression that I ever play with house money. Many sellers have an inflated sense of worth, for sure, and that has been the subject of many other posts. Yet many more sellers look to us for honest price opinion and list price strategy. They truly don’t know their home’s value and rely on us to deliver this information and the results. For these clients who are truly trusting me with their money, agressive and honest advise born from experience, market knowledge and confidence (rather than a need for instant gratification) is what I owe them. Make no mistake about it – I am human, and I am doing this for the paycheck, but I am willing to invest the time and energy in ensuring that their paycheck is maximized. Oh, and its goofy to suggest that I or any agent would be “agressive” (for lack of a better word) to the extent that we jeopardize both. Not only would we never get another listing if we routinely blew our client’s sales, but we wouldn’t eat.

    >There may be other reasons that a home has a dramatic price drop right away… maybe the seller needs to move quickly due to relocation, another purchase, etc. Further, maybe the agents that did show it thought it was overpriced!

    Aaron- Yeah, that. And I will concede that we must understand each of our client’s unique circumstances and objectives, which will sometimes result in a lower list price than we would have liked. I have got one of those right now. The seller asked two questions – What is it worth? and Where should we price it to move it in two weeks? Different answers, and she opted for the lower price. That was two weeks ago, and I have a serious offer coming in today, yet I remain firm in my resolve that a higher price was achievable given the luxury of time. She made an informed decision, and “informed” is the operative.

    >Let the clients figure out what they want to do!

    Phil, of course that is what we do. But they can only decide what they want to do when they are advised properly. Managing expectations is becoming such a huge part of the listing process now. It doesn’t matter how often I tell a seller that they need to prepare themselves for 60 days on the market (every time), I invariable get a call four days into the listing wondering why they haven’t sold. This “give it time” discussion has to happen continually.

    Also, Phil, I would offer that real estate is not so simple as your recipe. Add to the ingredients: Know every competing listing on the market, sit on the “hot sheet” so that you are always current, be well-versed in local and broader market trends, understand the buyer mentality du jour, and communicate with your clients often to ensure that when they do “figure out what they want to do”, it is based on a complete grasp of the foregoing information.

    The bottom line, and the crux of my argument, is that selling a home is no longer an “event”; it is a “process”. At some compelling price, it can be an event, but I see too many agents not giving their clients the choice.

    I am sitting an open house at 1:00 today, but I am free this morning if you want to yell at me some more. :)

  13. Sock Puppet July 15th, 2007 9:13 am

    LOL Kris I’m not yelling. I do think the market responds a lot faster today than it did even a couple years ago. In the mid 90’s it would have taken months as a buyer to see all the properties in a price/area. Today buyers just view them all online in a day or so, and then start seeing their short list.

    The two week viewing of homes by Internet buyers as opposed to seven weeks for non Internet buyers are NAR figures. So I think the market does move faster now than it ever did. Todays 2 months being somewhat equal to 7 months “back in the day”.

    I’m not in heavy disagreement with you on this post either Kris. Pricing wildy high or low isn’t good for the seller. Just covered the two week “rule” as it got hammered into us here in Connecticut.

  14. Jonathan Dalton July 15th, 2007 9:30 am

    >If you know what a home should sell for, you need to stick to your guns for more than just two weeks.

    It’s not my decision to make, Steve. If one of my sellers calls and tells me “I need to sell yesterday” and wants to drop the price, we’re going to drop the price.

    Some of the price reductions may be the result of agents either pricing incorrectly at first or panicking down the line. But some also are the result of sellers who do not have the patience to sell for maximum dollar, who just want to get out the door.

    Not all are foreclosures … many are corporate relos who either have two mortgages or a split family and in either case just want to sell as fast as they can.

  15. Steve Berg July 15th, 2007 10:23 am

    Jonathan- Agreed! We are advisors and consultants. We always remind our clients that they are the boss and that ultimately the decision is theirs. However, the point I/we are trying to make is based upon knowledge in our local market, which, I am assuming may apply elsewhere. For example, we know of a couple of agents, whose listings and, ultimately their sales are consistently the lowest within our community. These list/sale prices are not just $10,000 below, but $20,000-$40,000, or more, below market. We have a hard time believing it’s just the clients who are in distressed situations. of course, I could be wrong.

  16. Chuchundra July 15th, 2007 2:33 pm

    How many points is that 20-40K for the average house in your area? Around these parts, that’s in the ball park of five percent or so. I’m pretty sure that if I went to any of the homes that have been languishing on the market here for several months or more and offered a deal at five percent off, I’d get plenty of takers.

    I’m not interested in average DOM. What I want to know is, what’s the median DOM for listings in MLS and what’s the median DOM for listings that have actually sold in the past three to six months. Moreover, what are those numbers for your listings as compared to the discounters. How much time are they saving their clients?

    Even if you don’t believe the apocalypse is nigh, home values certainly aren’t going UP any time soon and the longer a house stays on the market, the more it is going to cost the owner in both money and stress. How many points is a month or two off the market time worth, even if the owner isn’t distressed?

  17. Jonathan Dalton July 15th, 2007 5:54 pm

    It always can be a combination. Finding the right price is a squishy thing, even if you do know the market like the back of your hand.

    One agent prices a home at X. A second agent prices a substantially identical home at X minus 10%. Home number two sells in two weeks, home a languishes – even more so now that home two drove the comp down.

    Still, home number two is sold. Is that necessarily wrong? Or is the fact someone was willing to pay X minus 10% a sign of where the market truly is (or is going?)

    Some of the more successful agents here in the Valley always seem to have the listings on the bleeding edge of the market.

  18. […] Equity harvesting is another principle promoted in Missed Fortune. It is recommended because home equity fails the litmus test of sound investing. It is illiquid, volatile, and it has absolutely no return. Equity harvesting protects property owners from volatility. Kris Berg describes the challenges experienced Realtors face with panic selling, induced by illiquid property owners and inexperienced sellers’ agents. An equity harvesting strategy, invested in a side bucket to provide liquidity, can mitigate that risk. Mr. Clements directly attacks that principle as being a fee-driven recommendation and misapplies a disclosure offered by the NASD in 2004. […]

  19. […] Kris Berg did a fantastic job is summing up what it takes to perform in the current “slow” market. What does it take for an agent to successfully represent a seller today? Hard work, time (a lot), money (a boatload), and patience. […]

  20. […] This is a question we receive from just about any homeowner interested in selling, especially with our current market conditions. And I just spent some time reading a good discussion on the same subject by a group of Realtors. […]

  21. Bob August 2nd, 2007 4:51 pm

    “though the numbers have varied, these distress sales have existed in all past markets. The resulting “comps” can be easily explained.”

    As an agent who went through a market like this in the 90s,represented builders, lenders and more than my fair share of short sales, I can tell you that the resulting “comps” are not going to be as easily explained as you suggest. They weren’t then and they won’t be in the coming months.

  22. […] Berg did a fantastic job is summing up what it takes to perform in the current “slow” market. What does it take for an agent to successfully represent a […]