As the real estate market begins its tailspin, home buyers and sellers alike need to figure out how to play the real estate game. The time has passed for simply taking the lowest cost provider of real estate services. Realtors on both sides of the transaction must now prove their worth. In a down market, which many buyers and sellers now face, market knowledge and savvy negotiating skills champion the day.
The Sell Side
The most obvious need for good representation is on the sell side of real estate transactions. Realtors, who simply look at the MLS and price a home at the market average, will become serious liabilities to their clients. There is nothing worse for a seller than trailing a market decline.
When listing a home, there should not be a time where sellers are forced to reduce their price. This suggests either the seller had their sights set too high or that the real estate agent in charge of the listing was out of touch with the market. Regardless of the situation, every month a home stays on the market cost the seller pays holding costs. This could be additional mortgage payments, lower market demand, or simply the hassle of postponing moving plans.
Furthermore, in a declining market a faster sell means experiencing less of a price decline and a higher long run purchase price. When my wife and I wanted to exit our Detroit properties, we looked at the market and priced our house about 2.5% below the market average. This strategy was important because our house looked better than the market average. Initially, it looked like we could have gotten more, but it was clear that the market was declining fast. Even with our reduced price, our home languished on the market for almost two months. Luckily, we were able to get very close to our asking price when our first (and only) offer came in.
The flip side of that story is the numerous houses that stayed on the market for years! This is no exaggeration. There were houses that were still on the market a full two years after we sold our house. The problem with the price reduction strategy is that it always lags the market. By the time a seller reduces their price other houses have come on the market at even lower prices. In addition, the listing becomes stale keeping potential buyers from even seeing an outrageously priced home.
A good real estate agent helps sellers get past the psychological hurdles of pricing their homes. In order to do this they need to be able to clearly explain the market pricing trend and set clear expectations in the eyes of their consumer. Simply going with a real estate agent who says they can get the most for a house will leave buyers holding their property for a very long time.
Time pressure adds an additional wrinkle to this equation. In a down market even the best pricing strategy may not be enough to achieve a sales goal, but a sure fire way not to succeed is to price at the market or, God forbid, above the market.
The Buy Side
Most home buyers have no idea how to negotiate the price of a home. Unfortunately many buy side realtors don’t either. Having a realtor that understands where the market is going and how to present a low price with style and grace is imperative. In down markets sellers are excited to hear any offers. Offers that might normally offend now become at least slight considerations.
Hiring a realtor with a good reputation, strong knowledge of the market, and solid negotiating skills is a must. This does not mean hire the “used car salesman” of real estate agents. Even though the ball is in the buyer’s court, a low offer is far more likely to be accepted when presented factually and fairly. Arbitrary low bids will be far less successful.
Do not forget about the economics of the situation as well. Realtors benefit financially from a higher price, so really challenge a realtor to make sure the best price is being offered. Most realtors balk at the mention of this conflict of interests, but it is very real and many unsuspecting buyers pay too much for homes.
Both Sides
A good real estate agent is always worth their weight in gold. During up markets anyone can sell a house for top dollar, but during down markets the wheat separates from the chaff. Of course no matter how good the realtor is, if a buyer or seller chooses to go against their judgment they have no one to blame but themselves. The time for buyers and sellers to start interviewing agents and asking tough market questions has come. To have inadequate representation in a down market is tantamount to throwing money out of the window.
Tim says:
Wonderful post, Michael. Unfortunately, for many sellers who owe more than the home is worth due to the downward shift in the market or due to serial refinancing, the same agent that sold them the house when all was well is now the purveyor of difficult news: the market is not what it was.
Incidentally, we had a former client who purchased a “flip” home just over a year ago (took them a while to get it done)discuss with my wife the strangeness of why their just listed home didn’t sell over the last two weeks.
July 19, 2007 — 1:49 pm
Chuchundra says:
There’s a flip house I’ve been watching since last year. You can read about it more in depth on my blog, but basically the flipper bought for 412.5K back in September of last year, made some nice renovations (maybe 40K worth, maybe less) and dropped it on the market in October at $575K looking for a big payday. Of course, nobody bought it. It’s a pretty house and nicely renovated, but there are more than a few negatives.
So here he is, over ten months later with no buyer, an empty house and he’s dropping the price ten grand or so every couple months to try and catch a buyer. He just dropped it again to 519K, chasing the market down. He might have sold it for $475K or so if he priced it aggressively at the beginning of spring. Now…who knows?
July 19, 2007 — 4:18 pm
Chris says:
I am seeing two problems:
First lets talk about sellers, most think there property is worth more then it is. That never changes, just the gap between reality and what they want is bigger now.
Buyers are the ones that are driving me nuts! They want to low ball everthing, even homes that are properly priced. Then they wonder why they don’t get it! I said well there were several offers and they sold it for close to asking according to the agent. So don’t low ball the next one or you may lose it. Of course they need to lose at least one home before they bother to listen to you. But even then sometimes they don’t.
July 19, 2007 — 6:45 pm
J. Ferris says:
I absolutely agree with Chris but I do want to note why buyers may be trying to low ball homes. In the past four weeks I’ve successfully guided two buyers into wonderfully beneficial transactions for them: $69,117 off asking price on one and a whopping $91,000 off asking price on a new build in addition to a free deck and we are still negotiating the number on closing costs the builder is willing to contribute. My market isn’t dying and reaching for it’s last breath by any means but there are sellers/builders willing to deal. It’s just a matter of finding those deals. Of course you are still 100% correct that many buyers are simply unrealistic. I dumped a buyer who kept offering $100,000 – $150,000 under what the asking price was on homes. People want to sell but they aren’t going to just keel over for you either. To this day he has still not bought a home. Go figure! 🙂
My advice is to talk with your buyers and explain to them the range they can expect to lop off the price on various types of homes so they have realistic expectations. One of the simple things I’ve learned from Brian Buffini (and it sounds so common sense too but it wasn’t in my common knowledge memory bank) is that YOU are the professional and YOU are the one in control. If your buyers aren’t willing to listen then dump them and move on. Bad buyers are like bad sellers and no matter what you do they will still never be happy.
July 19, 2007 — 8:40 pm
Chris says:
Ahh another Buffini student! He is good, his material has helped me a lot.
There are some good deals out there, it depends on the house. Just this week my buyers wanted to offer $30k less then asking on a house, and asked me if I thought it was a good idea. I said well its only been on the market for three days so…thats probably not going to be accepted…they are asking #350k.
July 20, 2007 — 4:47 pm
J. Ferris says:
The only way to make that work is to have them up their down payment and make their closing date within 30 days of contract. I’ve found sellers go bananas for a buyer who is putting 20% down and ready to close within 30 days but is offering them less than another buyer.
July 22, 2007 — 2:23 pm