Chapter 11
IN THIS CHAPTER
Understanding house-pricing methods
Using buyer enticements to help you sell and avoiding gimmicks
Figuring out why your house is still on the market
If you really want to be a successful seller, think like a buyer. You probably didn’t buy the first house you looked at. Few folks do. On the contrary, most people spend months industriously inspecting many houses on the market. To avoid overpaying for the home they ultimately purchase, buyers are forced to become experts on property values.
It’s a free country. You can ask any price you want for your house. But your house won’t sell until you find a buyer who agrees that it’s worth the price you’re willing to accept. Smart sellers know that although only one person sets a price, two people — a seller and a buyer — make a sale.
Adverse factors outside your control (such as a flood of houses on the market, high mortgage interest rates, or dismal consumer confidence) may negatively affect your sale price. Even so, you don’t have to passively let the real estate gods crush you. This chapter offers proven ideas you can use to create demand for your house no matter how poor prevailing market conditions are.
Chapter 10 explains how to use the asking prices and sale prices of comps (houses comparable to your house) to factually determine your house’s value. This information puts you light-years ahead of sellers who either don’t know about using comps or, worse yet, choose to ignore comps when pricing property.
You can pick a price for your house in a hundred different ways — visit an astrologer, poll your friends for their guesses about its worth, roll dice, pay for a professional appraisal, grab a number out of your hat, interview dozens of real estate agents until you find one with a suitably elevated opinion of your house’s value, and so on. In the final analysis, however, they’re all variations of the two pricing methods we discuss in the following sections.
The consequences of pulling an unsubstantiated asking price out of the air are unacceptable for a smart seller. You may undervalue your house and risk leaving money on the table when you sell. Or, more likely, you may overprice your house, which results in an exhaustingly slow marketing process that ultimately lowers your sale price. Houses marketed by unrealistic sellers usually go through the following four distinct pricing phases prior to sale:
If the four-phase pricing plan is a flop, what’s your alternative? We’re glad you asked. The smart way to sell your property is the pleasure-pleasure-panic pricing method. You can sell your house quickly and get the highest possible price by using this method. The secret of success is establishing a realistic asking price for your house when you first place it on the market.
Here’s how the pleasure-pleasure-panic pricing method works — Milt and Judy have spent the last three months looking at houses on the market in their price range. They’re educated buyers; they know how to distinguish between a well-priced house and an OPT (overpriced turkey).
Judy and Milt nearly bought a great house a couple of months ago. It had all the features they wanted and was fairly priced, to boot. However, Milt didn’t realize how well priced it was because he’d just started the education process. While Milt was haggling over the price and terms of sale, the seller accepted a better offer. Judy still blames Milt for losing their dream house.
They’re spending today the same way they’ve spent the previous 11 Sundays, touring what seems like an endless series of newly listed OPTs with their agent. Then Judy and Milt trudge into your first open house and pleasure-pleasure-panic kicks into gear.
Panic: Judy and Milt see another couple entering your house. They’ve seen these folks at many other open houses during the past couple of months. That familiarity isn’t a coincidence. The other couple obviously wants to buy a house in the same neighborhood and price range.
Judy and Milt stare at each other in horror. If they love your house and know it’s well priced, so will the other couple. Their deodorants fail when they realize that if they don’t act quickly, the other couple will snap up the house. Milt tells their agent to write up a full-asking-price offer. Judy kicks Milt in the shin and instructs the agent to go $10,000 above your asking price just to be safe. Milt agrees. He doesn’t want to be a two-time loser.
That scenario explains how pleasure-pleasure-panic pricing creates a sellers’ market even in the midst of a buyers’ market. This approach puts intense pressure on buyers to perform quickly.
Don’t be surprised if you get several purchase offers, including some that are equal to or more than full asking price, as soon as your house hits the market — if your house is priced right. After your property has been given broad, immediate market exposure, spirited competition forces buyers to pay top dollar for your house. This method works almost every time. (And, by the way, we cover exactly how to handle multiple purchase offers in Chapter 14.)
Put yourself in the buyer’s shoes for a moment and imagine that you’re buying, not selling, your house. If you’re like most people, one of the first things you do is decide how much you want to spend. For example, you set your upper limit of affordability at $250,000. If you’re working with a real estate agent, you probably tell the agent, “I don’t want to spend more than $250,000,” or “Don’t show me anything that costs more than $250,000.” Why waste time looking at property you can’t afford to buy?
Buyers use price limits, called quantums, to simplify house hunting. Pricing quantums are initially expressed in nice, round, easy-to-work-with numbers, such as $100,000 and $50,000, and then fine-tuned to $25,000 and $10,000 quantums.
Think of buyers as fish swimming in an ocean of houses for sale. At any given time, huge schools of buyer-fish usually are swimming in this sea. However, the buyer-fish swim at many different levels; one school swims at the $150,000-to-$200,000 price quantum level, another swims at the $200,000-to-$250,000 price quantum level, and so on.
Buyer-fish from higher-price quantums occasionally swim down to a lower quantum in their searches for a house. However, buyer-fish rarely swim up to a higher quantum (if they establish realistic affordability limits). When a buyer-fish can’t afford to swim up, the price must drop down to the buyer-fish’s price quantum for the house to sell.
Follow these steps to use price quantums to hone your initial asking price to razor sharp, pleasure-pleasure-panic perfection:
Determine your house’s market value within the appropriate $100,000 quantum, unless you happen to live in an area where no house ever has sold for more than $99,999.99.
Use the comparable market analysis (CMA) method described in Chapter 10 to define a general price range for your property. For example, if a CMA shows that five houses similar to yours in size, age, condition, and location sold within the past six months for $310,000 to $335,000, your house clearly belongs in the $300,000 to $400,000 quantum. So far, so easy.
Adjust the price within the correct $50,000 quantum.
Continuing with the same example, decide whether your asking price should be over or under $350,000. Because not one of the comps sold for more than $335,000, your price belongs in the $300,000 to $350,000 quantum. As problems go, still no head-scratcher.
Fine-tune your price to the closest $25,000 quantum.
The more accurate your pricing, the more exacting your scrutiny. Deciding whether the price should be in the $300,000 to $325,000 quantum or the $325,000 to $350,000 quantum requires careful analysis. If, for example, four of the five comps sold between $310,000 and $325,000 and the fifth went for $335,000, you’d be wise keeping the asking price under $325,000.
Ultrafine-tune your price to the nearest $10,000 quantum.
This is the moment of truth. Now you must decide on the precise point between $310,000 and $325,000 to put your price. If the actual prices of comparable houses that sold under $325,000 were $310,000, $317,500, $319,500, and $322,000, three out of four sales point toward an asking price under $320,000.
If you seriously want to sell quickly for top dollar, don’t put your asking price in the next higher quantum to give yourself “room to negotiate.” Here’s why:
Computers: All agents use computers tied to their multiple listing service’s (MLS) database to perform property searches. For example, a buyer decides on a neighborhood and asks the agent for a list of homes with the following features: three bedrooms, two-and-a-half baths, a two-car garage, and an asking price of $250,000 or less. Per the agent’s request, the MLS computer spews out listings that meet these conditions. The computer isn’t smart enough to make allowances for properties with negotiating room in their prices. If your house is listed at $269,500 or even $251,500, it won’t be on the printout, and buyers won’t know it exists.
True, some agents show buyers higher-priced houses they think will sell in the buyers’ price range because the asking prices are “soft.” Smart agents, however, know that buyers are deeply concerned about being manipulated into purchasing a more costly house. These agents won’t show buyers property over the stated price limit until the buyers have seen every house on the market in their specified price range and request to see more expensive homes.
Less buyer exposure to your house means less buyer competition for it. Less competition translates into a longer time on the market — and usually a lower sale price, to boot. High sale prices come from spirited buyer competition.
Conditioning: Whether people are buying houses or blouses, everyone loves a bargain. Believe it or not, $9.95 advertising is mighty effective. A nickel ain’t much, but most folks are well-conditioned to think that $9.95 is much cheaper than $10. Subconsciously, $249,500 is more exciting than $250,000, and $299,950 sounds like a much better deal than $300,000. Don’t try to buck a lifetime of Pavlovian conditioning; smart pricing makes buyers drool.
Don’t price your property to dazzle your pals. You may impress people at a party by telling them you’re asking $300,000 for your house, but that’s a foolish price compared to $299,950. Price your house to sell, not to feed your ego.
In strong real estate markets with many ready, willing, and able buyers clamoring to purchase good houses, property priced near its market value typically sells quickly. You don’t need additional inducements in a red-hot market.
But when the tables are turned, and sellers far outnumber buyers, even pleasure-pleasure-panic pricing may not do the trick (see “Pleasure-pleasure-panic pricing: Fast, top-dollar sales” earlier in this chapter). If that’s the case, you may have to offer buyers additional enticements to make a deal. In a buyers’ market, the key to success is using incentives that help put a sale together instead of fancy gimmicks that tarnish your property and make it harder to sell. This section highlights a few incentives and gimmicks you may encounter when selling your house.
In a really rotten market, you can sweeten the deal by offering buyers money in the form of special financial concessions. One or more of the following incentives may be the key to putting a deal together:
Smart financial incentives make deals happen. Improper inducements (which we call gimmicks because that’s what they are) waste time and usually result in lower sale prices. Impractical sellers sometimes resort to subterfuge in a futile attempt to disguise how ridiculously overpriced their property actually is. Instead of reducing the asking price to a realistic level, they try in vain to enhance their house’s value with gimmicks that fall into one of the following three categories:
Buyer baubles: “Buy our house, and we’ll give you a free week in Paris for two (or a diamond ring, a brand new motorcycle, whatever) to sweeten the deal.” Occasionally, sellers make this type of offer in phase one or two of four-phase pricing (explained earlier in this chapter in the section “Four-phase pricing: Prevalent but ineffective”). Sellers erroneously assume that buyers will be so dazzled by the “free” goodies that they won’t notice the house’s asking price is outrageously high.
Buyers usually know that the asking price includes a gimmick’s cost. They aren’t about to add the price of a trip to Paris, for example, into their 30-year mortgage. Opportunities to fly now and pay forever won’t sell a house. Neither will drive-now-and-pay-forever deals, or wear-now-and-pay forever gimmicks. Buyers aren’t stupid.
Contests: As the California real estate market hit bottom in the mid 1990s, a few desperate sellers decided that, if they couldn’t sell their houses, they would give them away in contests. Owners of a $150,000 house, for example, put an ad in the local paper inviting folks who wanted to enter their contest to write a 250-word essay explaining why they wanted to live in the house. Each contestant had to submit a $100 money-order entry fee with the essay. If 1,500 people entered the contest at $100 a pop, the property owners got their asking price. If, however, not enough people entered to make the contest worthwhile, owners reserved the right to cancel the contest and return all entry fees.
At least a dozen different California property owners tried variations of the contest gimmick. The ploy was a resounding flop. These contests uniformly drew far too little attention from contestants and far too much attention from state law enforcement personnel concerned about possible violation of California’s antigambling statutes. The name of the game is selling your house, not going to jail!
In a perfect world, your house will sell quickly for top dollar if you faithfully follow our sage advice. By now, however, you’ve probably discovered that the world is frequently far from perfect, and things don’t always go according to plan.
What if you can’t sell your house even though you’ve done everything we recommend? Did you waste the money you paid for this book? Should you abandon all hope of making a sale? Is it the end of the world as we know it? No. This section can help you understand why no one may have made an acceptable offer for your house.
The San Francisco Chronicle ran a front-page story about a Bay Area house that was sliding down a muddy ridge that had been weakened by torrential rains. Battered by a series of severe storms, the house was slowly cracking in half. Mother Nature was putting the finishing touches on a remodeling job the ill-fated homeowner had started only a few months earlier.
“Can’t,” used in the context of selling a house, means the property is impossible to sell. Unlike most people who claim they can’t sell their houses, the poor guy who owned this property really couldn’t sell it. There’s no market for unintentional mobile homes.
Fortunately, the vast majority of homeowners who claim they “can’t” sell their houses are exaggerating. They aren’t disaster victims whose property values have been abruptly reduced to zero. Usually, plenty of purchasers are willing to buy their houses, and many lenders are ready to make loans to those buyers.
If nothing is physically wrong with their properties, what’s the problem? Most of the time, the predicament is because of overpricing camouflaged by denial. A more accurate statement of the situation, for most would-be house sellers, is “We are unwilling to accept the price the market tells us our house is currently worth.”
These homeowners can sell. They simply won’t sell. As long as you choose not to take the amount that buyers will pay for your house, it will continue to languish unsold on the market. Saying you can’t sell your house is a self-fulfilling prophecy.
Sooner or later, all buyers hear that the three most important things to consider when buying a home are location, location, location. Because you’ve been through the purchasing process, you know this cliché is a gross oversimplification. Here are the three factors buyers actually consider when selecting a home:
If you’re having trouble selling your house, look at it in the same way buyers do. What can you change to bring your house’s price in line with a buyer’s perception of its value? Analyze your property with these three crucial factors in mind:
When you price property correctly, it sells. Conversely, even if your property is in exquisite condition and actively marketed (open houses, classified ads, MLS, website, and so on, as we describe in Chapters 12 and 13), a dearth of offers indicates it’s overpriced. The warning signs of overpricing may include any or all of the following:
No second showings: Well priced or not, agents and buyers rush to see new listings. Watch out for a precipitous decline in showings after the initial flurry of activity when your house first hits the market. If nobody returns for a second look, you have a problem.
Many showings, but no offers: Switch hats — suppose you’re a buyer. Your agent shows you a three-bedroom, two-bath house for $249,500. Then the agent takes you to a newer four-bedroom, three-bath home just two blocks away — with the same asking price. The agent doesn’t have to say anything; the difference between price and value is starkly obvious. The first house helps sell the second one.
Your listing agent (if you’re selling through a real estate agent) should help other agents route house tours by pointing out overpriced properties the agents can show their buyers before bringing them to your well-priced house. Successful agents show buyers OPTs (overpriced turkeys) to sell well-priced houses.
During Ray’s 22 years as an active real estate broker, he managed hundreds of real estate agents and participated directly or indirectly in thousands of sales. Having studied the correlation between asking prices and sale prices through all those years, he made an amazing discovery: Good market or bad, more than 97 percent of all property sells within 10 percent of its final asking price.
Ray’s observation doesn’t mean that every house starts out with the correct asking price — quite the contrary. Many properties go through a needless series of ineffective price reductions before ultimately arriving at the correct asking price. However, after owners finally reduce their houses’ asking prices to within 10 percent of FMV, their properties sell.
If you still haven’t gotten an offer after another six weeks or so of active marketing at the new price, make another 10 percent reduction. You may have been 20 percent or more over FMV when you put your house on the market. Perhaps you’re in a market where prices are declining. If that’s the case, the longer you delay a price cut, the greater the gap between your asking price and actual market value.
Six weeks isn’t carved in stone. In a hot market, three or four weeks may be more than enough time to give your house maximum buyer exposure. In a slower market (such as the long, hot summer when kids are out of school and many buyers and agents take vacations), you may be wise to wait seven or eight weeks before a price cut. Let local market activity be your guide when you time price reductions.
Telling sellers that they must cut their asking price if they want to sell is extremely difficult for agents. Many agents can’t do it. They’re afraid sellers will respond by saying, “This mess is all your fault. We relied on your advice to set the price. A halfway competent agent could’ve sold our magnificent house months ago. We don’t need a price cut; we need a new agent. Get out of our house. Never darken our doorway again. We rue the day we ever met you. Curse you and all your offspring forevermore.” Or words to that effect.
Firing the agent may be the correct thing to do. An agent who intentionally overstates your house’s value to get the listing deserves to be dumped. By the same token, a likable but inept agent is utterly worthless. You need a good agent, not a fraud or a friendly fool.
Sometimes, however, dumping your agent is like throwing the baby out with the bath water. Perhaps your house is tough to price because it’s unique or because no recent comparable sales have occurred in the neighborhood. Maybe the local economy took a nosedive right after your house went on the market. Venting your frustration on the agent for telling the truth won’t get your house sold.