Buyers ask me about real estate prices and the question is, “What is a fair price in this market?”  As I show homes to retirees from outside the Sequim area, the concern they have when they find the ideal home is how much to offer.  They don’t want to pay more than they have to, but they also don’t want to write an unreasonably low ball offer that is a waste of time and seriously offends the seller.

Real Estate Prices – Order Out of Chaos

The first point of reference when making an offer is the current listing price.  You may have heard someone regurgitate  a rule, such as, “Homes are selling for 90% of their listed prices, so you never offer the full listing price.”  Oh really!  Suppose a listing price started at a reasonable listing price and was reduced to far below true fair market value for a quick sale?  Or suppose the listing was on the market for two years, and it is now a short sale and being offered at far below FMV?  Suppose it has been reduced to such a steal of a price that there is no doubt several other buyers are going to snap it up?

When it comes to real estate prices, some homes are listed well above a fair market value price (FMV), but others are listed right on target in this current market, and still others have been listed at a garage sale price for the quickest possible sale.  This points out that general rules on offering prices are not applicable for a specific home.  What you need is the full history on a particular home, how long it has been on the market, and an accurate understanding of the true comps in this market.  And watch out for listings that are priced with no differentiation for location.  For example, a home right on the busy freeway should never be listed at the same price as a similar home in a private gorgeous area far from the highway and noise.  If you were going to make an offer on the freeway home, you might offer 80% of the listing price, but the home in the quiet area might deserve a 98% offering price.  There are many variables, and you’ll need to look at all of them to arrive at a fair offering price.  Only then will you be able to place a particular home in the context of current real estate prices.

Real Estate Prices and Reality

I just had a client call me this morning, a client I referred to another Realtor in the Puyallup area.  She asked if his advice to write a full price offer on a home was good, because she isn’t sure about real estate prices right now.  I know this Realtor.  He is one of the most knowledgeable, professional and honest Realtors I have known in 30 years in this business.  He knows the market and he knows how to work for his buyer.  If he says the current listing price is so good the buyer should write a full price offer, there is no doubt in my mind he is right.  In following up on this, I learned this house is a steal at the current reduced listing price, and two other buyers are in the process of drafting offers.

Of course, generally in this market and in light of the chaos in real estate prices, we would expect to write an offer that is significantly less than the listing price, but be careful you don’t get bad advise on how to write your offer.  Rely on a professional who knows the market and has a lifetime of negotiating prices.  Be careful about taking advice from friends.  Remember, while friends mean well, when you are sick, everyone is suddenly a doctor, and when you have a legal issue, everyone is suddenly a lawyer.  We know better.  Right?

Negotiate your specific home based on the relevant data and history for that home and based on real comps, not distant comps.  Real estate prices are all over the map right now, but be sure your offer is the right offer.

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Are home values tumbling?  Fox news reported today that Zillow’s first quarter data suggested that home prices have dropped in the U.S. by 3% in the first three months of 2011.

As they say, “Statistics don’t like–statisticians do.”  In this case, there are many possible interpretations of this data.  But there are a few simple rules to consider when drawing ultimate conclusions from this scant information.

First, this is data collected by one private company, Zillow.  Does it include 100% of all sales across the entire U.S.?  I can guarantee that it does not.  But it may include sufficient data to validate the reduced values.  We don’t really know.

Second, a statistical study must be properly weighted to exclude or adjust data that would or can scew the data.  In this case, the U.S. real estate market is so dramatically different in various regions and states that it is a very general statement to apply one statistical template to all areas.  Perhaps home prices only declined by 1% in your area and 5% in Phoenix.  It’s also very possible that prices stayed the same in your area and dropped by 6% in the foreclosure disaster areas, like Vegas and Phoenix.  Averages on a national level are not very helpful, except to remind us that nationally the real estate market is not sending any signals of recovery yet.

Have home values in Sequim declined by 3% just in the first quarter of 2011?  Not likely.  That would mean that a home at $300,000 has declined by $9,000.  There’s literally  no way to measure that.  I haven’t seen it, and prices just don’t drop automatically here.  There’s also no way to know whether a price decline is the result of a falling market in the first quarter.  A listing price may have dropped by 3%, more or less, but that may be a response to declining prices over the past 24 months.

Statistics like this one published by Zillow can be very misleading.  What does this statistic mean for a buyer or seller in Sequim?  Nothing.  Absolutely nothing.

Every transaction I negotiate for my buyer clients as a buyer’s agent are individually negotiated–one buyer and one seller, each represented by an agent.  Each transaction stands on its own.  Each seller and each buyer have their own motivations and financial considerations.  Each transaction is negotiated on its own merits.  What is happening statistically as an average number around the country in all local markets is interesting but of little negotiating value.

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Clients ask me periodically if they should make certain improvements on their home to make it more sellable.  What I’ve learned from hundreds of buyers who have looked at thousands of homes is that buyers generally do not care if some minor improvements are made.  In other words, it does not impact their decision to buy a home.  Now, if you have a major visual problem, such as a hole in the sheetrock in the hallway or a hole in the living room ceiling, yes it will make a difference to buyers.  A light fixture that is hanging at an angle in the dining room should be fixed.

But if you are considering a major remodel of the bathroom at a cost of $3,500, you will not get that money back from the buyer.  Will it make your home more sellable?  Probably not, unless the bathroom was such an ugly disaster that it would gross a buyer out.  The general rule is that whatever money you put into your home to get it sold is money you will not get back.  If it helps sell the house sooner, then do it, but only if it is cosmetic and doesn’t cost much money.

If your home is not the right home for a buyer from out of state, some improvements, other than minor cosmetic improvements, are not going to get them to sign an offer.  If your home is the right home, the right floor plan, the right location, and within their budget, not spending money on improvements is not going to push them away.

You can see that these same rules apply to the methodology for professional appraisers.  They do not add value to a home for the kinds of improvements I’m talking about.  Want to see exactly what goes into a lender’s appraisal?  Here are the rules on values and appraisals.

For Fannie Mae, Click here

For Freddie Mac, Click here

For FHA, Click here

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Question:  I found your website doing a search for “for sale by owner” information. I am considering the pros and cons of listing this myself, or enlisting a broker to help me out.  I am impressed by the amount of information you provide for free.

Although my property is in Kitsap County, I am writing to ask your advice regarding setting a price that is well above the current market value.  The reasons I am considering this are:

1. I am in no hurry for a sale. If it takes the market improving to the point that my asking price is more obtainable, I may be willing to wait for that.

2. Property is 1+ acre in a location that would be perfect for a small business owner. we are on a busy road, and although right now it is zoned residential (the home is manufactured), there are several businesses very nearby. It is only a matter of time before this property is used commercially as well.

Thank you for your time and thank you also for being so generous with the information on your website.

Joe [not real name]

Answer:

One of my pet peeves is overpriced real estate. An overpriced home on the market can actually cost a seller a lot of money. A home only sells for fair market value (FMV), not more than buyers are willing to pay. That’s what FMV is–what a ready, willing, and able buyer is willing to pay for a home. Yet we still see both FSBO’s and agent listings on the market above FMV, and some are substantially above FMV.

If your home is for sale at a price above FMV, you can end up selling it for even less than FMV down the road. I’ve been preaching this for almost 20 years now, but finally there is authoritative proof. [See my earlier blogs on this: Save $10,000 Buying and Port Angeles and Sequim Overpriced Listings]

The proof is in the Sunday, October 28, 2007 issue of the Seattle Times at page E7:

“Real estate agents often warn sellers about the danger of overpricing a house. Now they have evidence to show skeptical clients: research by Jeffrey Otteau, a New Jersey appraiser. He found that in a market where prices are declining, sellers who ‘test the market’ with a high price usually end up with a lower price than those who price realistically.”

The article points out that a house that is priced right for the current market sells within a reasonable time, but one that is overpriced will sit on the market while the market prices decline, and when the home does finally sell, it sells for less than the FMV of that home when it was first on the market.

The statistical proof showed that in a market where a home that was listed for $599,900 (FMV) and which sold for $599,000 (almost full listed price within 30 days), a comparable house that was overpriced at $634,900 actually sold for $585,000 months later when the market had declined even a little more.

There’s another solid reason not to overprice your home.  When a home first goes into the MLS and is advertised at that price, you have an opportunity to reach a small percentage of buyers who may be interested in your home, can actually afford it, and who are ready to do so now.  An overpriced home may cause them to look elsewhere.  And this is the clincher, buyers rarely come back to look at the same home again even after you’ve reduced the price.  That’s true.  Not only will most buyers not come back to see if you’ve reduced the price in the months to follow, but by the time you actually do reduce the price in the MLS, those original buyers are long gone, most having purchased a home that was not overpriced.  So as a practical matter, you have one shot at each buyer.

Sometimes a seller who wants to gamble by asking far more than his home is worth will say, “I’m in no hurry to sell.  If it doesn’t sell, I can hang on to it until prices go back up.”  If that’s your sentiment, then don’t waste time and effort listing it for sale when you know it won’t sell.  Hoping you will get lucky and find an uninformed buyer who will pay way more for your property than the true FMV is a pipe dream.  Buyers are very intelligent these days, especially with the availability of the powerful tools on the Internet.  If you want more, then don’t list your home until prices actually do appreciate to that level.  Believe me, no one will buy an overpriced home.

This is such an important lesson for homeowners who want to “test the market” with an excessively high price. Don’t do it. You could lose a lot of money by the time you end up selling it for much less in a slower market.

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One of the popular games in Clallam County as well as around the country right now is called, “Musical Chairs With Realtors.”   It’s a game that some sellers of homes and land are playing without realizing the tragic consequences of losing.   Here’s how the game works.

An owner of either a home or vacant land hires a real estate agent to list and sell the property.   The agent wants to list the property at a sellable price, of course, because the agent only earns a commission if he actually sells the property.   The seller is a strong personality.   The seller tells the agent what the property should sell for.   The seller asks the agent his opinion, but everyone in the room knows the seller isn’t really asking:   the seller is telling.

An agent often cannot be certain the seller is wrong, because pricing property is not some kind of mathematical science.   It is partly objective, partly subjective, and timing is everything for the right buyer at the right time and place.   Often an agent is persuaded that a seller’s property could be listed at a price the seller is quite adamant about.   Who knows, the seller could be right.   There are not any recent sales of anything exactly like this home or lot, so it is hard to definitively prove anything to a seller that will persuade him to reduce the initial listing price.   But in so many cases, this agent can testify, as can many other agents, that sellers send strong messages that they are not to be challenged on the price.   There are many ways sellers send this message, and those of us in the business know only too well how this works.

An agent doesn’t want to be rude or offensive, and without specific mathematical proof that the listing price should be lower, it is hard to say anything real intelligent or persuasive to a passionate owner who justifies every which way up one side and down the other why this property should sell at such and such a price.   Sometimes it is just impossible to argue otherwise.   Any agent worth his salt knows that if he argues with his client, he loses.   We don’t argue with our clients.   It would be bad form and unproductive.

So the agent lists the property, but after so many months, usually three to six months, the owner has decided it’s the agent’s fault it hasn’t sold, and it’s time to try an agent that can sell it.   Granted, some sellers don’t blame the agent, but still the result is the same in that they hire another agent.   (Honestly, even though a seller may say he doesn’t blame the agent, he really does, or he wouldn’t be listing with another agent.)

And the game of Musical Chairs With Realtors begins.   The first agent notices that the new listing price with the second agent is way below the price the seller insisted he list it at.   What does the agent think?   The agent is thinking, “Wow!   Why didn’t my client list it with me at that price.   I might have been able to sell it.”   This is an entirely legitimate question.   To this some sellers would immediately reply, “Well, why didn’t you tell me it had to be listed at this lower price.   I would have reduced it and you would still have it listed.”   Not.   Experienced agents try to tell sellers a hundred times that the price may be too high, but many sellers simply refuse to hear it in all the conversations.   They don’t want to hear it, and they direct the conversation to justifying the price each time.

But it gets better!   Wait, there’s more, to parrot the famous commercial.

The second listing agent is soon to be replaced by a third listing agent, only this time at an even lower price.   Oh, this game of musical chairs is such a fun game for all of us. Who benefits?   No one.

The seller is making the job of selling his properties hard for everyone, and he is sabotaging his own goal of getting the properties sold.   The seller is also disrespecting every agent he hires and then dumps.   And worse, with his property on the market so long, he has made his own property less desirable to buyers who no longer see it, even when he keeps reducing the price.

There may be an occasion when it is appropriate to change agents.   Agents come in all different sizes and shapes, so to speak, and education, experience, competence, trustworthiness, and professionalism all play an important part to the discerning seller.   (Note the word “discerning.”)   A seller might find out that his agent is not good at marketing and sales, and with some due diligence find an agent who is.   But in the vast majority of cases from my experience, most sellers are playing musical chairs, rather than doing some deep investigation to find out who is the best.

This game of musical chairs is played all the time, every week in Clallam County and around the country.     Not all sellers are playing this game.   How many are or what percentage are playing is hard to say, but a substantial percentage are playing.   It’s too bad, too, because everyone loses when this game is played, and in this market who can afford to be a loser.

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When homes don’t sell quickly like they did in 2005, many salespeople in the real estate industry resort to gimmicks.   Some homeowners have picked up on these gimmicks thinking that they must work.   Gimmicks don’t sell homes, but real estate agents can testify that gimmicks do get homeowners to sign listing agreements.

Some gimmicks are just plain silly (not to mention expensive), and other gimmicks seem to have some potential, but closer insight by experienced professionals will tell you otherwise.

One of the more ludicrous gimmicks that has spread to a couple of places across the country is the offer of a luxury car to the buyer of an expensive home.   A Phoenix developer mistakenly took the counsel of his real estate advisor and offered a brand new $200,000 Bentley to anyone who purchased one of his multi-million dollar homes.

One of the homes, described as the “Old World European Villa,” is priced just under $5 million and is about 7,800 square feet.   The other, which is called “Tuscan Estate,” is under $4 million and is about 7,500 square feet.   [Read Real Estate Gimmicks to Sell Homes.]

This same idea was picked up again recently by a homeowner in Orlando, Florida.   Jim Benson is offering the buyer of his $699,000 home a vintage 1967 Rolls Royce.   Such gimmicks have never worked, and professional salesmen with experience under their belts will all share that.   Of course, someone will pipe up, “Well, it does get the guy some exposure and that’s promoting the home, right?”   Wrong.   Exposure without a sale is just wasted energy, right?

The goal is to sell the home, not to have gimmicks that the public finds entertaining for a few minutes in the news.   There are some gimmicks, however, that seem to have some promise.   Real estate brokers and agents around the country are coming up with new gimmicks to get listings.

It’s been a tough year for real estate brokers around the country as they struggle to explain (repeatedly) to their listing clients why their homes have not sold.   What many agents are thinking now is that they just need more and more listings.   It used to be that “listings was the name of the game,” and you could list homes and let other agents sell them.   Well, we got away from that, but many agents are thinking that if they have a lot of listings, just maybe some of them will get sold, and the agent can survive in this market to live and sell another day.

One of the gimmicks some agents use around the country is to “bid for listings.”   Homeowners who want to sell and get the highest possible price will most often list with the agent who promises them the highest listing price.   Not very smart of the homeowner (ignorance of the truth is no excuse), but it is especially not very ethical or professional on the part of the agent.   For some agents, the rule is:   Anything to get a listing.

Another gimmick large brokerage companies are toying with (remember, toys are for children), is to call expired listings or FSBO’s, and give them the latest hot sales pitch.   It goes something like this:

Hi, my name is [agent's name] and I’m a real estate consultant (a nice catchy new phrase) and Realtor.   I notice your home listing recently expired, and I’d like to tell you about an exciting new program we at [brokerage name] are offering absolutely free of charge to homeowners like you.   May I tell you about it?   [What homeowner won't say yes at that point.   Nothing to lose, right?]

Great.   We have a very powerful new program to help homeowners like you figure out what you can do to sell your home in this market in a very short time.   It works like this.   We bring six to twelve of our agents to your neighborhood and to your home.   We spend time looking it over and then we discuss it among ourselves–with you present, of course–right there at your home.   We discuss the value of your home, what you have been doing to sell it and at what price.   We discuss the state of the market, what is selling and where and for how much.   We talk about marketing and the latest and most effective techniques to sell a lovely home like yours.   We answer any questions that you have, and then we leave.   No obligation at all.   Of course, I would love to list your home and sell it for you in the next 30 to 90 days, but that would be entirely your decision, and there’s no obligation at all. Does this sound like something you might find helpful?

Wow!   I just drafted that script off the top of my head, but it sounds so good, I might just use it myself.   No, just kidding.   It’s nothing but a gimmick, and you have to think it through to realize that.

Imagine this.   Imagine a nice brokerage company with lots of agents.   The agents are individually struggling, because their listings are not selling in this slow market, the phones are not ringing like they were in 2005, and buyers are not exactly stampeding into the office lately.   To make matters worse, print advertising in newspapers and magazines is not selling real estate either, but it sure is expensive.

As a homeowner you wouldn’t really jump up and down with excitement to hire one of these traditional agents with no ideas and a 20-year old business model that is not all that exciting anymore. So here’s the big question.

Why would you think that putting six to twelve of these same agents in the same room is somehow going to be the catalyst of extraordinarily new and exciting techniques to sell you home?   A group think tank only works if the individuals in the group have something to offer.

Watch this.   Many homeowners who are desperate to sell and have not read this article will list with agents who read this script.   They don’t know it’s just a gimmick, and they’re desperate to try something.

Are homes selling with these gimmicks? The answer is no.   Gimmicks don’t sell homes.   Good marketing and connecting with the right buyer is what sells homes.   That’s why I’ve built the largest Internet brokerage in Sequim and Port Angeles.   The Internet is the single most effective way to sell homes.   Period.   But there is much more to the story about how to effectively price and market a home.

The answer is not group think.   If you have a home in Sequim or Port Angeles you want to sell, call me on my cell at 360-775-5424.   My name is Chuck Marunde.

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