Pricing Property in a Declining Market

[RFM]

1. Do not waste everyone’s time by ‘testing’ the market.

Persuading sellers to be realistic is challenging in any market, but especially so when the market has been very good and now is declining. A realtor or seller may want to “test the market.” This will be a huge mistake. A seller mistakenly may believe that the initial reaction to their property will continue throughout the listing period. Nothing could be farther from the truth. When a property is first listed, there is pent-up demand among buyers who have not found a property. When the initial surge ends, showings slow and are limited to new buyers coming into the marketplace. Missing the initial “honeymoon period,” which normally lasts about three weeks, typically results in longer time on the market and often a lower price. If a potential buyer feels the property is overpriced, you probably have lost that buyer for good. No matter how often they see your listing pop up, such as with every price drop, they will always see it as the overpriced property they looked at awhile back. Remember the old adage about first impressions. If you lose the buyers who are already looking at the time you list, then you have to wait for new buyers to enter the market and hope one of them notices your listing.

2. Set the price below comparable sales or assessed value.

Today’s comparable sales represent prices 30 to 270 days ago (and assessed values are typically at least six months out of date). If the market is declining, then the property is worth less than the comparable sales or assessment suggest. Assume that comparable sales suggest a property is currently worth $400,000. If values are declining at an annual rate of 5 percent per year ($20,000), then 180 days from now the property will be worth $390,000. If you list at $410,000, the price is $20,000 higher than the property’s value. Even if you lower the price $10,000 in two months, the price will still be $10,000 over the new market value. This is exactly where the seller started at the beginning of the listing. If a price that was $10,000 over market value did not result in a successful sale, it is even less likely to produce a sale as the market continues to drop.

3. Reduce the listing price aggressively or you will chase the market to the bottom.

When property values are declining, reducing the price to the current market value is not sufficient. The price must be below market value to sell the property. Assume that a seller is paying $3,000 per month in principal, interest, taxes, and insurance (PITI) and that prices are decreasing by $1,000 per month. The actual cost to the seller of not pricing the property correctly is $4,000 per month. Common questions asked by buyers during a showing are ‘how long has it been on the market’ and ‘how much have they dropped their price.’ An example: which of these two identical houses do you think generates more interest and urgency in a buyer:

House A, which has been on the market 125 days and has dropped their price from $199,900 to $164,900 or House B, which just came on the market eight days ago and is asking $164,900? The houses are identical and listed for the same price, but House A looks like a desperate seller and House B looks like a listing that might get snatched up if the buyer does not make a move immediately. That also means House B is more likely to get a higher offer whereas House A will attract low-ball offers and have a difficult time negotiating them up. Ironically, the seller of House A probably has decreased the amount they can get for their home by trying to get more for it.

4. Motivate the seller.

Why does the seller have the property for sale? Retirement, death, divorce, ‘downsizing,’ ‘upsizing,’ financial difficulties, job transfer or another ‘life changing’ event? If the seller has to sell but is reluctant to accept a reasonable offer, you have to ask, “What is more important, getting on with your life or waiting for the real estate market to change?” If the seller is ‘moving up,’ they will be making money on the deal. If the seller of a home worth $300,000 experiences a 5 percent price decline there is a $15,000 reduction in value. Yet if that same person is purchasing a $600,000 home, that home will experience a $30,000 reduction in value. Thus, the seller comes out $15,000 ahead.

5. Yo-Yo Pricing?

You’re kidding, right? I regularly see properties with a price that has yo-yoed up and down, often without any apparent relationship to the market, the property or another measurable factor. There can be only one justification for raising the price of your property: significant improvements that add real value. If you correctly price your property according to the suggestions above, your property will sell. If you have not received an offer within a reasonable period (I would suggest 60 days at the most), then you did not correctly price your property. Raising the price will offend potential buyers. Remember, the pricing history of your property is available to buyers and yo-yo pricing suggests that the seller has a bipolar view of the property’s value. If you do not establish your property’s price based on the guidelines above, you might as well use the PPPP, but that’s the subject of another post.

[jzc]

(01-17-2013 09:00 AM)RFM Wrote:  Thoughts on Pricing Property in a Declining Market:

1. Do not waste everyone’s time by ‘testing’ the market.
2. Set the price below comparable sales or assessed value.
3. Reduce the listing price aggressively or you will chase the market to the bottom.
4. Motivate the seller.

Great post, thank you.

[AG Sage]

Consider that in a declining market you are running your own Dutch auction. Price drops should be automatic and weekly. No emotion, just cold hard drops. 15k a week if house values are over 500k, 10k a week if house values are lower. You want it sold in weeks. That's the goal. Make sure your realtor understands your aggressive stance. You want him/her running frequent open houses and a lot of ads. The Dutch auction works for you if you can hook multiple interested parties so that they aren't inclined to simply hang out, hoping to get the house cheaper next week. Each set of buyers need to assume the house will be sold next week, not cheaper.