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Why Some Sellers Are Throwing Away More Than $300/Day In This Market & How To Avoid Making Their Same Mistakes

September 5th, 2008 categories: Market Update, Selling

It usually goes something like this: A real estate meets with a seller and explains that in order to sell in a market like we’re in right now, they’ll need to be realistic. And the seller says “oh, don’t worry about that…we know what’s been happening out there. We’ve read the paper and know that we need to be priced competitively. We don’t want to be one of those who has their home on the market for four or five months.”

But then a strange thing happens. They look at the comps and see that the number they’d resigned themselves to pricing their home at before the agent arrived is actually still $50,000-$100,000 above the home’s current value.

Suddenly, their mood changes. “Well, we know our home is worth more than that. Plus, we have RV parking. And some of those ‘other’ sales were bank-owned. Besides, we just painted the entire interior four years ago. And our roof is only six years old.”

Begrudgingly, they agree to price their home $25,000 below what they were planning. Yet, in doing so, they’re still a good $40,000-$50,000 above where the agent says they really need to be, based on the competition. The agent expresses doubt that they’ll get much activity, let alone an offer anywhere close to that price. And there’s also serious doubt that an appraiser would ever come in that high, which itself would kill most any deal at that price anyway.

Nevertheless, the seller decides they “owe it to themselves” to give it a try. “We can always come down if we have to…but I’ve got to believe that once a buyer sees our home and compares it to what else is out there, they’ll see all the value we see.”

So they give it “a try.” And, as expected, they have very few showings. Yet, they wait patiently for the “right buyer” to show up. All the while, their competitors continue to drop their prices. Six weeks go by. Then 10 weeks. Then three months. Finally, the sellers say they’re ready to make “a serious statement.” They want to drop the price $25,000.

In their minds, that should make a huge impact. In the agent’s mind, it will get them closer to where they should be, but since the rest of market has dropped their prices along the way, even with a $25,000 price drop, he knows that these sellers are really no closer to pricing their home realistically than they were three months earlier.

So they go another two months and drop the price again. Similar story: their competitors are now $15,000 lower than they were two months earlier, so our sellers remain $30,000-$50,000 too high. In the minds of the sellers, who they started far below what they thought their home was worth initially and have now dropped it another $40,000, they’ve made huge concessions. Yet to a buyer, it’s still well above the current market value.

After six months, the sellers are tired of waiting and watching their competitors play the slash-and-slash-some-more pricing game. So they finally drop the price $15,000 below the competition. They’re now $85,000 lower than where they started (and $125,000 lower than what they were hoping for when they first sat down with their agent).

They finally get an offer. The buyer sees that they’ve been on the market for six months and figures that they must be very motivated and probably rather frustrated, too. So the buyer offers $15,000 less than their current asking price and also wants a $10,000 closing cost credit.

The sellers figure this may be the best offer they’ll ever get, so they take it. And in doing so, they net $110,000 less than their original asking price. Had they relied on the comps and their agent’s evaluation of the market at the time they listed their home, not only would they likely have sold their home sooner, but they also might have easily pocketed an extra $50,000-$60,000, and avoided a lot of unnecessary stress, anxiety and frustration along the way.

So what did this 6-month real estate expedition really “cost” these sellers. Assuming they lost $60,000 by “chasing the market,” they essentially threw away $333 a day. That’s $2,331 a week. $10,000 a month. Even if they got out with only a $50,000 additional loss, that’s still over $275 a day, almost $1,950/week and $8,333 a month.

The sad part of all of this? A hundred prospective sellers could read this story, but at least 85 of them would probably do just the same thing as our hypothetical seller. Why? Because in their heart, they’ll feel that their home “really” is the exception to this rule.

Every once in a while, we encounter a situation where we have to take the comps with a little grain of salt. But most of the time, when a seller tries to deny what the comps clearly show, they’re setting themselves up for a huge loss over a long period of time – one that could easily cost them more than $300 a day.

My advice? Be realistic. Look at the comps objectively and try to do so through the same set of glasses that a prospective buyer will use to view your home. Your agent should be able to provide conclusive evidence that the price range they’re recommending is indeed where the market is at. And he or she should be willing to take you out and let you see your competition first-hand.

There’s always a chance you could happen upon an inexperienced or “hungry” agent (one who’s out for nothing more than lightning-quick sale regardless of how much of the seller’s money they potentially leave on the table). If it’s clear you’re in the company of one of those, run like the wind.

But a good, reputable agent should be willing to take whatever time is necessary to illustrate exactly why your home is only worth “X.” It shouldn’t be just a “gut feeling,” but rather a range based on the prices other similar recently closed homes have sold for combined with the asking prices of those homes now in escrow along with the list prices of those presently on the market (your competition).

A professional, experienced agent shouldn’t lead you to believe that a severely overpriced home will eventually sell close to that price. That’s called “buying a listing” and will give the listing agent more visibility in your neighborhood but do nothing to actually get your home sold. That agent is hoping other more-motivated prospective sellers in your neighborhood will contact them. So they’re essentially using your home to troll for other clients.

Earlier this year, we met with prospective sellers who had been trying to sell their home for over a year at a price that was a good $100,000-$125,000 above where it really needed to be. They were ready to switch agents and wanted us to take over the reins.

At one point in the conversation, the sellers indicated that they’d be willing to drop their price $25,000 below where they’d been for the previous few months, thinking that that would do the trick. When I told them that such a price drop would make no appreciable impact on the buying public since the house would still be a good $75,000-$100,000 too high, he said “I’m not ready to walk away from all that equity just that.”

I politely told him that he wasn’t walking away from any equity. Indeed, that perceived equity was long-gone; it had literally already walked away from him. I suggested that it wouldn’t do him or us any good to market the now-vacant home if it was still priced substantially higher than its approximate market value. Essentially, he’d only be putting a different sign in the yard. But the public’s perception would be exactly the same. Yes, our market efforts would be different and he would have had a stronger internet presence. But even with the marketing upgrade we would have provided, there’s no way an informed buyer would have paid $75,000-$100,000 more than the home was clearly worth.

I gently told him that we really weren’t the right agents if all they were looking for was more of the same but with just a different colored sign in the yard. Three months later, he’d be out another $6,000-$8,000 in mortgage payments on their vacant home and they’d be no closer to selling than they were today.

They thanked me for being candid and honest. And then they went out and found an agent who told them exactly what they wanted to hear. When they listed it with this agent, they did drop the price slightly below what they had said was their “absolute” bottom line, but it was still substantially higher than the home’s market value. Another three months have since gone by and it’s still sitting there. No surprise.

And in the meantime, the market has dropped some more…which means that still more of this seller’s equity has “walked away.” It’s sad to sit on the sidelines and watch this happen. But we see this same scenario play out over and over again. Had these sellers relied on the market knowledge and awareness that only a full-time experienced local agent can provide, they would have long ago made one of two decisions: they either would have priced it at its REAL market value or realized that an offer at the price they wanted was not in the cards, at which point they would have been smart to abandon their plans of selling altogether.

Pricing your home is not an exact science. But it doesn’t have to be an exercise in futility, either. If you price your home realistically and adjust the price as needed when it becomes clear the market is not responding the way you had hoped, you’ll sell much faster and save hundreds of dollars a day.

But every month, thousands of sellers find this out the hard way. They don’t learn by their predecessors’ mistakes. Instead they choose to reinvent the wheel and in doing so, set themselves up for months of misery and heartache, not to mention a $300/day hit to their pocketbook.

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This entry was posted on Friday, September 5th, 2008 at 1:54 pm and is filed under Market Update, Selling. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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