Thursday, May 17, 2007 at 06:11AM
Seller's Disease
<<< Gordon Gekko
Yesterday an agent was coming out of the house next door to one of my listings. I knew that the owner of that home was thinking of selling - they had had trouble with the tenants, who finally vacated without notice.
I had told her about the four critical steps to selling:
1. Have the home look spectacular
2. Make it easy to show
3. Hire a good local expert to represent you
4. Put an attractive price on it.
So what does she do? Hires her out-of-county relative to be the agent, and lists it 5% higher than the price I told her. This happens on virtually every listing around town. The sellers INSIST pushing the list price about 5% to 10% higher than recommended.
Why are sellers so fascinated with getting that extra 5%?
In this case, the agent went on to explain that the owner had a negative cash flow on all her properties of $20,000 per month. She has about 30% equity in this property and is now eating a payment of around $3,500 per month, but she just HAD TO inflate her list price by the extra 5%.
WHY? How did it get this way?
In the 1980s if you could sell your house for more than you paid for it within a year or two after you bought it, you had done well. What happened since?
1. Gordon Gekko, who in the 1987 movie 'Wall Street' uttered the now-famous line, "Greed is good".
2. The creation of the lottery, and people dreaming of being rich.
3. The 'Las Vegas-ization' of America, with casinos everywhere.
4. The eight-year bull run in real estate.
In the early 1990s we learned a lesson about greed that left its mark - greed is NOT good when the market is in decline - if you hold out, you'll end up selling for less, later.
Of course the ensuing 8-year bull run in real estate obliterated the memory of the early 1990s. Now sellers not only feel overly-optimistic about what their house is worth, the greed has soared to new heights to the point where sellers IGNORE the tough market conditions, IGNORE the advice of their realtor, and still INSIST on pushing for the extra 5%, believing that they know better than anyone what the house is worth - and how to go about selling it. Many sellers don't even know why they want the extra 5%, they just do.
Consider how the market has changed. Compare this year to 2004:
San Diego County
Jan 1 to May 17 2004 2007 % diff
Total listings 11,052 17,358 +57%
Total closings 9,266 5,735 -38%
The chances of selling have dropped considerably. Buyers are fully aware, and are only buying the properties that stand out as exceptional buys.
We will be hearing about the 'housing slump' for as long as sellers are living in their '5% fantasy world'. The incessant need to push for more dough has stalled the market place.
If you're selling, and you catch yourself pushing for that extra 5% with justifications like:
I need the money, I want the money, I deserve the money, my house is better, my house is different, my area is different, I don't have to sell, I'm not desperate, I can wait, etc.,
then recognize that today's buyers aren't very tolerant of greedy sellers, and are willing to wait until they see a property with an attractive price on it.
Here's how sellers can tell if their price is right:
Buyers are making offers: Price is within 5% of being right.
Buyers are coming, but no offers: Price is 5% to 10% wrong.
No buyers are coming: Price is 10% or more wrong.
What does it hurt to go a little higher? Sellers only have one chance at making a first impression on buyers - and there is enough inventory that buyers forget about you in a hurry. Get it right from the beginning, or adjust quickly.
Jim the Realtor
in Thinking of Selling?
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Reader Comments (24)
The fear when a seller opens the process is not that they may not sell quickly it is that it will sell quickly for less than they could have gotten. Eventually, they will come to fear that it might not sell.
As for why they push for 5% more. It may be that they want to "net" their price after transaction costs.
Most people seldom, if ever, actually sell anything. They are always on the buy side, typically in a retail situation where the seller sets a price and the buyer either accepts it, or not. So they are completely unfamiliar with any kind of sales process, or price setting and/or negotiation from the seller's point of view.
Having said that, most real estate agents that I have met are in the same situation. They have little or nothing in the way of professional selling skills, just some minimal familiarity with the regulatory and documentation requirements of processing a listing and sale. Particularly those who have gone into the business in the last few years.
None of these people understand the problem of selling a particular property - not properties in general but this one right here. Even in "normal" times, properties can sit for some time although they are fairly priced - buyers are not plentiful enough to provide instant liquidity except in the height of a mania. Sure, maybe you can price it low enough to attract a speculator who has more patience then you, but at any given time the end users who "fit" your property may not be looking. You've either got to go out and find them or wait patiently like the Inuit by the fishing hole.
This makes pricing even more difficult...
Jim, you are working very hard to get the word out. I hope what you say will eventually make it to some the sellers out there.
Either get out with your shirt now or take it in the shorts later. ;-)
<<<Either get out with your shirt now or take it in the shorts later. ;-) >>>
or just pay your mortgage each month and sell for double today's prices in 10 years :)
Duke,
Double today's prices in 10 years?
I'd love to hear more about that - this is how the next ten years looks to me:
2004-2008 bumpy road with lots of conflicting data due to the occasional lucky sale, but overall a downward trend in pricing.
2009-2011 same as above with slightly upward trend in pricing. Both will only be obvious by looking at it after the fact.
2012-2015 get back to 2004 pricing.
To double today's pricing would take easier money than we've had over the last five years, wouldn't it? I think the banks will be very reluctant to repeat the easy money scenario we've had lately. They are losing $100,000 or more on EVERY FORECLOSURE who did 100% financing the last few years.
I don't see interest rates being a lot lower than they are now either. How could prices double? If you're just kidding, I understand, but if you have a crystal ball, please share!
Um, the current home prices will certainly not be double in 10 years from now. In 2017, prices will probably be only 10-20% more than they are today...
libertas - best comment of the week, thanks.
You're right about the realtors - for the most part their success has NOT been caused by their expertise, it is more likely due to being in the right place at the right time.
Jim
I also think you are right on with the comment that you only have one chance, let me repeat, one chance to make a first impression on a buyer. We had agents in Sausalito who stressed this to us. The result -- we spent about $15k -- 10k to fix up a crappy bathroom and 5k to make the front of the home look as good as possible with as little money as possible -- and this was during the good times. And the strategy worked -- we sold in 45 days which was EXTREMELY fast for RE (that is list to close date).
Before we bought our home that we sold, we had to buy during the start of the crazy sellers market. But even with that market, when we saw a place that was not clean, staged, and presented at least marginally well, my wife would say "yuck, no way." And she would often say this before wen got in the front door.
Our friends, they bought a place 150k below a reasonable estimate of the current value (and during the seller's market as well) because the front door lock wouldn't work, most buyers would not go through the effort of trying to get in, the selling agent was out of town, and the house was on the market for 7 months. Most buyers agents don't want to bother with a property like that -- I suspect they are either too lazy or they are smart and realize that such lack luster preparation by the seller is a good indication of a negotiation in which getting the seller's attention may be tough. They just tell their buy side clients to move on.
So if you don't get a buyer right away, and make them think wow, with 17k in inventory you are very unlikely to get that buyer again -- unless, of course, the buyer is a bargain hunter -- and no bargain hunter will ever pay you 5% above what the house next door sold or is selling for. .
Thats ok, the prssure will build and the explosion to the downside will be even bigger. More supply, less demand...now who passed Econ 101?
I want a condo in Aspen for about $40k.
Is Duke, pronounced Doo-key? I guess he missed the lecture on business cycles.
Shot for the right price and subtract 2-3% ($10-25K) and hopefully choose the the offer with the least contingencies.
Sellers haven't had to deal with meaningful contingencies in over five years. They're going to return. That little get out of the deal clause that says provided the buyers gets a loan of at such and such rate for no more than blah blah points, will start to have bite. As will buyers that need to sell their home first.
Yes, buyers could always use that excuse before, but with the tightening credit market, I suspect it won't be an excuse anymore, it'll actually be that they can't get a loan they an afford.
The picture has to go. You look like you're trying to get laid.
That's Gordon Gekko - and you're right, that's how he looked. I added his name for clarification, and made the picture bigger.
wow, Jim. Apparently some mistake you for a younger Michael Douglas. Catherine Zeta Jones jokes are left as an exercise to the reader.
You guys are funny. The replacement value alone for my home bought in 2000 has risen 50%. It'll rise another 50% by 2017 guaranteed. I guess in your world builders will be selling homes for 1/2 of what it costs to build them. I'm sure the entitlement costs for whatever land is left will also be the same in 2017 as it was in 2004. Actualy it will probably be 3-4X todays soft costs and 50% higher for hard costs and land. Do the math.
Duke,
Do the math? OK, brand new homes will be more expensive to build. Not sure the buyers will care what they cost, if resales provide a better/cheaper alternative.
I'm not sure if the prices would double in the next 10 years but I'm also very skeptical of those who believe that nominal prices will fall by 40-50% in the next few years. If that were the case, we would be back to 1995-1997 prices (in real price terms). I don't think such severe price depreciation is likely. I'm will to bet a cup of tea on it.
Also, if you measure Los Angeles or San Diego home prices from early 90s (ie 90-93) with annual home appreciation rate of 5-6% you will realize that today's prices are not that out of line compared to the historical appreciation rates. What bothers most people is that the appreciation was not evenly spread over the course of 15-17 years, instead it occurred essentially over the last 5-6 years. But, that's what markets do...its neither bad nor good.
As a side note, I believe that there is not much upside benefit for the average home owner/investor at this point in the cycle, accordingly, I've sold my main home as of yesterday. (my house was sold on the first day that it was listed for sale and closed escrow in 40 days) I'm ready to buy if a great deal comes along, but I don't mind watching from the side as market goes through its gyrations.
Jim,
New homes dramatically affect resale homes both posittively and negatively. You have to know that.
Southswell is right. Look at the Case Shiller index for confirmation. In the last market cycle prices peaked in July of 1990. It took 12 years for them to double from that low and the down market lasted about 6 years before taking off again. Market peak here was Oct. 2005 and I have no doubt we'll double in 12 years from that point (which is 10 years from now). And that was with thousands of new homes being built 5-10 miles from the coast. That will not be the case in this next cycle as coastal land is essentially depleted save for certain small infill projects. San Diego is not the sleepy, military/aerospace driven economy of 20 years ago and it's still a bargain compared to the Bay Area or many parts of LA.
Duke,
today's prices double in 10 years? This is highly unlikely unless there is massive inflation. The odds of this happening are less than 5%. To double in 10 years assumes a 7% increase each year. How are salaries going to go up 7% a year? There are already pressures on salaries from outsourcing. Any astute investor or student of asset markets would not bet on prices doubling in 10 years.
It is likely they will not be much higher 10 years from now.
Norcal
You are right most astute students of asset market wouldn't buy now...and they didn't buy in the past...therefore they will remain poor students.
I currently don't see prices droppping at all. Instead, I see prices rising in my neighborhood...which does not make me happy. However, so far prices are holding and the longer it holds...we'll likely see a prices flat lining not crashing.
But do the math, prices today reflect 6% annual gains since early 1990s...don't look at only limited sample of last 5-6 yrs to come to conclusion that prices have sky rocketed....it is always a better indicator if you are able to take the largest number of years to see where prices should be....if you even look back over 20 yrs you will see that prices today stay in line with 6%/yr trajectory
southswell- I have owned 3 homes and sold my rental in Nov 2005 (yes, perfect timing). I am sitting on a ton of cash in at 5.3% and will buy once it bottoms--3-4 years from now. Nope, we aren't all poor.
Interest rates will rise soon to save the dollar and oil prices are sending us throught the 70's again. Invest in coal and water and houses in about 4 yrs and you too will be wealthy.
I bet you dont surf.
South, would you agree prices are already about >10% off the peak?
sw stan,
What would you like to bet???
I know most talking heads speak of rising interest rates...but any significant rate increase won't happen for at least two years...I'll bet a cup of tea on that... Bernanke won't slow the economy years leading up to an election...even after the election, the Chinese and Japanese won't be demanding much higher rates on their money bc that would be like shooting themselves in the foot...I do expect gradual increase in the rates but nothing special within the next two years...but as always something can happen to screw the prediction...who would have thought home prices would go up about 20%/yr for 5 years....I guess you never really get hurt if your investment horizon is long....
I don't like commodities...I made some money off Jim Roger's commodity fund but I still prefer stocks...my luckiest hits have been DJ and SHLD (SHLD got me to retirement 20 years faster than I would have otherwise). Now I just stick with berkshire and few vanguard funds...I don't expect more than a few lucky picks in a lifetime.
I'm not sure if home prices are off 10%...check put Manhattan Beach, Hermosa, Redondo and Palos Verdes...all up from last year...
southswell- boogie boarding in August at Doheny does not count. :)
I found a few sites that show the MLS on a map, darn! it looks like every other house is for sale in some hoods. Increased supply and lower demand, yep prices are going up!