Untold Secrets – How the Real Estate Market Really Works – Price/Value
Competitive pricing – the solution to a volatile subject!
Imagine living in a home on a busy street with a major train line just beyond the back yard fence. People really do live in these locations, and even worse ones, by choice, but why? We’ve all heard the real estate adage, “location, location, location,” but there are two things much more important than location, and they are price and value.
You see, in real estate especially, buyers can only buy what they can afford. But regardless of the location, style, or attributes, buyers should still receive maximum value for the price they pay, and we’ve all heard that value is in the eye of the beholder. Sellers, on the other hand, are focused on price, i.e., their bottom line. Each, however, typically determines price and value from a totally different and almost opposite perspective. In a market as important as real estate, people expect to implement a standardized method, which could be used by anyone, to determine the price and value of a parcel of property, regardless of their perspective. Nothing is further from reality. This problem needs to be exposed and fixed.
For example, let us say that you’re wearing your buyer’s hat. You’ve hopped in your car, driven all over town, and you’ve personally walked through every viable property in today’s market that meets your particular needs and requirements. After choosing the single piece of property that best meets your needs, you would want to determine its true value. Then you would know whether the asking price was too high (forget it), too low (a steal), or just right (perfect), before deciding to enter the negotiating stage. So how do you, the buyer, determine its value? If the value is in the eye of the beholder, you, the buyer, would determine its intrinsic value to you. After all, it is your decision alone and you are the person who would be living there. Maybe you could consult with an appraiser, a real estate agent, a relative, or even your best friend, but any answer would come from their perspective, not yours.
If you have just viewed a dozen properties, and you have evaluated each, then those are today’s competition. It’s not what sold yesterday, or what recently sold up the street, or what just sold three blocks over, but it’s what’s on the market today. “Today’s competition determines today’s value.”
Now, let’s put on a seller’s hat and take a walk through the immediate neighborhood. Though buyers most often drive, the seller can walk. Why? If you’ve ever sold a home, or talked to a real estate agent or appraiser about how to value a parcel to sell, the typical explanation takes a wild and crazy turn away from the buyer’s perspective. The common answer, passed down through the decades, would sound like this: Find three properties that have sold recently, in your neighborhood, preferably mirror images of yours, and even on the same street, if possible.
Now those comparables, when presented by a real estate agent to a seller, along with a myriad of statistics, market trends, charts, graphs, and other non-conclusive data, will ultimately suggest a price range for the seller to choose from. The typical seller will usually choose the higher values from the range. But does that sound similar to how buyers value properties? No. In fact, it’s exactly the opposite! Sellers are looking at properties from a market that no longer exists, and buyers are looking in today’s market at the only choices they have.
Why should there be any difference in how value is determined, regardless of who is asking the question or for what reason? All logic says there is no difference, but each half of the market (buyers and sellers) determines price and value from opposite sides of the fence. Is there a problem here, and, if so, is there a solution?
Signs that advertise Price Reduced often create unintended difficulties for the seller. The implication is that the seller has finally realized the property is overpriced, i.e., not priced competitively, and they now want to adjust the price. These reductions in price are often too little and too late. When a new property is added to the market, most of the activity takes place in the first few weeks. In real estate circles, this is often referred to as the window of opportunity. Buyers and agents who are actively looking in that area and price range will often try to be first in the door. If their first impression is “nice house, but overpriced,” then they move on and rarely look back. However, agents will often appease sellers and say, “Buyers can always make an offer,” but most buyers don’t want to negotiate with a seller who has visions of grandeur. The property would not have been overpriced to begin with if the seller had determined the value the same way a typical buyer would, i.e., from a competitive approach.
The real solution for the seller is almost as simple as driving around town or looking on the Internet and identifying your viable competition. Adjusting for differences and determining your competitive market value requires some simple tools, which are slightly beyond the scope of this article, but the first challenge here is overcoming the natural human trait of resistance to change. As a seller, put on the buyer’s hat and try looking at the market through the buyer’s eyes, even though this approach would be foreign to most real estate agents or appraisers. Competitive pricing is the answer.
Kerry D. Bodily, author of “Untold Secrets - How the Real Estate Market Really Works - From a Twenty-Five-Year Veteran,” real estate instructor with several professional designations, award-winning software designer, real estate board officer, Multiple Listing Service advisor. ww.PricingRealEstateCompetitively.com
To reach the author directly, you can email him at kerry@kerrybodily.com