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$1 dollar.  That should get the ball rolling.  I wonder how often marketers abstractly anchor us at a higher price even though they know they can accept much less.

A while back I had a discussion about pricing over on the Sellsius blog.  The author suggested that you could get a better price by not actually anchoring the final value by putting a list price on the home.  Let the market determine the price.  In our discussion in the comments, he pointed out a study that he says supports his approach.  I disagree with the 1$ listing as much as I disagree with range pricing, but the study is actually a good one.

It shows how much people are influenced by arbitrary factors when deciding what they would be willing to pay.  If I read it right, arbitrary factors would include something as meaningless as a suggested retail price. 

I noticed that many builders have inflated their abstract pricing on their inventory in order to offer better incentives and offer ‘dramatic’ price cuts so that buyers feel like their getting great deals when they buy a new home.

 I recently sold a home in the Village at Centennial  near the Denver Tech Center where the builder was offering the same home at $505,000 even though they hadn’t sold a home like it for more than $450,000.   In fact, the majority of the similar home sales were around $425-$440k.  This method has helped the builders maintain their net in the face of foreclosures appearing on the market.  In fact, it actually helps keep the lenders from pricing their homes to low.  The BPO (Broker Price Opinions) usually include price of homes that are currently for sale.  So even though the foreclosed homes are trashed out, they are priced just under what  the builder will accept new.  And of course, the buyers leave like they’re getting a great deal.

I talked to the sales rep in the office about their current inventory and he admitted that he had the ability to move as much as 15% off of the list price depending on the ‘read’ he got off of the customer.  That’s the sort of thing that doesn’t bode well for the current homeowners that may have paid too much.  Especially when they get in a need to sell situation like a job change.  It also tells me that most unrepresented buyers are like deer in headlights when they walk into the sales office.

Funny part is, most buyers still fall for the ‘base price’ system where they hook you with a lower price while showing you a better product in the model.  They then either raise the price or act like their giving you a deal by offering you incentives in upgrades. 

When a builder is offering $50,000 in upgrades, it makes you wonder, how did they arrive at that number?

 

A study released on October 31,2007 by S&P Case-Shiller shows Denver leading the country in price appreciation.  While the numbers are not staggering, Denver’s subtle growth marks a stark contrast from the drastic price drops of other cities across the United States.

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I had a listing this week where we went under contract as my client was preparing to leave town on his honeymoon. Instead of ruining his honeymoon, I had the pleasure of meeting contractors with the prepared solution (provided by an electrical engineer) while he was gone and getting certain inspection items done in a timely manner. Now I must say, this isn’t my first rodeo. I know what things cost. It truly is a wonder what a range of bids you will get for the exact same job.

I have one rule I use to quickly guesstimate the value of service work so I can ballpark the cost. It’s a bit general but it seems to work well. Read the rest of this entry »

Things sure have changed. A couple years ago, a broker could miss pricing a home by 5%-10% and the market would rise to the price within a 6 month listing contract. Of course, if they priced it at value they would receive more than one offer. It was one of those you-really-couldn’t-screw-it-up markets. Here’s the basic ideas that I’ve found to help guide my pricing and sell homes faster than the market average.

1. Think like a buyer. What do the majority of buyers want? That’s the question you need to ask yourself. Be realistic. If the house you’re competing against has a remodeled kitchen and you don’t, you better have an ace up your sleeve somewhere else in the house. A buyer will buy the best house they find for the money within their price range. Most buyers look for homes within 25% price range. If your home isn’t the best home for the money, don’t expect it to sell. You can either improve the house or lower the price.

2. Comparable home sales have never meant much. All that comparable homes sales exist for is to make people (buyers, lenders, etc..) comfortable with the idea that they’re not paying too much or accepting too low of an offer (sellers). Right now, the only thing comparable sales might suggest for pricing is the approximate price range a home may sell in and justifying the final sales price. Actually getting offers for your home is something completely different.

3. Your current active competition is your best guide. Take a look at the competition. The competition is on the market but hasn’t sold. That says a lot. Theoretically, if your home was exactly the same as the other homes on the market, you can expect similar results. Pricing above or at the competition won’t sell the home any faster than the time they’ve been on the market. If your home is comparable to the active home that’s been on the market for 200 days at the price you’re thinking of listing at, don’t waste your time at that price. It won’t sell.

So what is your competition? Some homes in your price range aren’t competition and some are. That’s where experience comes in. A broker/agent needs to be out looking at the competition if they want to sell the listing. For me, I put myself in the mindset of a buyer and rank the competition in my mind based on which one the majority of buyers would find most appealing. I then price my home to fit in with what was observed. Make the price spread enough that differences between the property are properly justified in the buyer’s mind. Sometimes this lets you actually push the price up and sometimes you’re a little lower than some comps. Just remember though, the buyers have probably never saw the comparable sales on the inside so they really don’t matter.

4. Brokers/Agents - Don’t take an overpriced listing. If you can’t price well against the competition for whatever reason, you may want to think twice about taking the listing. Sellers have the right to hold out for whatever price they want. There’s always the chance somebody who hasn’t seen the competition would buy the home and pay more than what the majority of buyers would pay. I try to determine the probability of selling at a price. I won’t take a listing with a 50/50 chance of selling. It’s up to you as a broker to decide if it’s going to be a waste of time or not. The seller knows he can find somebody out there to list their home at their price. For me, I’m running a business, not a public service.

My rule is I take a listing if it’s within my farm area and not more than 10% higher than what I feel the value is. This usually depends a lot on how flexible on price I feel the seller will be if the time comes to adjust the price. It’s not too strict of a pricing rule just because of the benefits that come from having listings in your farm. If it’s outside my farm, I only take the listing within 5% of my target price. In the Denver area, MLS statistics suggest you won’t even get an offer unless you’re within 5% of value and the average listing that sells original list price is within 10% of the final sales price. Incidentally, there is still a spread of about 20% between the average active list price and the average sold price for the current month.

Pricing within the 5% rule helps me sell most homes in about 1/3 the time of the current market average. If my sellers want to ‘test’ the market at a slightly higher price, I used to take the listings, but I’m getting away from that. It’s hurts to spend thousands on listings that don’t sell. I find that most sellers always think of the price drop as money lost. In reality, their home was never worth the higher price. But in the end, you always seem to hit a wall on price that’s above what the home is worth even though they might have been agreeable to pricing it correctly if you helped them to be realistic upfront. In the end it’s rarely worth taking an overpriced listing.

I’ve been ruminating on the 60 Minutes story thinking about how much of the story was wishful thinking and how much was fact.

I wonder how much Redfin.com just saved in advertising by getting their side of the story pitched on 60 Minutes. I think the casual observer would have been quite taken in by the story. It was a strong example of yellow journalism at its best for students out there. You start with the premise, “Realtors make too much and do very little,” and build that into a story. It’s a shame that it was so one-sided. I agree that the real estate industry as a whole needs to be disrupted. Many agents do very little for the money they make. But there are other agents that earned every penny of their 6%-7% commissions. Their clients would swear by it. Change is coming to the industry, but it won’t be Redfin that makes it through the change. To all you VC’s out there that are all caught up in the hype of Redfin, you should take a break. The business is more expensive than you think. There is much more overhead than you are observing. One in every 86 adults is a Realtor. That’s a lot of competition. While everyone agrees that the Internet is changing how real estate is transacted, the Internet is not the method most people use to choose their agents. Whatever the case, the 60 Minutes story was misleading to consumers.
Here’s my observations on the story.
1. Does Redfin deserve a commission at all? They don’t do enough to earn 33% of the commission. The money they’re rebating to the buyer is the buyer’s money. Why not just knock it off the price? Do they even show the home to the buyer or do they encourage the buyer to meet the listing agent at the home? After the buyers have taken advantage of the listing agent, why should they involve Redfin? They aren’t knowledgable local experts; they’re just filling out forms. I don’t see how working with Redfin.com has any value to the consumer. Buyers are the only ones showing up with any money. They ultimately are the ones paying for the broker’s services. If you’re paying anything for a buyer’s agent, I hope you’re getting at least a level of service that can inform you what the true value of a property is. I’m not talking about referencing local sales and checking the Zestimate. I’m talking about the art of pricing.
2. Realtor commissions are not fixed at 6% as Leslie Stahl would have you believe. They vary all over the country. There are a wide range of service options currently available to the consumer. My brokerage model is based on the idea that if you offer full service for less, you’ll spend less money on acquiring more business, because you’ll benefit from the referrals of your past clients. We actually do the whole listing side of the sale for 1% of the sales price. That includes all the things traditional brokers would be expected to do. There are other models that attempt to offer less service in various forms but I have yet to see one successful, profitable business model. If it was out there, I’d be in it. HQHomes of Denver is one of the few profitable discount models in Denver. When the Help-U-Sell’s and Assist to Sell’s are failing, we are still growing. It’s not perfect yet but there’s no discounting service. The agents make money, we save our clients money and we do everything you would expect of a full service company. At the least, my clients can be assured that I handle more sides of a transaction a year than 95% of the brokers in Denver. The consumer can have expertise and save money without having to lower their expectations.
3. I cringe at the term “discounters”. It’s an offensive label. I’m a full service broker. I might not hold a costume-themed open house with men on stilts, party favors and clowns but I do hold open houses if I think it could help sell the home. How about calling us “industry pioneers”?
4. Reduced levels of service are currently available to the consumer. But that doesn’t mean it’s a good idea. Unfortunately, in any market buyers and sellers should be working with agents that have a firm grasp of value. That’s where most of these limited services fall apart. The agents at a place like Redfin don’t know anything about the local markets. Most homes in Denver are overpriced by as much as 20%. Will Redfin be able to show their clients when a home is overpriced and when they’re not? If they tried, how could they possibly be right without actually going there?

5. The value of service will vary depending on the type and quality of service provided. On a million dollar home, paying $60,000 for commissions might seem like a lot but really that depends. If your million dollar home would only fetch $850,000 as a FSBO (limited exposure), $900,000 with a limited service listing agent and you could possibly get $1.1 million for it listed with a full service agent. At which level of service did the agent earn his $60,000? That being said, as a buyer’s agent on the same million dollar home, if I let you write an offer for a home $1,050,000 when you could easily have got the house for $950,000 with an agent that actually knew the market, did I earn my $10,000? (33% of a 3% commission). If all I did was show you a picture on my website, you filled out an online form for the offer, I made a phone call and faxed over your offer, did I even earn $10,000? Just because you save money doesn’t mean you get a good value. You can’t automatically assume that saving money means you got a good deal.
To those that have read this, here’s what some other good folks have to say.

• 60 Minutes’ Redfin.com story delivers 400 hits in 60 minutes flat . . . Bloodhound Blog

• Redfin On 60 Minutes Tonight - Real Estate Market Disruption TechCrunch.com

• Redfin’s Corporate Blog

Here are some similar articles where I discuss this topic:

• Why I can’t justify high commissions

• What should be in a market analysis

• Think before making your first offer

Technorati Tags: Redfin, commissions, “60_Minutes”, discount, brokers

1. Most agents won’t respond to the email request for feedback because they are just too lazy.

2. Most agents won’t respond to any messages that are left on their phones for feedback because they just don’t care.

3. Most agents show more than one property in a day. So if they don’t respond in the first day or two, they probably don’t even remember any feedback.

4. If a buyer’s agent has an interested client, it’s not in his client’s best interest to give feedback, as it could compromise a future negotiation.