Superheated markets burn buyers, agents alike

(Second of two parts. See part 1.)

Last week I looked at how builders are aggressively competing to increase market share during down markets, usually at the expense of the resale market. This week focuses on the other end of the spectrum–the superheated sellers’ market–, which burns both agents and buyers alike.

In a sellers’ market like the one they are experiencing in many parts of California, inventory comes on the market and goes off almost immediately. Since it’s next to impossible to keep any properly priced inventory on the market for more than a few days, agents struggle with constantly trying to replenish their supply of listings. Low interest rates and high demand have resulted in skyrocketing prices. Exacerbating the situation, low inventory has caused many owners to stay put rather than fighting to locate a replacement property. All of this adds up to a nightmare for agents because without inventory, there are no sales.

During my 20 years as an agent, I had my very best years in down markets because agents with strong negotiation skills have a strong competitive edge. In contrast, I found the seller’s markets frustrating because inventory was scarce and when you did list something, it usually sold immediately with numerous multiple offers. Worse yet, the losers were often calling their attorneys to see if there was any basis to sue you and the seller for not selling them the property.

While the situation may be great for sellers, it’s hideous for buyers. One of my friends had more than 40 offers on a single property that ended up selling 35 percent over asking price. Buyers have no negotiation leverage since other buyers are waiting in the wings. In many cases, buyers ill advisedly waive inspections and loan contingencies. In addition, buyers who purchase properties at the top of the market will experience a huge drop in equity when the market cools down, which it always does. Typically, the southern California market has a downward adjustment every 10 years. The last downward adjustment started in 1990 and ran until about 1997 when property values started to increase. Given the 10-year cyclical nature of the market, the real question is how long before the next chilly downturn?

The question of how to compete in a super-heated seller’s market is a thorny one. The strategies below can help you build your listing inventory, as well as assisting the seller in obtaining the highest price possible on behalf of your sellers.

1. Pour cold water on the hot-blooded buyers.

During a sellers’ market, many sellers are seduced into asking more than their property is worth. Also, because they believe you will have to do very little to sell their property, they argue you should reduce your commission. To counter these two arguments, remind the sellers your goal is to help them get the highest price possible for the property. To do this, use a “Smart Seller” marketing plan. Very briefly, your marketing plan for the property should include at least 10 services you will provide to the seller, including Web placement, a sign, as well as any Web or traditional marketing you may be doing. In order for all of these different pieces of your marketing plan to work, suggest that your sellers delay accepting any offers for two weeks. Be sure you publish the specific date you will be looking at offers in the MLS, as well as on your Web site. The second piece is to price the property slightly below the comparable sales. These two strategies together will create a frenzy among potential buyers. Also, by slowing down the process and creating a bidding war, you will more than earn that extra 1 percent or 2 percent in commission. Furthermore, having a few weeks to market the property helps you to generate additional leads that you might not see if you only had the property on the market for a few days.

2. Create listings where none exist.

When you have buyers who cannot find the home they want in a specific area, target unlisted properties that meet your buyer’s criteria by sending a personalized letter to each owner. The letter should include your buyer’s wants and price parameters. Also be sure to inform the potential seller you are only asking for a one-party listing for this one buyer. I know one agent who did this in a multimillion-dollar area and had 12 responses. Six sellers signed the one-party listing and two of these sold.

3. Prospect out of area homeowners and investors.

In any market, 5 percent to 10 percent of the owners either live outside the area or are holding the property as an investment. One of the major challenges in a superheated market is finding a replacement property for the seller. In contrast, out of area owners and investors may choose to cash out or purchase elsewhere. Check the tax rolls to identify owners whose tax billing address is different from the address of the property. Also, in many areas, title companies can supply you with a list of out-of-area owners.

4. Religiously work your referral database.

In superheated markets, making sure your referral database remembers to refer to you is critical. There are a number of great technology tools that let you do this effortlessly for as little as $29.95 per month.

5. Back to Basics.

Door-knocking, calling on expireds and FSBOs, and consistently following up with past and present clients is critical to surviving both sellers’ and buyers’ markets.

Prospering in a superheated market is difficult, but possible. Curb in the buyers, create bidding wars by extending market time and don’t forget the simple basics that work in any market.

Bernice Ross is an owner of Realestatecoach.com and can be reached at bernice@realestatecoach.com.