Market changes can blindside your business if you’re not paying attention. How can you prosper when the way you have been doing business doesn’t fit the market shift?
The last two columns looked at how to prosper in a down market. If you have been in a red-hot seller’s market that will eventually become a buyer’s market, you will probably have six to 18 months of a flat or transitional market that precedes the major downturn. The strategies for prospering in flat market are very different from those required in a seller’s markets or a buyer’s market.
In a seller’s market, there are too many buyers and there are too few sellers. Prices increase and commissions decrease due to heavy competition. This cycle also motivates more people to enter the real estate profession. In a seller’s market, the goal is to be the first agent to contact the seller. According to the National Association of Realtors, 14 percent of all sellers interview two agents and 73 percent interview only one. Working your referral database, using call-capture, and door knocking are excellent strategies to put you in contact with sellers when they are ready to list. The red-hot market also results in reduced commissions. Commission cutters rely on higher volume to compensate for lower fees. When market time increases from days to months, however, inventory and marketing costs increase dramatically. So do commissions.
A flat or transitional market requires an entirely different approach. In a seller’s market, little skill is required to place a property under contract, although it requires considerable skill to guide the sale to a successful closing. In a transitioning market, great skill is required not only to educate the seller about the changing conditions, but also to place the property under contract, and then to keep it under contract. In a seller’s market, sellers are tempted to think, “If I wait, someone will pay me more.” When there are bumps in the transaction, the sellers are eager to see if they can obtain more money. In a flat or declining market where there is no appreciation, the temptation that buyers face is, “If I wait, I may be able to buy an even better property for less money.” Depending upon the type of market you are experiencing, your job is to educate your clients on how the market dynamics will affect their sale and/or purchase. Here are six strategies that can help you survive a slowing market.
1. Awareness
If you are not tracking market trends, the market may be well into the transition before you recognize that prices are flat or declining. Sellers and agents alike are often slow to recognize the change. How can you spot when your market is transitioning from a seller’s market to a transitional market? The first telltale signs are increases in market time, inventory increases, and builders who are advertising free upgrades, interest buy-downs, or other incentives. When builder incentives aren’t enough to move property, look for commission increases. If the problem persists, price reductions eventually follow. If you spot any of these, take immediate steps to monitor how quickly these changes are occurring. If the rate is slow and gradual, you may experience the soufflé effect, i.e. a slow flattening of the market and then stability. On the other hand, if inventory and days on market are increasing at a dramatic rate, your market may be transitioning into serious downturn. During the transition, there is a balance of both buyers and sellers. This may last for only a few months before sliding into a buyer’s market.
2. Change your business plan
Because listings take longer to sell in a transitional market, you must increase your marketing budget as well as the time you allot for marketing each property. Buyers have little, if any, pressure to make a quick decision. Many will want to see “everything on the market.” This means that the costs associated with closing each sale will increase.
3. Specialize in first-time buyer properties.
The first part of the market to feel the pinch is the luxury market. Luxury properties take longer to market, require more expensive types of marketing, and also require a higher level of attention from the listing agent. In contrast, the first-time buyer market is the last part of the market to be hit by a downturn because these properties are normally in high demand. Furthermore, savvy investors often look for entry-level properties that have a positive cash flow
4. Discuss market statistics with your sellers
Alter your listing presentation by demonstrating to sellers that prices are no longer increasing. A simple way to do this is to calculate the average sales price for the last six months for all listings in your marketplace. Then calculate the average sales price for the preceding six months. If the prices are the about the same, you’re market is flat or transitioning. If the prices over the last six months are less than the preceding six months, you are in a declining market.
5. Listings are no longer the name of the game
Smart agents always control the listing inventory. Nevertheless, when few listings are selling, it’s smart to have buyers who are ready to purchase. Agents who survive down markets do so by having a balance between aggressively priced listings and motivated buyers.
6. Monitor activity
Perhaps the most important strategy for prospering in a changing market is to monitor which areas are experiencing the most sales. Actively prospect and hold open houses in these areas as often as possible. Pay attention to your office sales board as well as the Multiple Listing Service (MLS) to determine where the activity is the greatest.
If you’re prepared, you can have outstanding production, even while other agents are struggling. Pay attention to the market statistics in your area to avoid being caught in a downturn. Bernice Ross, co-owner of Realestatecoach.com, has written a new book, “Waging War on Real Estate’s Discounters,” available online. She can be reached at bernice@realestatecoach.com.
***
What’s your opinion? Send your Letter to the Editor to opinion@inman.com.
