Overpriced listings have always been the bane of the real estate business. Given the tough lending environment, there is no longer any wiggle room when it comes to pricing. If your sellers aren’t willing to be realistic, even if they do get into contract, there’s a high probability they will never close.
It used to be that placing a property under contract was the toughest part of the transaction. Tight credit and major changes in the appraisal process have made it exceedingly difficult for agents to close transactions. In fact, when it comes to the appraisal process, many agents are finding themselves in an entirely new world.
For example, in the past, if a property had high-quality upgrades such as granite countertops, custom wood cabinets, hardwood or marble floors, appraisers would normally upgrade the value of the property. Today, that is almost never the case.
Recently I had a conversation with Lynda Conway, the coach and trainer for Austin, Texas-based J.B. Goodwin and Associates. When the topic turned to persuading sellers to realistically price their listings, Conway shared the following approach that almost always works.
Once Conway has gone through the comparable sales with the sellers and they absolutely insist on overpricing the property, her response is, "Give me a price I can defend." She then goes on to explain what is happening in terms of the lending environment.
Like many other agents, Conway reports that appraisers today seldom give credit for upgrades. About the only type of upgrade that does matter is an increase in square footage that results in more living space. In fact, even the addition of a pool may not result in an increase in value.
To illustrate this point, Conway’s buyers made an offer on a property that was listed by a real estate attorney. Based upon the comparable sales, the property was overpriced by $20,000. Conway’s buyers wanted the property and were willing to offer market value for it.
The attorney was convinced that his property was worth more because he had spent $30,000 on a beautiful outdoor living space. Conway asked the attorney for a price she could defend to the appraiser. She explained that the current appraisal environment was one where the appraisers give little, if any, credit for upgrades.
Even after Conway reviewed the comparable sales, the attorney was unwilling to budge. Like many other sellers, he ignored the comparable sales. When Conway asked for his reasoning, his response was, "I just know my property is worth more."
Conway’s buyers really wanted the property and were willing to agree to the attorney’s price, even though it was over the market, in Conway’s opinion. What Conway had her buyers do, however, was to add a new provision to the contract.
The new provision stated that if the appraisal did not come in at the agreed-upon sales price, the seller would agree to release the buyers from the contract. Furthermore, the seller would agree to reimburse the buyers for the cost of their physical inspection, their loan application fees, and any other transaction-related costs that the buyers incurred.
The attorney agreed to the provision since he was still convinced that he was right. Of course, the appraisal came in right at the price Conway had predicted. Faced with losing the sale and having to pay the buyers’ costs, the attorney relented and agreed to lower the price.
Now here’s an important point to note. Conway represented the buyers and was proactively involved in educating both her clients and the seller as to the market condition. She didn’t just fax the offer over to the seller and then hope for the best. When the seller wouldn’t relent, she came up with a creative way to keep both parties at the negotiation table, which ultimately resulted in the property closing at the appraised price.
If you have unrealistic sellers who believe their house is worth more because of their upgrades, here’s a great script to use:
"Mr. and Mrs. Seller, as a rule of thumb, your upgrades make your house more salable, but they normally don’t add any additional value to the property. To illustrate this point, your cherry wood cabinets, green granite countertops and custom tile floors are beautiful. Assume, however, that your buyer wants a contemporary kitchen with all white cabinets and countertops and a hardwood floor. How valuable would your upgrades be to that buyer since she is going to tear them out?"
Be willing to walk away
One of the most powerful things that you can do when your sellers refuse to be realistic about their asking price is to walk away from the listing. Here’s what to say:
"Mr. and Mrs. Seller, thank you for the opportunity to discuss the marketing of your home. Since you can’t give me a price that I can defend to an appraiser, I would like to wish you the best in getting your property sold for the price that you want."
At this point, stand up, shake hands with the sellers, and leave. In most cases, when the sellers see that you’re serious about the price you have proposed, many will relent and agree to a more realistic price. If they are still unwilling to give you a price you can defend, leave with a smile. You have just avoided months of pain with an overpriced listing that probably won’t sell, no matter how nice it is.