In many markets across the country, all that is currently required to sell is, figuratively speaking, a sign in the front yard and a posting on the MLS. When things cool, however, everything changes. A significant number of agents in our local associations have had their licenses five years or less and have consequently never seen a down market.
This means, in many cases, that they have never been required to utilize fundamental skills. For example, numerous agents in our region have adopted the practice of listing homes at prices significantly under market value (read “fake prices“) and then letting multiple offers drive prices higher. That practice requires no skill at pricing or negotiating and, while it might work in a hot market, it will have dramatically different results once the market cools.
We are already seeing some evidences of a shift. As an example, Patrick Kearns’ recent article cites San Francisco’s declining prices in the midst of nationwide increases. Rent prices are also slowing. Those of us who live in the region are beginning to sniff the first stages of urban flight as many, realizing they can now work from home, are deciding they no longer need to pay astronomically high prices to live close to their jobs.
There are additional factors coming in to play as well: local government’s inability to effectively handle surging homeless populations, talk of increased taxation, the pandemic-related shuttering of many iconic restaurants and services and the increased potential for COVID-19 infection in large urban centers. Consequently, a growing number of city-dwellers are looking to escape to the ‘burbs.
As the market shifts from listing-centric to buyer-centric, we will see increases in available inventory, a corresponding lowering of market prices and increased days on the market. In the midst of shifting realities, it becomes critical to understand and master the basics of selling listings.
The 3 P’s
We call the listing fundamentals the 3 P’s: preparation (or product), pricing, and promotion (or presentation). Like a properly constructed stool, all three legs must be given the same consideration. Learn to master these three categories, and you will excel in a shifting market while others fail.
Because buying a home has become more like online dating with buyers giving potential listings between 7-10 seconds before they swipe left, preparation is paramount. As discussed in previous articles, a majority of today’s buyers want move-in-ready homes and are willing to pay a premium to obtain one.
In an increasing market, sellers who wisely invest in preparing and upgrading their homes for sale will typically see a positive return on the amount invested.
In a declining market, they might never recoup 100 percent of their investment in property prep, but they will get a sale while other, lesser prepared homes languish on the market.
No matter how well a home might show, if the price is not right, it will go nowhere. To understand effective pricing, you need to start with a working knowledge of obsolescence.
In real estate, obsolescence refers to factors negatively affecting the value of a specific piece of real estate. There are three fundamental types of obsolescence:
- Functional obsolescence: According to Investopedia, functional obsolescence is the diminishing of a property’s desirability based on outdated design features that cannot be easily or inexpensively altered.” As desirability decreases, so does value. Examples would be a home with one bathroom in a neighborhood where the majority of homes have two or more bathrooms, an apartment above the third floor with no elevator and the like.
- Economic obsolescence: Economic obsolescence relates to a loss of value stemming from external economic factors affecting the subject property, according to Valuation Research Corporation. While functional obsolescence might be countered by physically improving a property, obsolescence related to economic factors cannot be changed in the short term. Factors could include shifting demographics, loss of a significant industry base, collapse in a regional economy or even countrywide economic conditions such as a depression.
- Physical obsolescence: Physical obsolescence occurs when a property has been neglected or abused and substantial physical damage has occurred. Although this could refer to mismanagement of the property by the owner or tenants, it could also refer, on a larger scale, to damage from storms, floods, earthquakes and other natural disasters. Frequently, the cost to repair is higher than the resulting gain in value.
Although sites, such as Zillow, might factor economic obsolescence into their algorithms and to some degree functional obsolescence, they do not include physical obsolescence. This is one of the fundamental reasons automated valuations are inaccurate and why a correctly constructed CMA (comparative market analysis) from a competent real estate agent is critical.
All three types of obsolescence must be factored into a realistic CMA so that a seller gets the best possible pricing recommendation. Correspondingly, if a home has physical attributes, amenities or a location that raises it above the obsolescence level of surrounding properties, this also needs to be factored into the value. An effective rule of thumb in overcoming obsolescence is to cost-effectively improve the things that will make a difference, and then set the price to compensate for the things that cannot be changed.
A seller has control over preparation and pricing, but the third P, promotion, is entirely the domain of the agent. Promotional standards vary from region-to-region based on local practices and home values.
For example, in areas where the median price is $180,000 for an average three-bedroom family home, it makes no sense to spend excessive amounts upgrading the property in preparation for sale, paying thousands for staging and other marketing bells and whistles.
In a region where the median price is closer to $1 million, however, everything changes. Extensive upgrades are more the norm, full professional staging paid for by the agent is common, and extensive marketing includes drone footage, video, 3D tours, slick brochures (or virtual brochures), social media blasts, extensive circle prospecting and much more.
The key to effective promotion in any given region is to know what top-rated local agents are doing to market their listings and meet or even beat their standard. At the least, basic prep and professional pictures should be the baseline.
Even though our country is currently in a recession, the stock and real estate markets have apparently not read the memo. That will change, and sooner than later — there are too many indicators pointing to significant change to think this upward momentum will continue much longer.
Those who embrace the coming reality with sharpened skills and well-oiled fundamentals will be the beneficiaries of the emerging opportunities. Lesser-trained agents will be leaving in droves, while prepared agents will be able to acquire significant market share and thrive.
Shift is coming. Prepare now.
Carl Medford is the CEO of The Medford Team.