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This post was last updated Apr. 4, 2023.
Ever found yourself trying to correct a mistaken impression knowing it will damper the hopes and dreams of someone? That’s how real estate agents feel often with homesellers now.
There was a memorable Superbowl commercial in 2012, one of the funnier commercials of recent years. As parents proudly remove their son’s blindfold to unveil a small refrigerator they are giving as a graduation gift, they make the mistake of putting it on the sidewalk in front of a shiny new convertible. The son, only seeing the car, begins yelling, “Best day of my life!”
He starts texting his friends and lighting up social media and in short order, a party has formed on the street. Everything goes downhill from there, and you are left wondering how the parents can possibly dig themselves out of the situation.
The commercial highlights a simple principle: Once someone believes they have received a gift, it’s very difficult to take it back. With the market shift now fully in play, we are seeing this effect realized with homeowners who have decided they now want to sell their homes.
Unfortunately, having garnered massive gains in home equity in the past few years, they are excited about their newfound prospects and do not want to give any of that money back now that the market is shifting downward.
Top 5 flaws in current seller logic
Starting with the phrase, “We don’t want to give our house away,” prospective sellers are informing listing agents that they want to sell but not at the new market prices. Hoping they can cash in on previous highs, homeowners are clinging to the hope that somewhere in the ether is a buyer who will love their home so much they will pay more than the going rate.
Unfortunately, there are significant flaws in this logic — here are the top five.
1. With today’s high home prices and increasing interest rates, a significant number of buyers are close to being priced out of the market. With declining prices and increasing inventory, buyers now have choices. With multiple offers a thing of the past, in most cases, buyers will not pay more for a home than they should.
2. Today’s buyers, with unparalleled access to real estate data through Zillow, Realtor.com and similar sites, are the most educated homebuyers of all time. They know current prices, understand market trends and — especially in a declining market — are simply unwilling to pay more than market value, no matter how nice any given home might be.
They also know that there is a good possibility that if any home remains on the market longer, the price might be lowered. They stay away from overpriced homes in droves, resulting in those properties staying on the market for long periods of time and, in many cases, not selling at all.
3. The majority of buyers want move-in-ready properties. Whereas these homes were able to fetch top dollar a few months ago, buyers are finding that everything has become negotiable. Since their odds of purchasing a move-in-ready home have significantly increased, they are ignoring those homes that are outdated or in need of repairs, unless they can score a significant deal.
The net result is that extensively prepared and competitively priced properties are the ones going into contract.
4. If a buyer is securing a loan, the lender will send out an appraiser to verify that the contract price does not exceed current market values. If the price is too high, the bank will only lend to the appraised value and the buyer must make up the difference.
5. While cash was not as much of an incentive in the superheated market, now that things have cooled, cash is once again king. That means well-heeled buyers are out shopping for bargains.
7 scripts to use when working with sellers who do not wish to price realistically
- “Home prices are very similar to the prices of stocks on the stock market: they fluctuate up and down as market conditions change. The only price that matters for any given stock is the amount an investor is willing to pay on the day you choose to sell, regardless of what you paid to purchase it or how high or low it has been in the past. Until a stock is sold, it only has a ‘paper value’ which is meaningless until there is an actual sale. It is exactly the same in real estate: homes around you may have sold for much higher prices a few months ago, but in the current market conditions, no one is paying those prices anymore. Buyers are only willing to pay ‘today’ prices, not ‘yesterday’ prices.”
- “You are saying, ‘I don’t want to give my home away.’ In reality, the only way you would be giving it away is to sell it for less than you actually paid for it. Since you purchased this home when prices were much lower, you have actually made massive gains and will, in reality, be reaping huge dividends when you sell. You might not be getting the same amount you would if you had sold a few months ago, but even though the market has fluctuated downwards, your gains are still substantial.”
- “Think of those previous sales as lottery winners. In every lottery, only a handful of people end up winners. Since there was almost no inventory, only a handful of sellers actually cashed in at the peak of the market. Like all lotteries, once the draw has been made, it is over no matter how many tickets you are left holding. Like it or not, that lottery is now closed.”
- “As the market continues to soften, we are moving towards a buyer’s market. As interest rates continue to rise, the short-term projection for the housing market is that prices will continue to slide. The sellers who are currently seeing their homes sell are those who are pricing AHEAD of the market – in other words, their prices are lower than previous sales, not higher like you are suggesting. Many who are pricing higher either end up lowering their prices substantially to get a sale or end up taking their homes off the market altogether.”
- “I understand that you have put a lot of money into this home over the years. That has helped to increase its value overall, but will NOT push the current value over what other comparable homes with similar upgrades are selling for currently.”
- “Some sellers are telling us that they will take their homes off the market and rent them out if they cannot get the prices they want. A normal market deflection is 10% – we believe that under the current conditions, we will see a larger downward trend than that. If your home is currently worth $______________ and the value goes down 15%, it will be worth $______________ and you will have seen a decrease in value of $______________. If the market slides further, the loss will be even larger. If the current market rent for your home is $______________, how many months will you have to rent it out to recoup the projected loss in value assuming prices will rise again at some point in the future? Do you actually want to be a landlord? Do you have any experience? Do you realize that if you hire a property manager, they will take approximately 10% of your income per month? Are you factoring in potential repairs if your tenants are not kind to your property?
- “If the only way you will list your home is to start high at $______________, will you agree to a mandatory price reduction to $______________ if your home does not have an accepted offer within ____ weeks? Are you willing to cover the costs of photos and staging if the home does not sell?”
Although these scripts may be helpful in helping a seller understand the new reality, some will still not be willing to lower their prices to realistic levels. In those cases, it may be better to refer them to another local agent and then circle back once it fails to sell.
The bottom line in this new market is simple: While it was awesome to watch values soar in the previous overheated market, in the new reality, some of those gains will need to be given back to get a sale. And, if you really think about it, since the true value is only there the day you close escrow, sellers who refuse to set realistic list prices are suffering from a classic case of looking at the convertible instead of the refrigerator.
Carl Medford is CEO of The Medford Team.