Four-phase pricing: Prevalent but ineffective

The consequences of pulling an unsubstantiated asking price out of the air are unacceptable for a smart seller. You may undervalue your house and risk leaving money on the table when you sell. Or, more likely, you may overprice your house, which results in an exhaustingly slow marketing process that ultimately lowers your sale price. Houses marketed by unrealistic sellers usually go through the following four distinct pricing phases prior to sale:

• Phase one: Sellers start by blithely disregarding any factual pricing method, such as checking comparable property sales. Why? Some sellers don’t know any better or get lousy advice from their real estate agents. Other sellers think their house is infinitely superior to those ticky-tacky comps. They’re sure their house’s inherent superiority will quickly attract a buyer with more money than good sense. Either way, this misguided method generally results in grotesque overpricing.
• Phase two: After several months of total market rejection, the sellers grudgingly make a tiny price reduction, which brings their asking price down from the grotesque level to merely absurdly overpriced. Fantasy moderated is, however, still abject fantasy.
• Phase three: More lonely months pass, and then two things happen. First, the sellers typically get a new agent — poetic justice for an agent who either didn’t know property values or who intentionally misled the sellers about pricing to get the listing. Second, the sellers reduce their asking price to one that “leaves room to negotiate.” Even though the revised price still is moderately higher than the house’s probable sale price based on sales of comparable property, at least the new asking price has some basis in market reality.
• Phase four: The sellers ultimately accept the validity of comps and reduce their asking price accordingly to a “let’s sell it” level. After the sellers establish a good correlation between asking price and fair market value (FMV), their house finally sells.

Ironically, instead of getting more money with this method, four-phase pricing usually stigmatizes a property and reduces the eventual sale price to less than it would’ve been with more realistic pricing. Here’s why:

• The listing agent can’t justify an indefensible asking price. If the asking price has no factual basis, the agent can’t provide a good answer to buyers who ask, “Why hasn’t the house sold after all this time on the market? What’s wrong with it?” In degree of difficulty, this situation ranks right up there with, “Just what do you think you’re doing?” when your mom caught you with your hand deeply buried in the cookie jar.
• The property is slowly but surely buried by new listings that come on the market. After several months, most buyers and agents either forget that your house still is on the market or belittle the house by saying, “That old thing. It’ll never sell.” In desperation, sellers are forced to slash their asking price to the bone to attract buyers.

Four-phase pricing creates a self-fulfilling prophecy. Folks who use this pricing method expect it will take a long time to sell their house. In a strong market, they’re correct because the market will ultimately rise to their price level. In a weak market, they’re disastrously correct as they chase the market ever lower.

Pleasure-pleasure-panic pricing: Fast, top-dollar sales

If the four-phase pricing plan is a flop, what’s your alternative? We’re glad you asked. The smart way to sell your property is the pleasure-pleasure-panic pricing method. You can sell your house quickly and get the highest possible price by using this method. The secret of success is establishing a realistic asking price for your house when you first place it on the market.

As we note in Chapter 10, the correct way to establish an asking price is to analyze houses comparable to yours in size, age, condition, and location — houses that currently are on the market and those that have sold within the past six months. Don’t be misled by asking prices; many sellers use four-phase pricing. Sale prices, not asking prices, determine FMV.

Here’s how the pleasure-pleasure-panic pricing method works — Milt and Judy have spent the last three months looking at houses on the market in their price range. They’re educated buyers; they know how to distinguish between a well-priced house and an OPT (overpriced turkey).

Judy and Milt nearly bought a great house a couple of months ago. It had all the features they wanted and was fairly priced, to boot. However, Milt didn’t realize how well priced it was because he’d just started the education process. While Milt was haggling over the price and terms of sale, the seller accepted a better offer. Judy still blames Milt for losing their dream house.

They’re spending today the same way they’ve spent the previous 11 Sundays, touring what seems like an endless series of newly listed OPTs with their agent. Then Judy and Milt trudge into your first open house and pleasure-pleasure-panic kicks into gear.

• Pleasure Number 1: Judy and Milt love your property. It’s the best place they’ve seen in the past three months. They could live in your house happily ever after. Their eyes start to sparkle.
• Pleasure Number 2: Milt and Judy can’t believe their eyes when they look at the asking price on your listing statement. By now, they know property values every bit as well as their agent. Your house is definitely priced to sell. Their hands start to tremble.

• Panic: Judy and Milt see another couple entering your house. They’ve seen these folks at many other open houses during the past couple of months. That familiarity isn’t a coincidence. The other couple obviously wants to buy a house in the same neighborhood and price range.

  Judy and Milt stare at each other in horror. If they love your house and know it’s well priced, so will the other couple. Their deodorants fail when they realize that if they don’t act quickly, the other couple will snap up the house. Milt tells their agent to write up a full-asking-price offer. Judy kicks Milt in the shin and instructs the agent to go $10,000 above your asking price just to be safe. Milt agrees. He doesn’t want to be a two-time loser.

That scenario explains how pleasure-pleasure-panic pricing creates a sellers’ market even in the midst of a buyers’ market. This approach puts intense pressure on buyers to perform quickly.

Don’t be surprised if you get several purchase offers, including some that are equal to or more than full asking price, as soon as your house hits the market — if your house is priced right. After your property has been given broad, immediate market exposure, spirited competition forces buyers to pay top dollar for your house. This method works almost every time. (And, by the way, we cover exactly how to handle multiple purchase offers in Chapter 14.)

Quantum pricing: An effective technique

Put yourself in the buyer’s shoes for a moment and imagine that you’re buying, not selling, your house. If you’re like most people, one of the first things you do is decide how much you want to spend. For example, you set your upper limit of affordability at $250,000. If you’re working with a real estate agent, you probably tell the agent, “I don’t want to spend more than $250,000,” or “Don’t show me anything that costs more than $250,000.” Why waste time looking at property you can’t afford to buy?

Buyers use price limits, called quantums, to simplify house hunting. Pricing quantums are initially expressed in nice, round, easy-to-work-with numbers, such as $100,000 and $50,000, and then fine-tuned to $25,000 and $10,000 quantums.

Think of buyers as fish swimming in an ocean of houses for sale. At any given time, huge schools of buyer-fish usually are swimming in this sea. However, the buyer-fish swim at many different levels; one school swims at the $150,000-to-$200,000 price quantum level, another swims at the $200,000-to-$250,000 price quantum level, and so on.

Buyer-fish from higher-price quantums occasionally swim down to a lower quantum in their searches for a house. However, buyer-fish rarely swim up to a higher quantum (if they establish realistic affordability limits). When a buyer-fish can’t afford to swim up, the price must drop down to the buyer-fish’s price quantum for the house to sell.

Deal-making incentives

In a really rotten market, you can sweeten the deal by offering buyers money in the form of special financial concessions. One or more of the following incentives may be the key to putting a deal together:

• Credits in escrow: One effective financial inducement is offering to pay a portion of your buyer’s nonrecurring closing costs for such expenses as loan origination fees, title insurance, and property inspections. You may also graciously offer to pay for some or all of the repairs found by the property inspections. As we explain in Chapter 14, these payments usually are made as a credit in escrow from sellers to buyers.
• Seller financing: Chapter 4 explains the risks and rewards of seller financing. On the plus side, financing some or all of the buyer’s mortgage may get you a higher sale price, a faster sale, an attractive return on your money, and possibly some tax savings. Doing seller financing, however, ties up money you may need for the down payment on your new home. Worse yet, if the buyer defaults on your loan, you must foreclose on the mortgage to protect your money.

Deceptive gimmicks

Smart financial incentives make deals happen. Improper inducements (which we call gimmicks because that’s what they are) waste time and usually result in lower sale prices. Impractical sellers sometimes resort to subterfuge in a futile attempt to disguise how ridiculously overpriced their property actually is. Instead of reducing the asking price to a realistic level, they try in vain to enhance their house’s value with gimmicks that fall into one of the following three categories:

• Buyer baubles: “Buy our house, and we’ll give you a free week in Paris for two (or a diamond ring, a brand new motorcycle, whatever) to sweeten the deal.” Occasionally, sellers make this type of offer in phase one or two of four-phase pricing (explained earlier in this chapter in the section “Four-phase pricing: Prevalent but ineffective”). Sellers erroneously assume that buyers will be so dazzled by the “free” goodies that they won’t notice the house’s asking price is outrageously high.

  Buyers usually know that the asking price includes a gimmick’s cost. They aren’t about to add the price of a trip to Paris, for example, into their 30-year mortgage. Opportunities to fly now and pay forever won’t sell a house. Neither will drive-now-and-pay-forever deals, or wear-now-and-pay forever gimmicks. Buyers aren’t stupid.

• Agent payola: Some sellers offer special inducements, such as trips or double commissions, to the agent who sells their property. These gimmicks are nothing more than blatant bribes for agents to sell their buyers down the river. Good agents categorically reject this kind of sleazy offer.

• Contests: As the California real estate market hit bottom in the mid 1990s, a few desperate sellers decided that, if they couldn’t sell their houses, they would give them away in contests. Owners of a $150,000 house, for example, put an ad in the local paper inviting folks who wanted to enter their contest to write a 250-word essay explaining why they wanted to live in the house. Each contestant had to submit a $100 money-order entry fee with the essay. If 1,500 people entered the contest at $100 a pop, the property owners got their asking price. If, however, not enough people entered to make the contest worthwhile, owners reserved the right to cancel the contest and return all entry fees.

  At least a dozen different California property owners tried variations of the contest gimmick. The ploy was a resounding flop. These contests uniformly drew far too little attention from contestants and far too much attention from state law enforcement personnel concerned about possible violation of California’s antigambling statutes. The name of the game is selling your house, not going to jail!

Even if you can find buyers gullible enough to overpay for your house, lenders can’t consider the value of gimmicks when appraising property; the mortgage won’t be approved if the property is overpriced. Our advice: Don’t waste time and money on gimmicks.

Can’t sell versus won’t sell

The San Francisco Chronicle ran a front-page story about a Bay Area house that was sliding down a muddy ridge that had been weakened by torrential rains. Battered by a series of severe storms, the house was slowly cracking in half. Mother Nature was putting the finishing touches on a remodeling job the ill-fated homeowner had started only a few months earlier.

“Can’t,” used in the context of selling a house, means the property is impossible to sell. Unlike most people who claim they can’t sell their houses, the poor guy who owned this property really couldn’t sell it. There’s no market for unintentional mobile homes.

Fortunately, the vast majority of homeowners who claim they “can’t” sell their houses are exaggerating. They aren’t disaster victims whose property values have been abruptly reduced to zero. Usually, plenty of purchasers are willing to buy their houses, and many lenders are ready to make loans to those buyers.

If nothing is physically wrong with their properties, what’s the problem? Most of the time, the predicament is because of overpricing camouflaged by denial. A more accurate statement of the situation, for most would-be house sellers, is “We are unwilling to accept the price the market tells us our house is currently worth.”

These homeowners can sell. They simply won’t sell. As long as you choose not to take the amount that buyers will pay for your house, it will continue to languish unsold on the market. Saying you can’t sell your house is a self-fulfilling prophecy.

If your house is under 6 feet of water, has been carried away by a tornado, is now a pile of rubble because of an earthquake, or was ravaged by some other natural disaster, you have a valid reason for saying you can’t sell. If not, don’t let denial blind you to the truth. You control your fate. You can sell your house after you correct the problem that’s driving away prospective buyers. Perhaps you didn’t follow our advice elsewhere in this book; you may have overimproved your property for the neighborhood, done a poor job of selecting an agent, or failed to properly prepare your house for sale. More often than not, however, the problem is overpricing.

Three factors all buyers consider

Sooner or later, all buyers hear that the three most important things to consider when buying a home are location, location, location. Because you’ve been through the purchasing process, you know this cliché is a gross oversimplification. Here are the three factors buyers actually consider when selecting a home:

• Where the property is: Okay. The old “location, location, location” adage is one-third true. Urban, suburban, or rural; high in the mountains, smack in the middle of the Great Plains, or by a shining sea; you can’t get around the fact that a house’s location greatly affects its value. People pay dearly to buy into “good” neighborhoods. Folks buy location every bit as much as houses.
• What the property is: A house’s value depends on many factors such as its size, age, condition, and architectural style. The quality of construction materials and interior appointments also enter into property valuation.
• How much the property costs: Whether they’re buying the most expensive house on the block or the cheapest, smart buyers try to get the biggest possible bang for their bucks. Furthermore, most people do a heck of a lot of comparison-shopping before they buy just to make sure they don’t overpay.

If you’re having trouble selling your house, look at it in the same way buyers do. What can you change to bring your house’s price in line with a buyer’s perception of its value? Analyze your property with these three crucial factors in mind:

• Can you change where the property is? Nope. Even if you could move the house, the land under it stays put.
• Can you change what the property is? Possibly. For example, if a rusted-out car is the focal point of your front yard, hauling the car away will probably improve your prospects for making a sale. Reinspect your property inside and out. Make sure everything is in tip-top condition. Be sure to read Chapter 9 to find out the best ways to prepare your property for sale.
• Can you change how much the property costs? Bingo. If you can’t change the property’s location, and you’ve done everything you can to prepare your house for sale, what’s left to change? The price! Don’t feel bad if you unintentionally overprice the property. Anyone can make that mistake. As we explain in Chapter 10, pricing isn’t an exact science.

Danger signs of overpricing

When you price property correctly, it sells. Conversely, even if your property is in exquisite condition and actively marketed (open houses, classified ads, MLS, website, and so on, as we describe in Chapters 12 and 13), a dearth of offers indicates it’s overpriced. The warning signs of overpricing may include any or all of the following:

• No second showings: Well priced or not, agents and buyers rush to see new listings. Watch out for a precipitous decline in showings after the initial flurry of activity when your house first hits the market. If nobody returns for a second look, you have a problem.

• Many showings, but no offers: Switch hats — suppose you’re a buyer. Your agent shows you a three-bedroom, two-bath house for $249,500. Then the agent takes you to a newer four-bedroom, three-bath home just two blocks away — with the same asking price. The agent doesn’t have to say anything; the difference between price and value is starkly obvious. The first house helps sell the second one.

  Your listing agent (if you’re selling through a real estate agent) should help other agents route house tours by pointing out overpriced properties the agents can show their buyers before bringing them to your well-priced house. Successful agents show buyers OPTs (overpriced turkeys) to sell well-priced houses.

The foolproof way to correct overpricing

During Ray’s 22 years as an active real estate broker, he managed hundreds of real estate agents and participated directly or indirectly in thousands of sales. Having studied the correlation between asking prices and sale prices through all those years, he made an amazing discovery: Good market or bad, more than 97 percent of all property sells within 10 percent of its final asking price.

Ray’s observation doesn’t mean that every house starts out with the correct asking price — quite the contrary. Many properties go through a needless series of ineffective price reductions before ultimately arriving at the correct asking price. However, after owners finally reduce their houses’ asking prices to within 10 percent of FMV, their properties sell.

If your house hasn’t generated any offers, even though it shows wonderfully and is aggressively marketed, update your CMA. You may discover that your house is overpriced by 5 percent, or by 20 percent, or, gasp, by even more. When you update your CMA, consider the following:

• As we note in Chapter 10, it’s tough to precisely establish the value of attributes such as proximity to bus lines, wonderful landscaping, and views. Your listing agent, if you’re using one, or you may have given your house’s amenities a much higher value than buyers do.
• You (or your listing agent) may have put too much emphasis on asking prices or used inaccurate sales data. Perhaps houses that were on the market when you prepared the CMA ultimately sold for much less than their asking prices. Maybe some sale prices of comparable houses didn’t reflect big credits in escrow from sellers to buyers for corrective work or nonrecurring closing costs.
• The local real estate market may have gone down the drain. Did mortgage interest rates skyrocket, or did consumer confidence plummet since the CMA was prepared? Adverse market conditions drag prices down. Find out how many properties similar to yours have sold since your house came on the market. Maybe nothing is selling. On the other hand, if comparable houses are selling and yours isn’t, put on your hard hat — falling price zone ahead.
• You may have missed the prime selling time. As we discuss in Chapter 5, every real estate market has peaks and valleys of sales activity. For example, suppose you base your price on sales made during September and October, when more buyers were active in your area. However, your house went on the market the day after Thanksgiving, after most buyers had vanished. Your timing is awful. To make a sale, you either have to cut your price to the bone or take your house off the market until buyers return in the spring.

Whatever the problem, don’t compound it with excessive tenacity. If you haven’t gotten any offers after approximately six weeks on the market, and other houses similar to yours are selling all around you, the odds are high that your asking price is at least 10 percent more than your house’s FMV. Under these circumstances, correct the problem by cutting the price 10 percent. Here’s how to maximize the impact of your price reduction:

• Bite the bullet and make a full 10 percent cut. Making a series of smaller price reductions only prolongs the agony. Your property will be forgotten as more and more new listings come on the market. Don’t turn your house into “That old thing? Something must be terribly wrong with it. It’s been on the market forever.”
• Use quantum pricing to fine-tune the new price. Suppose your asking price is $279,500. A 10 percent reduction ($27,950) cuts the price to $251,550, which isn’t a smart price. Never leave your asking price dangling just above the next quantum. You lose exposure to all the buyers who, for instance, instruct their agents not to show them anything over $250,000. As we explain in the section “Quantum pricing: An effective technique,” a smarter price is $249,950.

• If you still haven’t gotten an offer after another six weeks or so of active marketing at the new price, make another 10 percent reduction. You may have been 20 percent or more over FMV when you put your house on the market. Perhaps you’re in a market where prices are declining. If that’s the case, the longer you delay a price cut, the greater the gap between your asking price and actual market value.

  Six weeks isn’t carved in stone. In a hot market, three or four weeks may be more than enough time to give your house maximum buyer exposure. In a slower market (such as the long, hot summer when kids are out of school and many buyers and agents take vacations), you may be wise to wait seven or eight weeks before a price cut. Let local market activity be your guide when you time price reductions.

Placing the blame where it belongs

Telling sellers that they must cut their asking price if they want to sell is extremely difficult for agents. Many agents can’t do it. They’re afraid sellers will respond by saying, “This mess is all your fault. We relied on your advice to set the price. A halfway competent agent could’ve sold our magnificent house months ago. We don’t need a price cut; we need a new agent. Get out of our house. Never darken our doorway again. We rue the day we ever met you. Curse you and all your offspring forevermore.” Or words to that effect.

Firing the agent may be the correct thing to do. An agent who intentionally overstates your house’s value to get the listing deserves to be dumped. By the same token, a likable but inept agent is utterly worthless. You need a good agent, not a fraud or a friendly fool.

Sometimes, however, dumping your agent is like throwing the baby out with the bath water. Perhaps your house is tough to price because it’s unique or because no recent comparable sales have occurred in the neighborhood. Maybe the local economy took a nosedive right after your house went on the market. Venting your frustration on the agent for telling the truth won’t get your house sold.