Monday, September 15, 2014

DELUSIONAL PRICING

Long, long ago, like a year ago, the Denver real estate market was still a relatively sane place. 

Yes, it was a hot market.  Buyers far outnumbered sellers.  Prices were clearly rising. 

But because Denver remains a place where very few agents actually KNOW the numbers, our market has often been moved more by myth and rumor than by factual data.  And there’s a lag time to people figuring out what is actually going on, because there is zero “reporting” in the local media, just the lazy regurgitation of press releases from real estate companies and interviews with the same pod of talking-head industry insiders and DU professors who may or may not have any idea what is actually happening at street level.

After three years of solid, consistent recovery, however, we moved into new territory this spring.  Overheat mode.  Basically, everything that wasn’t falling down suddenly had multiple offers.  Hideous homes that had no prayer of selling three years ago went under contract, often “as is”.  For good homes, multiple offers became an expected norm, appraisal clauses were waived and buyers agreed to anything short of auctioning off their children in order to land a desirable piece of real estate. 

Even though the market began its sharp turn three years ago – and you could see it, if you actually tracked and followed real numbers – because of this lag time between what I will call “street knowledge” and “mass audience knowledge”, buyers could still find value. 

Many sellers felt it was still a buyer’s market, even when it wasn’t.  Many agents had no idea that they could price listings $10k, $15k or $25k over the most recent comp and sometimes actually get it.

So value lingered, even after the market had clearly moved from a buyer’s market to a seller’s market.

But that advantage only lasts so long. 

The good news, in Denver, is that the lag time wasn’t a few days or a few weeks.  I would argue it was a year or more before word fully got out that the buyer’s market had ended and a brave new era of seller-domination had begun.

Today, I am sad to report, the seller’s market is no longer a secret.  Even the most reclusive, disengaged, off-the-grid sellers knows buyers are everywhere and nothing is for sale.  And that means we have entered an era where delusional pricing is an increasingly common reality.

What is delusional pricing?  In my mind, it’s any home listed more than 10% over the most recent comparable sale.  If the last sale in your neighborhood of a model match was $300,000 and you price yours at $315,000, that's defensible.  If you price it at $330,000, that’s delusional.

And delusional pricing is now everywhere.

It’s not helped by desperate agents who have no listings and are sick of working with buyers.  Agents who fall into this category will say anything – anything – to get a listing, even if it’s $25,000 or $50,000 overpriced. 

What these agents know is that either, a) maybe somebody is desperate enough to waive their appraisal clause and pay the big number, or b) although it may be uncomfortable and take a few months to beat the seller down on price, eventually the home will sell.

It’s hard to compete against these tactics, which is what they are. 

I always tell my sellers that advising is my job, but pricing is their job.  It is, after all, their home.  I will show them comps, give them suggestions on how to prepare it, help them stage it, professionally photograph it, digitally market it, proactively engage with agents and buyers, creatively and skillfully negotiate contracts, and fight like crazy to get the best possible outcome… but pricing it is their call.

Within reason.

I believe that in a hot market, time is too valuable to let crazy people take over your ship.  If a home is worth $400,000 and somebody wants to list it for $425,000, that can be done.  Leave room for the market to come to you, but don’t be crazy. 

But if the same seller wants $475,000, I’m not interested.  Somebody else can take the punishment.  There are enough other motivated people in the market that you don’t have to hit yourself in the head with a hammer for six months to close a sale, with a broken relationship and unkept promises as your transactional legacy. 

Now every listing is unique.  Just as in life, some people are reasonable and some people are not.  There are good agents and lousy agents.  There are ethical people and there are people who think taking advantage of others is part of the game.  This is why it's really important to assemble a team of people you trust to help navigate these waters.

As a buyer, if you find a home that’s priced reasonably and you have faith in the market, then by all means get in there and swing hard.  Being on the sidelines is costing you money.  The median home value in Denver increased by $74 per day last year, with similar numbers likely this year as well.  Every day you continue to rent, you are paying someone else’s mortgage while your future mortgage becomes more expensive.

For you, time is money.

But if the pricing is crazy, you don’t have to play along.  Put a red line through it.  Wait for something else.  Be proactive and knock on some doors.  Try another neighborhood.

The problem with delusional pricing is that it feeds upon itself.  When Neighbor Smith sees that Neighbor Jones listed his $250,000 home for $325,000, Neighbor Smith now believes his home is worth $325,000. 

That’s wrong.  Your home is worth what a ready, willing and able buyer will pay for it.

Delusional pricing is like a cancer that gets into the market, spreading false perceptions of reality and emboldening others to become delusional.  That’s one of the maddening themes of 2014, especially over the past few months. 

A list price is not a sold price, and wishing won’t make it so.