Underpricing
For the same reason, brokers prefer to underprice properties. They will make all sorts of arguments about pricing it right from the start and not allowing the home to become stale. But I can think of no other product or asset class marketed this way. No, it is really about a quick sale and a quick payday.
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Let’s start this chapter with a conversation:
Broker: So you can see Mr. & Mrs. Seller, the comparable properties indicate a sales price of $400,000-ish.Seller: Er, we were thinking of something more around $450,000.Broker: Hmm, tell me why?Seller: Well, for one thing, we’ve put about a fifty thousand dollars into the place since you sold it to us seven years ago.Broker: Ah yes. Well, if you will remember, when you bought it, I cautioned you to be careful with upgrades and improvements. And to be sure you would enjoy them because you rarely get your money out of them.Seller: Oh yes, we remember, but that does not mean they are worth zero.Broker: Well sure, we could go to $405,000 or stretch to $410,000. But it would really be just room for negotiation. If we were to start anywhere near $450,000 the house would just sit on the market and get stale.Seller: Stale?Broker: Yes, it is vital to price a home correctly from the start. So that it does not sit on the market too long and become stale and buyers will surely think: There must be something wrong with that house. Then, you’ll end up taking even less than I am suggesting. Now, we don’t want that, do we?
This conversation goes on everyday across the country. And I am here to tell you what no one else will: It is a sham.
As I mentioned above, can you think of any other product or asset class marketed this way? I can assure of this: The only reason a potential buyer might think that there is something wrong with the house is that their broker tells them so. Otherwise they would think the same thing they do when they go to buy anything else: It is natural and standard for sellers to start high and come down over time until the product sells.
Just think of when you go out to buy any other product. An article of clothing, a new or used car, furniture, etc. A real estate broker would have you believe that the brand new line of spring fashions should start at mid-summer pricing. It’s crazy. And it is dishonest.
So sure, the seller’s hoped-for price may be wishful thinking. But on the other hand, the seller may have very good reasons for their price: This is a very popular neighborhood and there have been no sales in here for over a year. So Mr. Broker, your comparable properties are either older or from other neighborhoods. And we’ve talked to our neighbors; no one else is even thinking about selling. Or the seller may say: Well, we’ve got the time.
So what’s the alternative? Well, the conversation starts very similar to the above. But when the sellers say: Hey, we want $450,000, why not respond with:
Broker: Okay, well it is really a question of price versus time. I have explained the comps to you; I believe that it will sell for around $400,000, but God knows I am not infallible. And your points about the neighborhood sales are well made. I tell you what, let’s start at $450,000. And we can bring the price down on your schedule. Just don’t be surprised if it does not sell until we come down substantially. And please, do not get frustrated with me for not getting it sold before then.
I mean, what does this cost the broker?
The answer is: A quick sale. And an easy sale.
And, the broker is worried that the seller will fire them for not getting it sold. But I think the broker needs to do two things. First, be honest about what he thinks the property is worth. And second, respect his seller. The seller’s needs and desires are as important as the broker’s. More important. Actually, the seller’s needs should be paramount. Is it not sad that we must point this out?
I have found that if you begin the relationship this way, people will not fire you. They will remember what you said and think better of you for it.
This lack of respect for clients and potential clients is epidemic in the real estate business. We’ll spend more time on this throughout this book.
But wait, I said it was a sham, right? For brokers, it is not only about getting the seller to accept less than they want. It is also about getting the seller to accept less than they should. The comparable properties typically indicate a price range, and the broker wants the seller at the bottom or even beneath that range. Again, quick sale, easy sale.
Plus, go back to my comment about price versus time. If you put the house on the market for three days, your buyer pool is, by definition, less than if you leave it on the market for, God-forbid, a whole week. And an expanded buyer pool increases the likelihood of an offer or of an acceptable offer, and surely of the best possible offer.
Now I hear you: No other brokers are telling us this. How come your advice is so much different? Remember Freakonomics? Economists found that when brokers sell their own properties, they price them higher and leave them on the market longer than when they sell client properties.1 Why? Well if they are selling their own property, it’s their money, not yours.
I am not saying there is absolutely no truth in this staleness business. I am just saying that brokers are being disingenuous about their goals.
After a broker lists a property, what does it cost the broker to leave it on the market for a few days or weeks? Nothing. Only bragging rights about a quick sale. And a quick payday.
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1. Steven Levitt & Stephen Dubner, Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, William Morrow, 2005.