Consider a seller who bought a home for his family at the price of $300,000 in 2003. The value of the home quickly inflates – more than doubling before the crash – then drops down to $250,000 by 2009, where it stays today. The seller has taken a new, better paying job with a farther commute.
The seller now considers relocating his family closer to work for sake of their quality of life. The seller locates a real estate agent, intending to list the property for sale.
Against the agent’s advice, the seller insists the property be listed at the original price of $300,000. The agent takes the listing at that asking price, agreeing to diligently market the property and locate a buyer. No buyers submit offers. As days, weeks and months pass, the listing languishes.
The seller continually refuses to accept the market reality: his home is no longer worth what he paid for it. Eventually, the agent and his broker terminate the employment under the listing for their inability to attract buyers without a huge price reduction.
first tuesday insight
Stubbornness such as the seller’s is known as the sticky pricing phenomenon. Many sellers in a devalued real estate market of reset prices willfully disregard the fundamental concept of fair market value (FMV). Instead, they insist their home is worth at least what they paid for it, or more. Their original purchase price creates a floor which they cannot contemplate going under.
Most positive equity property sellers believe prices will return, and it is just a matter of time before they get their asking price. In the seller’s unalterable mind, previous pricing for the property serves as a guideline for an acceptable offer. Accepting anything less would compromise their belief in the market, and force them to accept a loss.
Lingering money-illusions of past dollar amounts stem, in part, from adherence to the myth that California real estate perpetually appreciates. With this in mind, it seems almost a concession to merely ask to recoup their initial investment, regardless of the cold hard truth that their home is now worth significantly less than the dollars they originally shelled out. Further, that figure comes before considering the ravages of even 2% inflation we have experienced annually over the past of decade.
Seller fidelity to past pricing and home price appreciation myths directly inhibits buyers from making an offer. The property is listed at a price estranged from reality. Worse, other agents soon get the word on this “shop worn” listing, effectively killing the property’s chance of being shown and sold at any price. Any buyer’s reasonable offer, as determined by comparable property analyses (comps), would be rejected out of the seller’s misguided allegiance to their money-illusion.
Presumably, many of these sellers bought their homes going into the Millennium Boom, then saw property prices soar above the equilibrium trend line, the historical mean price of real estate, past, present and future. When the bubble burst and prices plummeted, many sellers were left with little to no equity. The only thing remaining was the pre-crash price stuck in their heads.
The equilibrium trendline: the mean-price anchor
It is crucial to note that an impractical listing based on past values will not avail anything for the seller – or his agent. The temptation to ask for more than is presently reasonable needs to be corrected by counseling to position the seller’s thinking. Otherwise, buyers will go elsewhere, or wait as they are presently doing. Worse, other agents and brokers will avoid dealing with the agent’s listings as client counseling is missing, and work on the agent’s listing will likely be a waste of the other agent’s time.
If a buyer and his agent do choose to take the over-priced bait, appraisers and lenders are next in line to shoot down the transaction – again wasting agent time – since the property does not qualify as adequate security for the loan.
Sticky prices, tricky situation
Agents in a sticky pricing situation are challenged to invest time educating the seller about the property’s actual FMV before undertaking a listing employment. Compile sales data from recent comparable properties (comps) and enter it on a comparable market analysis worksheet to for setting values. Review it with the seller to educate them on the market using real numbers in their neighborhood. You will fast learn whether your seller is a match for your services. [See first tuesday Form 318]
Unfortunately, most sellers today question the legitimacy of this counseling. When the facts are confirmed by a second or third agent (or which agent that panders to the seller’s illusion), the seller employs that agent, not the one that got it right first.
If the seller on enlightenment about pricing conditions still refuses to budge, do your part to keep sales volume and fees moving smoothly; avoid the employment, and the seller might just get the hint. You will not likely earn a fee from a listed property that can’t be sold for lack of seller reality for marketplace dictates.
Re: Don’t Let the Original Price Haunt Your Decision to Sell from the New York Times