Tuesday, December 21, 2010

Pricing Your Home - To Sell

If you house is languishing on the market, unsold, for months, it is overpriced, period.

When selling a home, many folks get nervous when their house sits, unsold, for months or even years on end.  Why isn't our home selling?  Is it the Agent?  The advertisement?  Lack of open houses? The decor?  What?

Price.  That's the only thing that sells houses.

You can't blame people for being stupid about this - very stupid.  Most folks sell a house maybe once or twice in a lifetime, so they don't get a lot of experience about how to buy or sell a home.

But you can blame people for being greedy.  And most folks over-price their home because they went with the Real Estate Agent that told them they could "sell" the house for a higher price.

But the reality is this:  Houses are usually sold by another agent, who shows the home to a prospective buyer by picking it from the Multi-listing database, based on price and location.  And the home buyers are going to buy based on price, which is a direct correlation to affordability.

If your home is overpriced, it won't sell.  And if you want to sell a home that isn't selling, lower the price.

Now granted, there are other things you can do to sell your home, and I have listed them here in this blog.  I have talked about home pricing before as well as how to get your home ready for sale.  It goes without saying that a home that is dirty, ugly, bizarre, or has major structural flaws will be harder to sell.  But even those "defects" can be cured by lowering the price - and in many cases, lowering the price is cheaper than fixing the defects in the home.

And in pricing your home, determine your real goals here.  You can bankrupt yourself trying to get "your price" on a house.

For example, Jim moves to L.A. to get a new job.  His company downsized in the recession and after months of searching, he found a new job - on the opposite coast.  He has to sell his East Coast home, but in the meantime, he is making mortgage payments on it AND paying rent on a condo in L.A. until he can get settled.

He picks the Real Estate Agent who told him he would "get $450,000" for his house, even though similar houses in the neighborhood are selling for $350,000.  And Jim knows, from experience, that many homes in his area languish on the market for months, if not years, for the simple reason that there are few buyers and few jobs in the area.

Worst yet, Jim is paying $3000 a month in mortgage payments on his house, and another $2500 a month in rent on his Condo in L.A.  Even with the new job, this is too much money, and his cash-flow has gone negative in a big way.

If Jim "hangs on" to the house for a year, hoping to find that magic buyer, he will spend $36,000 in mortgage payments to keep the house.  And since the house is overpriced, he likely will have to drop the price anyway, to below $400,000 if not more, to get it to sell.  Compounding this, the vacant house is not going to show well, and Jim will have to pay energy bills on it, and also worry about pipes freezing.

He could rent the home, but that would yield less in rent than the mortgage payment.  And once rented, it will be difficult to sell, as the tenants will not likely cooperate to keep the place in "show" condition.  And Jim will be an unwilling amateur landlord who lives thousands of miles away - always a recipe for disaster with tenants, particularly if they don't pay rent or trash the place (both common in the depressed area Jim lives in).

If the house doesn't sell, Jim could literally be facing bankruptcy within a year or so.

A better approach is to price the home reasonably.  Jim hires a different Real Estate Agent, who does market comparables and pulls recent sales for his area.  Based on these, it appears that Jim's house is worth maybe $375,000 on a good day.  But, it is fall, and not a good selling season.  Moreover, average time-on-market for Jim's depressed area is 10 months, even for an appropriately priced home.  That amounts to $30,000 in overhead and carrying costs.

Jim's Agent offers to pocket-list the home for a 3% commission, which would save Jim nearly $12,000 in closing costs.  Between the savings on commission and on overhead, he can afford to drop the price dramatically for a quick sale - and yield the same return on his money. 

So they drop the price to $330,000 and sell the house in a week.  Jim gets the same amount of money he would have dicking around with an overpriced house on the market for years, but doesn't have the pain of supporting two homes in the interim.

If you are in a two-home situation, calculate the overhead cost of the home you are selling, and factor that into your selling price.  If homes are languishing on the market in your area, it makes no sense to list a home for years and years, hoping to "get your price" only to later lower it, and effectively walk away with LESS, having paid the overhead on an empty home for two years.

But in reality, that is what happens a lot in Real Estate, particularly in certain rural areas in this country.  I recently sold my home in New York and presently live on an island in Georgia.  In both locations, home languish on the market for years (sometimes as many as five!) before selling.  And in both locations, people wildly overprice homes.

How wild?  Well, when you list a home for $900,000 and get no takers after a year, and then slowly lower the price to $450,000 over a period of two years, and still no takers, that is pretty fantastic over-valuation of a home.

The "get my price" mentality seems to permeate depressed areas.  And for that reason, I would not suggest buying a home, car, or boat, in such places.  People have unrealistic expectations in such areas, and if you try to buy things there, you will just end up over-paying or getting frustrated when people "hold out" for insane prices.

For example, never buy a used car in Pennsylvania or New York.  They are rusted out pieces of crap, to be sure.  But for some reason, people in these impoverished areas think their cars are worth more than a rust-free garaged example with low miles, from Florida.  Wealthier people don't obsess about getting every last dime out of a used car - they move on to the next one.  But in depressed areas, constipated commerce dominates.

As Edith Lank has said on many an occasion, if your house isn't selling, you have to lower the price, period.  There is no point in putting your home on the market at joke prices - it just ends up causing your pain and money.

Sell it and move on...

UPDATE 2021:   In this new housing bubble era, where you can list a house and sell it for over-asking, in a weekend, with four contracts with escalation clauses, this information may seem dated.  But bear in mind that the current market is an anomaly.  This too, will change.