Why Do Sellers Misprice?

Lack of Information & Objectivity

Not all Home Sellers misprice -- or would if their Realtor didn't convince them not to -- but enough do that it begs the question: why?

From my perspective, it's usually a combination of three factors (none of which involve vanity or ego).

One. Lack of information (about the Comp's, or comparable sold properties).

A client of mine last year was adamant that his home was worth more than another on his block that had sold for $40,000 more than I recommended pricing his at.

So I asked him, "Did you see your neighbor's updated Kitchen? The new master bathroom? All the new windows in the back of the house?

Answers: 'no,' 'no,' and 'no' -- he'd never been inside. (Memo to fans of Trulia, Zillow, CyberHomes, etc.: they suffer from the same shortcomings.)

Two. Lack of objectivity.

This one especially comes up with homeowners who haven't moved in a long time.

Anything you look at day after day -- let alone year after year -- gradually becomes . . . invisible.

Once upon a time, when I lived in Manhattan, I had a 35th floor apartment with sweeping views of upper Broadway and the Hudson (at least until a developer put up a new, 50 story building across the street).

Yet after a few months, the only time I really noticed it anymore was when guests would visit and be mesmerized by the view.

Or, after I'd been away for longer than a week and returned, the views once again registered for a few days, before turning back into wallpaper (albeit very attractive wallpaper).

The same phenomenon explains my initial meeting with a client a ways back, as we toured her home.

When we got to the master bedroom, I pointed out a conspicuous stain in the ceiling that I recommended fixing.

"What stain?" was her first, incredulous (and honest) response.

Then a second later: 'Oh, that stain . . .'

(Sidebar: the one exception to becoming inured to one's everyday environment: natural light. At least in my experience, you never get tired of natural light -- or used to its absence.)

Three. Lack of information -- about Buyer tastes, market trends, etc.

Another recent client of mine took umbrage at the (rather deafening) chorus of feedback all zeroing in on the home's dated feel.

The windows, the carpet, the Kitchen counter tops, the color scheme, the home's siding -- and on and on.

The owner had spent good money periodically updating those things and keeping them in good repair, but after 30 years in their home, they simply weren't able to relate to Buyers' comments.

Which leaves it to a Realtor they trust to (gently) tell them -- ideally, before they come on the market.

New Feedback Forms: Now Twice as Annoying!

The Real Purpose of Showing Feedback

For the uninitiated, every time a Buyer's Agent takes a client through a property, they subsequently receive an online feedback form debriefing them on how it went.

Once upon a time -- like two years ago -- they all basically asked the same thing(s): 'tell us whether your client liked the home or not -- and, if not, why not."

Now, I'm seeing "custom" feedback forms with more -- and more demanding -- questions (my knee-jerk response follows in italics).

Like:

"What listings do you consider the closest competitors?" You did the Comparative Market Analysis ("CMA"), you tell me.

Or this one:

"What could we change/improve to get this house on your list?" Don't ask me to do your job . . . . mine is to find a home for my client that already has what they want.

Of course, the perennial favorite remains some variation of the following:

"Please indicate whether the home is priced above, below, or at market."

a) unless my client has serious interest, I'm not going to carefully price it; and b) if my client does have serious interest . . . that's the last thing I'm going to share.

Making these questions even more annoying is the fact that you can't get rid of the form until you fill in all the fields (a single punctuation mark suffices, I quickly discovered).

If you simply try to ignore the form -- it'll magically keep re-appearing in your in-box until you do.

Full disclosure: Edina Realty's feedback forms do this, too.

Feedback's True Purpose

As a Listing Agent, I like to tell my selling clients that "the only feedback I really care about is a full-price offer from a well-qualified Buyer -- or even better, two such offers."

Which is the truth.

It's also the case that providing thoughtful feedback is a courtesy shown to colleagues, and that if you want to have a reasonable expectation of receiving constructive feedback on your listings, it's incumbent upon you to fill in their feedback forms.

Call it "feedback karma."

Which gets to what feedback forms are really all about.

Not Shooting the Messenger

If you really need feedback forms to tell you how the market views your client's home (price, condition, floor plan, etc.) . . . you probably haven't been selling real estate that long.

Rather, the real purpose of feedback forms is to help wrest needed price reductions from resistant Sellers, without the Listing Agent being "the bad guy."

Put it this way: it's one thing for the Seller's agent to say their home is overpriced. After all, don't Listing Agents just want the price to be as low as possible, to consummate a sale??

However, when a parade of strangers all zero in on the same 3-4 shortcomings, then promptly disappear . . . the message tends to be a little more credible -- and potent.

Seller's Comp's vs. Buyer's Comp's

"East is East and West is West"

From experience, here are two good rules of real estate negotiation:

Rule #1. Never argue the "comp's" with the other side.

A comp, or comparable sold property, is a similar, nearby home that has sold recently.

To determine fair market value, Realtors and appraisers alike typically look for three good ones, then go through a "compare-and-contrast" process with the subject home to arrive at an adjusted value.

The first person to do the comp's is the listing agent, in the course of preparing a "market," or Comparative Market Analysis, for the homeowner.

Subsequently, the prospective Buyer's agent will also scrutinize the comp's.

Then, once there's a deal and the Inspection Contingency has been removed, so will the appraiser hired by the Buyer's lender (unless it's a cash deal).

In almost nine years of selling real estate, I've yet to encounter a situation where the Buyer's agent, in the course of negotiating an offer, made the case that the Seller's comp's were unrealistically low.

Nor have I seen an instance where the Listing agent, representing the Seller, readily conceded that their comp's were too high ("You got me! What was I thinking!?!").

In fact, the agendas of each side are so manifestly clear and self-serving -- not to mention transparent -- that it's almost always a waste of breath to engage on this.

Rule #2. If you're going to break Rule #1, you'd better make sure that you know the comp's -- or comp, if there's one in particular that looms large -- better than your negotiating counterpart.

I recently had a deal where the other agent was adamant that, "based on the comp's," my Seller's asking price was out of line.

He placed particular significance on one property in particular.

It turns out that the other agent had never been in the home.

Guess who had?

In fact, I'd shown the home to 3(!) clients, and knew every square foot of the house by heart.

So, I knew that the flattering Kitchen shots masked what was easily $100k in needed updating; the floor plan was off; and that the master bath was tiny -- and couldn't be expanded.

The upshot?

The Buyer significantly raised their offer, and ultimately reached agreement with my client.

P.S.: Trial lawyers have a saying, "never ask a witness on cross-examination a question that you don't already know the answer to." Good advice for Realtors "debating" the virtues of various comp's!

Picking Comp's: Vertical or Horizontal?

What's it Worth? Who Wants to Know?

Pricing well is one of the most important skills a Realtor brings to the table.

In turn, that depends on knowing which "comp's," or comparable sold properties, to choose.

As defined by both Realtors and appraisers, the comp's are the three homes most similar to the "subject property" -- in terms of style, age, square feet, condition, etc. -- that have sold the most recently.

Once you've identified three homes, step 2 is to go through a "compare-and-contrast" analysis juxtaposing each comp with the subject home, adding or subtracting to adjust for the differences (How much? That's another "experience" judgment).

"Vertical" vs. "Horizontal" Selection

By convention, "recently" used to mean the last six months. However, as underwriting standards have tightened in the wake of the housing bust, some banks now insist on three months.

But what if there aren't three good comp's within the last few months? Or even one comp?

That's where it gets interesting.

Appraisers, working for the lender, will typically stick to the shorter timeline and simply look as far afield as necessary to find three similar homes. Call that "horizontal" selection.

By contrast, a good Realtor who knows the area will opt to choose the comp's "vertically," i.e., stay within the immediate neighborhood, and go back as far as necessary to find good sales precedents.

Guess which approach is more accurate?

Inside Information

The latter, because a Realtor who knows the chronology of local neighborhood sales can "connect the dots" going back as far as necessary.

They'll know which homes sold fast, which sold slow, which sale prices were aberrations -- and why.

Armed with that info, they'll have a feel for momentum (or lack thereof) . . . . and can price accordingly.

By contrast, bank appraisers invariably end up comparing geographic apples to oranges.

In their quest to find timely comp's, they'll jump significant -- but invisible -- neighborhood boundaries that render comparisons much more difficult.

Just in Minneapolis and the west suburbs, I can think of numerous, contiguous neighborhoods where you'd never compare a home in one neighborhood with one in another.

Country Club vs. Morningside

To pick just one example, consider Edina's Country Club and Morningside neighborhoods.

Both wonderful neighborhoods, they each have their own characteristic housing stock, supply and demand -- and per square foot selling prices.

Confusing two, disparate areas often leads to homes not appraising when they should -- or Sellers not pricing their homes appropriately.

How Big a Premium for Small Lakefront?

The Art of Doing Comp's

I'm working on an assignment for a client now that's proving devilishly difficult: identify the premium associated with a home on a small, metro lake so that it can be priced appropriately for sale.

The lake in question isn't Lake Minnetonka, Lake of the Isles, or other "marquee" name. Rather, it's just one of hundreds of small lakes -- picturesque, but not really big enough for boating or other water sports -- that dot the Twin Cities.

Puzzle Pieces

In theory, answering the question is easy: just find two identical homes, one on a small lake and another across the street, that sold at the same time -- then calculate the percentage difference.

Of course, that's nearly impossible to do: after screening upwards of 200 home sales on six different metro lakes over a five-year period, there's always one -- if not multiple -- differences.

If the homes sold in the same market (roughly defined as within six months of one another), the size, style, and condition were different.

If the size and style were similar, the sales dates and condition were different.

And so on and so on.

Further complicating matters: some homes across the street from lakes have views (because they're on a hill), while others don't. As you'd expect, the premium between "lakefront" and "lakeview" is smaller than between lakefront and "no lakeview."

The number of permutations, distinctions, etc. would make anyone but a statistician (and I'm not) throw up their hands.

Permutations & Interpolation

So what to do?

Find the closest match(es), then use "interpolation" to close the gap between the dissimilar traits.

So, in one case, I found two, quite similar homes -- one on a lake, the other across the street -- that sold 18 months apart. To determine the lakefront premium, I calculated the change in market prices for the area over that period.

In a second case, I took two homes that sold within a few months of each other, and were in similar (good) condition -- but were quite different in both size and style.

In that case, the challenge was to appropriately adjust for style and size.

Conclusion

Needless to say, the premium is necessarily a range: some homeowners especially prize lakefront, others actually consider it a drawback (families with small children, for example).

It's also true that in many cases, much of what appears to be a lakefront premium is actually explained by the difference in the neighboring homes themselves: the one backing up to the lake is much bigger and ritzier than its neighbor across the street (surprise, surprise).

Factor all of the foregoing in, what do you find?

The premium for small lakefront property would appear to be between 20% and 30%.

"Bracketing," explained

The Goldilocks Approach to Appraisals

Just like Goldilocks preferred the porridge that was neither too hot nor too cold, appraisers like to see a home that prices in the middle of its peer group.

In appraiser lingo, such a home is said to "bracket."

In plain English, that means it's priced more than a slightly inferior home, and less than a slightly superior home.

For purposes of doing a Comparative Market Analysis ("CMA"), the subject home's peer group typically consists of the three, most similar closed sales, ideally no further back than six months. Depending on the part of town and activity, sometimes three months is now considered the max.

In fact, the subject home is supposed to "bracket" twice: before the comp's have been adjusted -- and after.

Adjustments are all the things that differentiate the comp from the subject home. It can be another bathroom, more (or less) finished square feet, a new Kitchen, better (or worse) condition.

Regardless, if the subject home doesn't "bracket" a second time, after the comp's have been adjusted . . the deal can be in trouble.