The Limits of Sales Incentives

Overpriced + Fat Payout = Overpriced

Can a whopper of an agent bonus move what appears to be an overpriced listing?

This South Minneapolis duplex (pictured above) would certainly seem to be an excellent test case.

Listed Friday for $430,000, what jumped about the listing -- besides the modest curb appeal and aggressive asking price -- was the $7,500 agent bonus being dangled in the "Agent Remarks" field.

Agent to Client: 'Buy THIS One!?!'

Unbeknownst to many prospective Buyers, MLS actually has two fields with descriptive information: the "Public Remarks" field, viewable to everyone; and the "Agent Remarks" field, intended only for agents.

Given that the standard, 2.7% payout being offered to the Buyer's Agent comes to $11,610 on a $430,000 property, a $7,500 bonus is certainly eye-catching.

Will that bonus goose showings?

Probably.

But when prospective Buyers arrive, they'll see a modestly-sized (2,400 square foot) property with an asking price that's almost $200,000 above the tax assessed value of $231,500.

That's a helluva premium, even for a duplex that's been completely updated, as this one is supposed to be.

Which is likely to prompt the prospective Buyer to ask, "what on earth are they thinking??" -- followed in quick order by this one, addressed to their Realtor, "exactly why did you want me to see this one so badly??"

That's why I make a practice of always providing my clients with the (unabridged) "Property Full" report from MLS.

In other words, they see what I see.

Standing Out From the Crowd

None of which is to say that I'm a critic of Realtor sales incentives.

Far from it (see, "4%!").

In fact, prospective Sellers who face scads of competition from other, near-identical homes would be well-advised to consider hiking the Buyer Agent payout from the standard 2.7%, to 3.15%.

Money motivates, and nobody (that I know) is selling real estate for the sheer thrill of it.

And yet . . . .

Sales incentives work best in conjunction with an otherwise well-priced, well-marketed home -- not as a substitute for those things.

Going back to the duplex discussed above, if the Seller were really serious about selling, they'd price at something like $299,900 and offer a 3-point-something payout.

Realtor Cognitive Dissonance

"Ten Showings, $10,000"

I hated discussing ideas with investors. Because I then become a Defender of the Idea, and that influences your thought process. Once you became an idea's defender you had a hard time changing your mind about it."

--Author Michael Lewis, quoting investor and fund manager Michael Burry in The Big Short (p. 56)

I've been using the long holiday weekend to do some recreational reading (yeah!), including the wonderful The Big Short by Michael Lewis (Thomas Wolfe and Lewis are my two favorite writers).

In my experience, something analogous to Burry's experience with investors (above) happens to listing agents, too: namely, in the course of pitching a home to prospective Buyers, it's easy to lose your objectivity about the home's value, and become convinced that it's worth the asking price.

Unhh-unh.

Unless the listing agent is buying the home, it's worth what someone (else) is willing to pay for it.

The Danger of Sitting Tight

That's why Realtors say, "ten showings, $10,000."

Translation: if ten serious, well-qualified Buyers view a home and all pass -- the home's (at least) $10,000 overpriced (make that 3% - 5% for a more expensive home).

So what's so bad about the listing agent thinking a home is properly priced when it's not?

They'll be slow to counsel a price reduction, which will (eventually) cause the home to linger on the market.

In turn, homes that linger on the market often need to be deeply discounted to sell.

Price Cuts on Thanksgiving

Trees, Forests, & Price Reductions

If a tree falls in a forest and no one is around to hear it, does it make a sound?

--ancient riddle

I don't know the answer to the tree-forest question, but I do know the answer to this one: "if you drop your price when no one's paying attention, does it do any good?"

That's why I'm recommending to my listing clients that, if their home is overdue to take a price reduction, better to do it now, when the market is active, than nearer (or after) Thanksgiving, when things predictably slow down.

Knowing When to Pass (on an overpriced listing)

Realtors & Overpriced Listings

"I will not take an overpriced listing."
"I will not take an overpriced listing."
"I will not take an overpriced listing"
"I will not take an overpriced listing."

Four down, 496 to go.

There are many, many reasons it's a bad idea for a Realtor to take an overpriced listing.

Here are four of them (unfortunately, all gleaned from personal experience).

One. A homeowner who insists on an unrealistic asking price will blame you when their home fails to fetch it.

No matter that you did everything short of hire the Goodyear blimp to hover over the home -- to the Seller, it won't be enough.

They'll expect you to go broke buying ads; host endless Sunday open houses; and find fault with your marketing literature, photos, sales skills, work ethic -- you name it -- no matter how professional.

Contrary to popular myth, it wasn't Caesar but a Realtor who first said, "the fault, dear Brutus, is not in our stars, but in ourselves" (substitute "Realtors" for "stars" and "asking price" for "ourselves").

Two. Lack of cooperation. The flip side of the foregoing is that homeowners who see their home through rose-colored glasses see little or no need to spend time or money on things that undeniably make homes easier to sell, for more money (Realtors' generic term for this is "client cooperation").

That includes things like staging, fixing things, keeping the home sparkling clean (tough to do, but very important if you want to sell), and being accommodating about allowing showings (and then leaving for them!).

Three. It's expensive. For the Realtor and homeowner, both.

As the saying goes, "nothing kills a bad product faster than good marketing."

Driving a ton of traffic through an overpriced home is a waste of time and money, because prospective Buyers will inevitably be underwhelmed.

So, weeks (or months) later, when the home has been reduced to a more reasonable price, you'll need to do it all again.

Then, another axiom applies: 'it's easier to get prospective Buyers through a home the first time then to get them back in a second time.'

Of course, owners of homes that have been on the market too long discover another truth: you often need to discount below market value to get a deal done with now-skeptical Buyers.

Confronting that truth does nothing to help what by then is already a strained Realtor-Client relationship.

Four. It's demoralizing.

Selling a home that people want to buy is exciting.

There's a palpable feel to a home that's "priced to sell" (as they say): there's a buzz at the broker open; first showings kick in right away (some of which quickly progress to second showings); Buyers (and their agents) feel a sense of urgency that you pick up on.

All that energy creates momentum that gets deals done.

By contrast, trying to sell an overpriced home has all the energy of a . . . flat can of soda.

While Realtors are trained sales professionals, they're people, too. After awhile, trying to sell a home that's priced too high makes you feel like Sisyphus pushing a boulder uphill.

Instead of attending to an overpriced listing, you try not to think about it. Which isn't doing the homeowner or the listing any good.

Reality Test: Failing Grade

Twice in my eight years in real estate, I was so exasperated with a prospective Seller and their price expectations that I insisted that they view their competition.

So, I set up previews of 4-5 nearby, competing homes -- homes that not only were larger and/or in better condition, but had lower asking prices.

The would-be Sellers' reaction at the end of the tour?

Both were convinced that their asking price was too low -- and insisted on raising it!

Unfortunately, the cure for that mentality typically is market time . . . lots of it.

(There! . . . I feel better)

"Not-selling-itis"

Resisting Treatment

Imagine you had a medical condition, and sought advice from an expert.

They told you that, while there was a tiny chance that you could spontaneously recover, in the vast majority of cases the condition was degenerative. Meanwhile, there was a medicine available that was 100% effective, albeit expensive.

Would you take the medicine?

The vast majority of people in this situation probably would -- and sooner rather than later (at least assuming they could afford it*).

"Needles in Haystacks"

Now substitute "home seller" for patient, "Realtor" for expert, and "unrealistic asking price" for "medical condition" . . . and suddenly people's behavior changes.

Instead of responding rationally to overwhelming evidence that their home is overpriced for current market conditions, they opt to wait -- hoping for a stronger market, a needle-in-a-haystack buyer . . . or both.

Unfortunately, like the aforementioned, hypothetical medical condition, time is your enemy when you are trying to sell an overpriced home.

By the time the patient is resigned to taking the medicine, the chance for a "cure" may already have been squandered.

*Of course, just like some patients are willing to take medicine but can't afford it, some home sellers know that their home is overpriced, but can't afford to reduce it -- because they owe more than its fair market value.

Then, they either need to pursue a short sale, whereby the bank(s) reduce the mortgage amount, or, failing that, contemplate defaulting.