Most home sellers have this crazy notion that there is a direct correlation between asking price and the price at which their home ultimately sells. In other words, the more you ask the more you get. This failed logic is based on the incorrect assumption that the home seller should always leave themselves some negotiating room to come down in price. But research tells us otherwise.
Unlike selling almost anything else, selling a home can suffer from a “negative herd mentality” if it stays on the market too long. Stigmatized homes that take too long to sell actually sell for less. And the longer they stay on the market, the worse it gets. It follows then that the number one goal for a home seller is not to pick the right asking price, but to avoid choosing the wrong asking price, one that is too high.
Nobody really knows the perfect asking price when selling a home. Not home owners, not real estate agents, not appraisers. The reason is because there is no way to know with certainty what buyers are out there waiting to buy the home. The best anyone can do is make an educated guess. But what if the guess is wrong? The only thing a seller can practically do to protect themselves is to err on the side of conservativeness and underprice it. But isn’t there a downside to underpricing a home? Not really.
What is the worst that could happen if you underprice your home? You get too many offers. (You might think the worst thing that could happen would be that you get no offers, but if that happens, then by definition it is not underpriced.) You get too many buyers, some of which only chose to make an offer because your home is underpriced.
Too many offers is a good problem to have as a home seller, even if they are for an amount less than what you had hoped for. There is no downside to these offers because as the home seller you have the ultimate insurance policy: you do not have to accept any offer. But with those multiple offers in hand you can to start a bidding war.
As the home seller you can use counter offers and best-and-final requests to get more for you home than the initial offers. In this manner, the buyers who want your home more and can offer more will raise their bids, and the buyers who only bid because your home was underpriced will fall away. And if none of the buyers raise their bids, guess what? Your home was not underpriced.
When a buyer makes an offer on a home they form an emotional attachment to it. They can actually see themselves living in the home even before their offer is accepted. That is why bidding wars are so effective: they ask buyers how much they want the home AFTER they have formed an emotional attachment to it.
The best way to leave yourself negotiating room when you sell your home is to underprice it, get lots of offers and go UP from there. The best time to negotiate is AFTER the buyers have made an offer and an emotional attachment to your home. There really is no downside to underpricing your home. In fact, it usually works out better.
To learn a more effective way to sell your home, check out The Intelligent Home Seller.
I am perplexed that home sellers, in hot seller’s markets like we have today, have not yet learned to use that fact to reduce the commission they pay to sell their home. Most home sellers thoughtlessly hand over tens of thousands of dollars in commission to sell their home, even though the home practically sells itself, the pent up demand is so great. The only way I can explain it is a failure of imagination. Most home sellers cannot even imagine that they can pay less to sell their home. The thought just does not even occur to them, for if it did, clearly they would pay much less, because it is not that difficult to do.
When sellers have buyers climbing all over themselves to buy their home, sellers should learn to use that circumstance to reduce the commission they pay to their agent, if they hire one, AND to the buyer’s agent. And while real estate agents will try to convince home sellers that they have to pay 5%-6% commission to sell their home, in a hot seller’s market, there is no reason to do so.
Even in a hot seller’s market, saving money on commission requires two different strategies: one for the buyer’s agent and one for the listing agent. Saving money on the listing agent’s commission is pretty easy to do and there are a lot options from which to choose. Flat-fee realtors, fee-for-service realtors and discount realtors can all save home sellers a lot of money on the listing agent’s commission. But it is the buyer’s agent’s commission that presents the real challenge to commission savings, even in a hot seller’s market.
The challenge to saving on the buyer’s agent’s commission stems from a problem known as buyer steering. When a seller sells their home they are expected, by custom, to pay for the buyer’s agent. And since the seller does not get a chance to negotiate with them directly, the only choice the seller has is to offer them less than the customary amount (2.5% – 3%) in the listing agreement. The risk in doing so is that buyer’s agents may “steer” their buyers away from buying such a home until the seller raises their rate back up to what is customary. In this regard, buyer steering makes the buyer’s agent’s commission more of a ransom than actual compensation for work done. So, how does a home seller offer less to the buyer’s agent in a hot seller’s market and avoid buyer steering? By incentivizing the buyer.
When homes for sale are hard to find, desperate buyers look for any advantage they can get to try and win a bidding war when a home they want finally comes on the market. What I recommend sellers do in such a situation is to let all buyers know that they will give preferential treatment to any offer made by a buyer who pays for their own agent. Now buyers who really want the home will start to consider the possibility of paying for the real estate services they are receiving.
If done properly, this technique can benefit both the buyer and seller. The seller can sell their home for a fair price without having to pay for the buyer’s agent. And the buyer can negotiate compensation with their agent which may cost them less than trying to win a bidding war. Of course the buyer’s agent may not receive the amount they are accustomed to. That’s okay. They can make up for it during the next hot buyer’s market.
It is the second best feeling a home owner can experience: accepting an offer for their home and opening up escrow. The best feeling, of course, is the day the home actually sells. It has become a custom to publicly acknowledge this milestone—opening escrow—by placing a “Sale Pending” or “In Escrow” sign on top of the For Sale sign in the home owner’s front yard. But is that really a good idea? As things turn out, no.
The problem is that until a home actually sells, it may not. It is entirely possible for a home to “fall out” of escrow. It happens all the time—even on the last day, just before the escrow closes.
Suppose the person offering to buy your home is killed in a car crash the last day of escrow and the bank lending the money finds out about it. I am pretty sure your home is going to fall out of escrow and you will start the home selling process all over again. What insurance can you get against something like this happening? None, but there is something you can do just in case it does happen. What you can do is to continue to collect the names and numbers of buyers interested in your home. In that way, should your home fall out of escrow, for whatever reason, you will have a list of names to call immediately and quickly restart the home selling process. The problems is that “Sale Pending” signs scare away the next round of buyers.
If a buyer drives by a For Sale sign and they like the home, the chances are they are going to call the number on the sign. When you or your agent answers the phone, you can tell the prospective buyer that the home is in escrow, but you will take their name and number in case anything changes. On the other hand, if that same buyer sees a “Sale Pending” sign on top of the For Sale sign, there is a pretty good chance they will just keep driving, and there goes your backup plan. Why would you do something that offers no benefit and may be a detriment?
When you are selling your home and it finally goes into escrow, resist the urge to do what every other home sellers does and forget about the Sale Pending sign. There will be plenty of opportunity to celebrate once your home is no longer yours. The only sign you should care about is the buyer’s signature on the contract.
Quill Realty. This company gets it. This is how all brokerages will function in the future. It is just a matter of time. Regrettably they are only available in Seattle right now. If I were selling a home there it is the only company I would consider using.
What is Quill doing that is so unique? They are actually pulling out of their local MLS (Multiple Listing Service), which is unheard of today. And why are they doing that when every other brokerage in the country belongs to an MLS? Because Quill understands that today MLSs exist ONLY to serve real estate brokers, and do almost nothing to help home sellers. And apparently Quill has this crazy notion that they want to serve home sellers more than they want to serve other brokers.
But you cannot sell a home without listing it on the MLS. Of course you can. When buyers shop for homes they do not go to the MLS to search for them, they go to Zillow or Trulia or Reatlor.com. And while it is true that those sites get their listings from the MLSs, anyone, including real estate brokers (like Quill), can send their listing directly to these sites and bypass the MLSs altogether. And that is exactly what Quill intends to do. And why do they want to do that? To save home sellers money. A lot of money.
When you list a home on the MLS you are expected to pay the cooperating broker. That is a fancy way of saying the seller has to pay for the buyer’s agent, a practice which is unfair to both buyers and sellers. By not using the MLS, Quill’s clients can forgo paying the 2.5% to 3% commission to the buyer’s agent.
By leveraging technology and NOT using the MLS, Quill will charge their home sellers just a 1% commission. That will save home sellers $25,000 on the sale of a 500,000 home (compared to the customary 6% commission). I would think that might get home sellers excited.
Naturally the other brokers in the area will be none too happy with this and will try to keep their buyers away from Quill’s home sellers, but with buyers seeing the homes on the Internet, it will be very difficult to do, and Quill knows that. A properly priced home in a seller’s market is going to get purchased, no matter how little the seller pays to the cooperating broker. Kudos to Quill for recognizing that AND doing something about it.
This is the future of real estate: listing brokers charging home sellers a fair price and home buyers paying for their own agents, if they feel they need one. I have seen the future of real estate and the future is…