Are you experiencing a superheated market with virtually no inventory? Are you in a stable market where inventory and demand are balanced? Or are you in a buyer’s market where buyers are as rare as hen’s teeth? You can prosper in either type of market provided you have the right strategy.
When I’m not on the road speaking, I generally split my time between Austin and Los Angeles. Other than the price points (a $400,000 home in Austin would be $1.5 million to $2 million in Brentwood or Santa Monica), the most striking difference is the market. Austin is experiencing a buyer’s market in most places. In contrast, almost all of California is in a superheated seller’s market.
Of the three types of markets (buyers’, sellers’ and flat) the most difficult market to prosper in is a buyers’ market. Since more than 90 percent of all top-producing agents focus on obtaining listings, buyers’ markets pose a potentially serious challenge to agents, brokers and sellers alike. Making matters worse, if your area is like Austin and has a steady stream of new construction, there is a new source of competition that could be a prognosticator of what will happen inyour next buyers’ market.
According to the Austin American Statesman, several major builders are gearing up to compete with the resale market by offering buyer incentives that include “price reductions, thousands of dollars of free upgrades, no down payments, and low-interest mortgages.” Other incentives include “free plasma televisions, golf course memberships, interest-rate buy-downs, plus 7 percent commissions.” At least one builder has more than 300 ready-to-move-in new homes in its inventory. The results for resale sellers have been devastating. In fact, the problem is so bad one agent is suggesting sellers lease their homes until market conditions improve. Furthermore, the brokerage community prefers selling new construction. As one agent put it:
“Why would an agent take you to a resale when the buyer gets a better deal and the agent gets a better deal with a new house?”
As an agent, how can you survive in the face of this type of competition? Here are some key tips:
1. Be brutally honest about price.
If prices are declining, your sellers must actually price their property under the comparable sales. If they don’t get ahead of the decline, they will be “chasing the market down.” Losses can be substantial. To assist your seller in obtaining the highest price possible in a declining market, you must first identify how much inventory is on the market and how quickly it is selling.
Second, you will also need to identify the price per foot and how much that price is declining each month. When you couple the decline with the seller’s PITI, you then have the actual cost of holding the property each month. When sellers see the true numbers, the shock is stunning. Back in the disastrous Los Angeles market in 1990-1993 where prices declined 33 percent in just 18 months, almost all of my sellers (I represented REO for 15 different banks) sold their properties because they were willing to take a slightly lower price to move the inventory immediately. Sadly, most residential agents are not trained to have this critical conversation that can maximize the seller’s return in a tough market.
2. Articulate the advantages resale has over new construction.
If you have ever purchased a new home, you are well aware of the hidden costs the builder doesn’t normally include. Sometimes these can be quite substantial. Mature landscaping, sprinkler systems and window treatments can easily run over $25,000. While the builder may be providing money for upgrades, these benefits usually disappear when the buyers elect to upgrade the carpets, counters and flooring. Furthermore, new property always has little problems that have usually been ironed out in a resale. For example, when we purchased our new home, the plumber had plumbed the hot water rather than the cold water into one of the toilets and several of the vents on the roof were not properly installed.
3. Show sellers how to compete with interest-rate buy-downs.
During the last down market I experienced, lenders had buy-down programs. For example, by paying extra points on the buyer’s behalf, a seller could buy down the buyer’s interest rate. The seller could also offer to pay the closing costs on the buyer’s behalf. There are hundreds of loan programs available. Since lenders are generally suffering in buyers’ markets as well, they are usually more flexible in terms of what they offer. Do the research and locate two or three lenders with flexible loan programs. Be sure to reference the flexible financing wherever you advertise the property.
4. Have the sellers purchase a home warranty for the buyers.
Resale homes may not look as nice as the model, but they certainly look better than the empty standard production completed product. The concern, of course, is that older houses have older systems. To counteract this, have your sellers pay for a home warranty. To be really competitive, have them purchase a warranty for two or more years.
5. Price is the key, but higher commissions and incentives do help.
One of the reasons many areas are experiencing commission erosion is due to the strong sellers’ markets in those areas. In contrast, when the market shifts to a buyers’ market, commissions increase and so do the seller incentives. Ultimately, however, incentives and higher commissions only get the buyers and their agents through the door. Buyers will not purchase unless they perceive the total value of the property (price, incentives, condition and location) to be greater than or equal to what they are willing to pay.
Buyers’ markets are tough, but sometimes a sellers’ market can be even more difficult. To learn how to effectively compete during a difficult sellers’ market, see next Friday’s RealClues: “Prospering in Up and Down Markets Part 2: Superheated markets burn buyers, agents alike.”
Bernice Ross is an owner of Realestatecoach.com and can be reached at bernice@realestatecoach.com.
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