Agents are making more concessions than ever to obtain listings during the inventory shortage, even if it means seriously overpricing them. While this may be an acceptable strategy when inventory is tightening, it often spells doom if the market has already crested or has begun to decline.
According to Steve Cook, publisher of Real Estate Economy Watch, the inventory drought has continued to worsen, with an 11.4 percent decline in inventory during the last 12 months.
Nevertheless, Trulia sounded a warning alarm because home prices could be peaking due to shifts in the rental market, which means you might be talking to your sellers about price reduction in the near future.
Here are five ways to approach the situation:
1. Risky market? Play it safe
After five years of steep rent increases nationally, listing prices in the rental market are edging lower, and landlords are cutting advertised rents more often than before.
Meanwhile, for-sale price increases remain strong, but sellers are still cutting prices at an accelerated rate in order to move homes off the market. This suggests that if price cuts are predictive, home prices could soon flatten.
Top metros experiencing rent declines include: Austin, Texas; Dallas; Houston; Jacksonville, Florida; Miami; Oakland, California; Portland, Oregon; and Seattle.
Trulia goes on to report that 69 of the 100 largest metros saw the share of for-sale listings with a price reduction increase from last year to this year.
According to Cook, eight of the 10 foreclosure hotbeds from the previous downturn are adding inventory. Examples include: Atlanta, where inventory is up 15 percent; Nashville, where it is up by 11 percent; and Las Vegas, where inventory has gone up 5.1 percent.
Cook also agrees with Trulia’s conclusion: vacancy rates climb and maintenance costs increase as properties age. He also believes many investors will sell this year to optimize their return.
Here’s how to address the price reduction conversation with your sellers:
Agent: Mr. and Mrs. Seller, the rental market in our area has become overbuilt. As rents begin to decrease and aging properties become more expensive to maintain, more investors are predicted to liquidate their holdings.
This may result in too much inventory, which leads to declining prices. The bottom line is that this may be the peak of the market. Rather than risking chasing the market down, the wisest course of action may be to reduce your price and get your property sold now.
2. Monitoring months of inventory
If there is more than eight months of inventory where your listing is located, you are already in a buyer’s market with downward pressure on prices.
Here’s how to explain the rationale for a price reduction:
Agent: Mr. and Mrs. Seller, even though there is an inventory shortage in many price ranges and locations, we currently have over eight months of inventory on the market. This means there is already downward pressure on prices. To avoid chasing the market down if this trend continues, it would be smart to do a price reduction now.
Always monitor the months of inventory on the market for each of your listings. If there is over eight months of inventory, lean hard on your sellers to reduce the price before their property value declines any further.
3. The executive review
An excellent way to properly price a listing or obtain a price reduction is to conduct an “executive review.”
Here’s how it works: A member of the management team and several top agents preview the property and provide their written opinion about the price.
When a price reduction is needed, the executive review team — usually led by either the manager or the most articulate, persuasive agent — makes the case for the price reduction.
A “good cop, bad cop” strategy allows the “good cop” listing agent to smooth the sellers’ ruffled feathers if they become upset by what they hear.
4. 10 showings or 500 web views
Showing sellers how much traffic your marketing and advertising has generated is a concrete way to demonstrate how well you are doing your job. Use this to your advantage when discussing price reductions.
To use this approach, you’ll need to obtain an agreement from the sellers that states they will approve a price reduction if no offers are made after 10 showings or 500 web views.
When we were selling our house, our listing agent gave us the graphic below.
You can see the so-called “honeymoon” period where you get the most web views and showings — usually within the first 7 to 10 days the property is listed.
When I saw that we had over 2,000 page views and showing activity had dropped dramatically, we reduced the price only two weeks into the listing period.
You can see the uptick in traffic at the end of September when we did the price reduction. That reduction resulted in 50 percent more views the following week, and it attracted the buyer who ultimately purchased our property.
5. Release them from the listing
If you’re convinced a property won’t sell even after doing an executive review, showing the traffic you have generated and reviewing the latest comparable sales, you can terminate the listing.
This powerful approach from Mike Ferry works, but it’s not for the faint of heart.
Here is what you should say:
Agent: Mr. and Mrs. Seller, I must apologize to you. You see, I wasn’t strong enough to tell you that your price is too high, so I have come to release you from your listing.
When the sellers realize you’re so convinced the house is overpriced that you’re willing to walk away from the listing, chances are they will be much more open to a price reduction. If not, you’ve saved yourself a lot of money, time and effort.
Keep in mind that the listing belongs to the broker, and you must obtain your broker’s approval before using this approach.
Listings continue to be in short supply in most markets, but no matter how good the market is, some properties will still be overpriced.
There’s no better time than the present to brush up on your price reduction dialogues: If current inventory increases spread, you may be using them sooner than you realize.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, author and trainer with over 1,000 published articles and two best-selling real estate books. Learn about her training programs at www.RealEstateCoach.com/
