As a part of my daily routine I discuss the current market conditions and todays property values with dozens of property owners. Recently I was struck by a contrast between two sellers.
The first one said, “We are planning to move and we really need the money,” when I explained the market would not bear their asking price. Their situation is as follows; they paid approximately $210,000 about three years ago, they had the home listed last fall and through the winter for $379,900 to begin with and “the agent seemed to think that price was OK.” Except that it has not sold. I suggested it will sell if priced around $280,000, maybe $300,000. They stated, “We have already dropped the price three times, no way, we will be losing money!” OK, so you paid 210 and sell for 280 and you are losing? Yes, selling at $280,000 does mean net proceeds at close of escrow of around $257,000. By the way that is a 7% return on their investment per year, and they lived in it for the last three years, but everybody EXPECTS more! They think for some reason they are losing money? Then they explained,”we refinanced this home and we pulled money out to do some stuff, we owe around $300,000 on an adjustable rate mortgage and they are raising our payment amount. If we sell for $280,000 we will lose money!
Now the next guy said, “Chris we bought this new home last summer, as an investment, but we didn’t close until April 2006. We paid $320,000 or $202 per square foot and we really NEED to sell it. We never planned to hold it or rent it. (Of course it is a real alligator and would have a huge negative cash flow as a rental anyway!) We owe $320,000 on it and the interest is mounting up daily. We need to get $217 per square foot to cover our costs of sale and make any profit, or $349,900. If we sell for $320,000 we will lose around $25,000.” My response was it is only worth $320,000, not $349,900! It may not even bring $320,000, that’s pushing it. Many new homes are only bringing $175 per foot. Of course that is “out of the question” this seller tells me because we would lose $60,000. What ever the number, this will be cash out of their bank account, not paper equity, its absolutely real money! If not the bank will take it back for the $320,000 owed on it.
Now both say they will lose money at the current market prices. Losing money based on expectations verses actually taking money out of your pocket. Are they both really losing money? Are they the same?
Does it matter that some are actually taking money out of their pocket to cover the loss, while others simply are conceding to the actual market value, or that they already spent the equity. Is the old asking price relevant to anything? They could have been asking 10 million and then they would be losing even more, right?
Do sellers really believe they can price property based on their expectations, or that the market cares about what they think they need? As the supply grows and buyers have more to pick and chose from, some sellers will have no choice but to get real, the rest may just have to wait it out, and make those payments.
Today we have many properties listed on the market that are priced based on seller’s unrealistic expectations and perceived needs. These expectations or needs have nothing to do with the actual market value. It also makes no difference where the sellers got their expectations. Last years market is gone and the only meaningful numbers are recent sales. Justification does not change the market.
How much responsibility do agents have in pricing and sellers expectations?
Let me know what you think.