Tuesday, September 28, 2010

Market Range Pricing--So Misunderstood, So Effectively Good


Carly Simon's You're So Vain is about somebody, but she won't say who.  Thanks to Al Gore's internet, I now know the guy, who we don't know, didn't walk into the party and "scarf apricots", and there were no "clowns" but "clouds" in Carly's coffee. With a little better understanding of the words, the song makes sense.

So, is this blog about songs or real estate?A little of both I guess. Instead of singing the blues in a market where competition is lagging, it appears Realtors are picking up one of the most misunderstood marketing tools and getting results. A quick search of the Realtors Association of South Central Wisconsin, MLS shows 3053 single family home sales in Dane County of properties listed since January 1, 2010. Of those sales, 354 are noted to have been marketed as Range Priced. A simple marketing idea of inviting people to come and look even if they had capped their search below the seller's contracted list price. I expect the trend of range priced properties to go up as the housing economy goes forward.

When I first heard about Market Range Pricing it was 1996 or so, and the concept had hit California via Australia. The San diego real estate community had picked up on Market Range Pricing and found it to be effective in a down market. Real estate is always valued, (appraisals, assessments) on comparison price evaluations. When the housing market is not fast and furious, people making buying decisions take time to do comparison price evaluations too. However, the price setting is traditionally done the way a commodity is priced---by a fixed price. Probably all fine and good but the inflexibility of a fixed price in a highly flexible environment may result in some buyers being intimidated away and some seller's missing out on acceptable prices and extraordinary terms from highly qualified buyers.

The Intent of Market Range Pricing is to invite the person who is qualified to visit your house even if they have capped their search to a price below your asking price.  We know people are being more conservative and for example, while the bank may have qualified you for a purchase of $300,000, you may have capped your search at $250,000, and maybe $275,000. If I have a client who has a house verified worth $300,000 and we are not getting activity because there are few buyers in our price point in our neighborhood, I will suggest a range price strategey of $250,000 to $300,000. By entering the property in the MLS at $250,000+ the house is being found by the persons who limit their search at $250,000 or $275,000. I know this house will compare favorably to those priced significantly less. A clear explanation of our intent helps the buyer, and their Realtor,  know this is not a bait and switch strategy, but an invitation to visit and compare. I provide 2 or 3 comparable sales to support our listed price of $300,000.

We expect buyers are going to do their homework and know what a home's value is to them. Not for everyone, but for many people, when given a choice to spend more than they planned, instead of less than they should, to get more of what will make for a better home for them, the choice to move up is an easy one. There are few things more expensive than owning the wrong home at any price. Owning the right home at a fair price is always going to be the wise decision.

Why should I make an offer above the low end of the range? That's a question I often hear and the answer is simple. Range pricing is designed to bring more people to the house. More people improve our chances of having mulitple offers. You don't know what someone else might do and there is no guarantee that you will get a second chance to make your best offer. The owner is inviting you to compare and make a decision on what the house is worth to you. If you offer $250,000 on a house with evidence to support a $300,000 appraisal, do you want the owner to consider your offer to be your best? Unless you have some compelling reason to not offer your best offer, a low offer with weak terms, might leave you on the outside looking in at what could have been a great home.

I think range pricing is misunderstood here because like anything that hits the midwest from the left coast, we are compelled to add our own flavor to the product. Range pricing came here when our market was in fast-forward. Remember, this is a tool designed for a down market, so when we picked it up, every broker put their twist on the model. What we called range price marketing didn't look much like the authentic tool; instead of being as simple as a cross cut saw, it was more like a hammer, screw driver, wrench, and pudding set in one. One common misperception is range pricing is used when value is unknown. That's probably been a past use. When the market was hot and I thought a house was worth $240,000 and the owner hoped for $250,000 +, we could range price at $240,000 to $260,000 and maybe get $255,000. The appraisers appraised and everyone was happy.

Buyers and Sellers have a win - win opportunity with range pricing. Some of the best terms in today's economy are not price first. Sure price is important, but so is closing date. An offer subjet to sale of real estate is a big uncertainty, but an offer from a pre-approved buyer with nothing to sell and flexibilty to close is highly preferred. I can't say enough about a pre-approval letter from a local lender. Given the choice of a buyer with a letter from a lender in the community or a commitment letter from an internet broker the seller is likely to choose the local lender buyer for peace of mind.

Limitations exist. The search systems in our MLS and real estate web sites require one price, and at first look a consumer will see a price of say "$275,000". The explanation of Range Pricing is typically found in the body of the description, but it is possible for a person to feel mislead when they see one price, get enthused, and then find out the house is actually priced at $300,000, but the range price marketing shows $275,000 to $300,000.  Explanations help.
Range pricing is a tool who's time has come.

Monday, September 20, 2010

Buyer Enticing Pricing, and Time on the Market


I analyzed the data reported to the MLS by the listing brokers of 126 sales in and around Madison, through mid September 2010.  To be considered in the study, the property had to be listed on or after January 1, 2010.
Conclusion:
The data proves nothing we haven’t known about the fundamentals of pricing:  There is a correlation between “over price” and a longer length of time on the market.  In the economy of pre-2007, which is the one most home seller’s knew when they bought their homes and still relate, the fundamentals were nearly irrelevant.  Testing the market at prices not supported by recent sales could draw interest and offers. Appraisers adjusted and underwriting conceded.  

A home owner who was a buyer five or more years ago probably can’t get revenge today. But, they could accomplish a relatively quick sale and avoid the stress of a protracted effort if they concede the "hopeful price" and price according to recent neighborhood sales. Take time to evaluate your objective. If peace of mind is more important than a bigger than reasonable piece of the pie, price is the solution.
Findings:
·         Thirty seven percent (37%) of the group sold without making a single price change
·         Average time on the market of all the sales in the group is 116 days
·          Average time on the market from last price change to accepted offer is  34 days
·          Average sale price to last asking price (price after one or more price reductions and before a buyer made an offer) is  96%
·         Average sale price to initial asking price is 91%
·         Average days on the market until the price where a buyer made an offer that resulted in a closing is 88 days
A couple of observations:
·         A home not sold in the first 30-40 days is not likely to attract a buyer at the asking price
·         Homes do attract qualified buyers relatively quick (34 days), when the buyer considers the price to be favorable
·         When you properly price on day one, a sale price of 97-98% of your asking price is reasonable to expect
  • Using this information to work backward expecting to still get a price above supported value is not going to work.

Deficiencies, and Logical Assumptions in the study:
Distressed sales are an unknown percentage of this study.  Time on the market from last price change to a status change from ACTIVE to a status indicating an offer is in place is not always accurate. Logical judgment was used to come up with a reasonably accurate data. Sales where I could see a continuous effort to market the property beginning prior to January 1 are included.  I excluded properties where the data provided appeared to indicate a non-listed property offered for sale by owner and sold by a buyer agent as those do not give time on the market or pricing history information.

Friday, September 17, 2010

Buried Treasure in Madison, Wisconsin Sales Numbers

Pirates buried their treasures and some just took them to the bottom of Davey Jone's Locker with their ships. These gold nuggets get found today by people who go down beneath the surface or otherwise don't wait for the good stuff to rise up and find them. I think there is gold underground in Madison, WI. The kind of gold we can do something with---golden insight. I got a tip off by listening to some open house visitors last Sunday.
The typical buyer is looking at numbers and not the numbers the Realtor Associations are giving out; buyers are flush with data, and we know he who has the information is in charge. Information, relevant information is gold. Gold is king. Here's what I am hearing the informed buyer talking about.
  • Price relative to Assessed Value. OK. We don't like that comparison even in a hot market. But at a time when municipal budget shortfalls, foreclosures, distressed sales, high property taxes, are on one's mind, it makes sense to see if what we knew from the old economy is true today with respect to property assessed values. While we might have grinned to bear it, around Madison, Wisconsin, there was said to be a reasonable correlation between assessed value and market value. Homes sold for about 5% to 8% above assessed value. Buyers resisted it and owners accepted it.
Today, the buyer is looking at assessed values and asking prices. If you are above assessed value, Ricky Ricardo would say, "You've got some 'splaining to do, Lucy." Right or wrong. The buyer believes assessed values are wrong and thus, your price can't be right in their minds. Without a compelling reason to jump, buyers are moving on.
  • Asking Price to Sales Price. Our MLS reports the last asking price and the sales price. In 2005 that percentage was typically 98% and price reductions were relatively minor. Today, the same comparison looks a little lower, but not disturbingly low, at about 95%. That's not enough to label the market a bust, but if you look at the initial asking price and compare to the final sales price you might be at least a little uncomfortable if not disturbed. 
I looked at 8 fairly popular areas of Madison, DeForest, Middleton, and found the Initial Asking Price to Sales Price is no better than 95% and as low as 80%. I believe if I look at all areas I will find the number to settle in around 88 to 90%.
  • The average Cumulative Time on the Market is pushing triple digits in Madison, Wisconsin. We don't talk a lot about cumulative time. We report the last marketing effort and that number will always show a relatively short time. In the hay-day that was fine because the original effort was typically enough to get the job done. A buyer knowing houses are staying on the market and going through more than one broker, may hold off expecting the new listing will become interesting in about 6 to 7 months.
This is not remarkable, but it is fascinating to see in black ink on white paper: When the price is adjusted to where a buyer is willing to make an offer, the time to getting that offer is quick. 19 to 45 days is about all. In a fast paced market, that's what we saw. Price was right from the get go because buyers were willing to jump, and homes had offers in less than 60 days. Now, homes are on the market for hundreds of days but when the price is at the "right price" the buyer's move.

Initial asking prices are determined by many opinions and influence: Broker, Seller, Neighbor, Friend, Hope, Faith, Obama, Doyle...If it weren't for Hope and Faith, I think we would see homes come on the market at 7% less than they are and we would see homes selling in less than 60 days.

Here's the Gold in the buried treasure: Appraisers will be using the sales from 2010 to value homes in 2011. Those prices will be used to decide to sell or stay, offer or walk away. Possibly, as homes come on the market from here out we will have homes priced in line with the true new economy, not the false stimulated economy of first quarter 2010.

Tuesday, September 14, 2010

Madison Area Homeowners Look to FHA to Refinance Upside Down Mortgages

Department of Housing and Urban Development has a solution for Madison area homeowners who are upside down in their primary home mortgage. It's possible to refinance from a non-FHA insured loan into an FHA loan if your situation meets prescribed conditions. Granted, meeting all of these conditions is a tall order, but for those that do, it's worth a look.

The FHA resource center is a place to start,  
1-800-CALLFHA (1-800-225-5342). Persons with hearing or speech impairments may access this number via TDD/TTY by calling 1-877-TDD-2HUD (1-877-833-2483).

Another avenue would be an FHA mortgage lender. If your bank doesn't have an FHA expert on staff, call Bill Quigley 608-831-4663.

Madison, WI area home owners can protect their homes and their credit by using help of local experts and government initiatives.

Monday, September 13, 2010

Mr. and Mrs. Janus, and the depression survivor view

In August I spoke with a person who sincerely has not noticed any difference in her family's economic, social, or psychological well being. I thought she was being coy, but learning they live a modest lifestyle, well within their means convinced me my friend was not unstable--she's just old fashioned. (Let's call her Mrs. Janus because she and Mr. Janus look to the future with an eye on the past.) Mrs. Janus is so old fashioned she's relevant. My friend is an authentic 51 year old. She and her family pay as they go, carry no debt, and share a car with a teen driver. Mr. Janus works for the man, and she works for herself. College educated and self-taught and inspired, my friend balances her work for cash with her work for 4 children who occupy grades one through college. I believe this couple are reincarnations of survivors of the last Great Depression.

Why am I writing about Mr. and Mrs. Janus? Because, as a Realtor, I interact, seven days a week, with people who are evaluating their peace of mind. Unlike Mrs. Janus, who is not being forced to change her spending and saving habits, the recession-depression is squeezing society into submission. Once the surrender is complete, a revolution of sorts will grow. How people price homes and how the consumer determines value could be very different very soon.

Already we are seeing consumers of real estate service turning to non-Realtor controlled on-line systems such as Zillow.com for insight into local real estate values, and home selling/buying advice. The consumer walking into an open house is likely to have more data on recent sales stored in their smart phone than the hosting realtor has in their possession. Cautious and conservative buyers know a fair value when they see one and they almost don't even want to see anything unless it's a stunning value. How value is determined by buyer and seller may never be entirely the same. However, if the differences continue to move apart this could be a very interesting few years.

Access to market data has been the prized jewel for home sellers during the price run-up days. Sure buyer agents had that data for their clients in 2005, but rather than come into the process highly educated on values and trends, the home sales data was mostly used to verify that an asking price was not too unreasonable. Today, the buyer who meets a Realtor shows up with high quality data of neighborhood highs, lows, trends, and generally conservative advice for negotiating. There is nothing to be gained in debating an armed buyer. They're armed for a reason--protection. There is no chance of changing determined minds. No one wants to make a mistake and lose. That goes for both sides of the table. Safety is a reasonable goal.

Buyers are already thinking like Mr. and Mrs. Janus, with a view of the future and an eye on the past. They are expecting to buy a home and some cushion from further decline of value. Home owners who are would-be home sellers have hope that the prices are at least stable.  I'm going to continue to evaluate what I am seeing, hearing, and concluding. 
We can make it out of this recession-depression, but probably not with everything we carried in.

Tuesday, September 7, 2010

Who's That Knocking at My Door?

Door to door sales was a career choice for a fellow political science college grad friend of mine in 1982. He became a lawyer and has an educational system related job in New York State today, but back in the day, my friend was being driven from D.C. to the burbs to knock on doors selling who knows what. Until Al Gore invented the internet the best way to knock on doors was to knock on doors. Today, the door knockers are knocking on our smart phones.

It's a steady stream of offers I'm getting this month. I can go back to school for Photography, an MBA (ya, I want one of those degrees), or even to learn to install replacement windows. Graphic design is an option if it's my passion, which it's not. Medical billing and coding experts must be in demand. I assume they need people to code "Insured" or "Not insured" on medical records. There are 15 positions a person can do from home...provided they have a home.

As my phone continues to "ping" with the alert of another email I glance at my door and wonder what it would look like outside if these offers were being delivered by the door to door salesperson. I see a line of people waiting their turn to wrap their knuckles on my wooden baricade.

 Real estate is not my job, it's my career. I enjoy this business and wouldn't miss this opportunity of a lifetime. There is no other service where  life experiences have better prepared me to be helpful to people. When we make it through, and we will, I want to be able to say I was part of the solution, and I hurt no one.

I have a message for the solicitors in general: You can keep on knockin' but you can't come in. I'm riding the storm out.

Thursday, September 2, 2010

Neglected Improvement Homes Might Be Your Best Opportunities

When given the choice of staying home and fixing up around the house some fellas will be opt for a morning at Home Depot and a weekend on a ladder. I want to buy the house these people are selling. Are they the norm? Doubt it.

A good use of a home equity line of credit, when homes had equity and our ratings had credit, would be home improvements. But the allure of an exotic week to 10 day vaction to an island beach house with tile floors, luxury kitchens, and fancy bathrooms was more appealing than replacing the old vinyl with tile and the kitchen with brilliance. Procrastination Vacation. So today we have upside down mortgages or tapped out equity, limited income, and maxed out credit cards. When the writing is on the wall and selling the house is the way out of a financial press, where will the money come from to bring the 20 year old house up to speed? I give up.The money probably isn't there.

Good homes in great locations are on the market. The asking price might include the cost of that spectacular vacation, the cottage up north, or the third car, and cool boat. (I always intended to pay those off with the next big pay day or bonus.)  Should the owner expect a buyer to pay the price  for my grand lifestyle? No, but that doesn't mean somebody won't try.

When you see a property with a few years worth of weekend projects left behind, it's a good indicator that the money for improvements is gone on the seller's side of the closing statement. Prior to today it was typical for a home buyer to estimate the expense of updating higher than actual and negotiate for a credit or price discount at twice the actual cost. That approach won't work today. The money is gone. A more successful strategy is to take the time to get real estimates and use real prices.

Reputable remodelers are charging fair prices. If you can come to terms on price, exclusive of the repairs, and the location is terrific, keep moving to closing by focusing on real costs. Losing a house that has the right location because we can't negotiate extraordinary expenses for repairs might be short sighted. A perfect condition property in an equally ideal location will have more demand and drive a higher price. It is more likely that location won't be comparable and you will pay more than you should for a house that has less of what you want.  The National Association of Remodelers- Madison Chapter is a super resource for the people you need to make smart decsions and get brilliant remodeling.

Wednesday, September 1, 2010

Reasonably Competent Human Being (RCHB)

I think I am. Not brilliant by any means, but reasonably competent. I base that opinion on my awareness of my logical approach to conclusions. Illogical positions confound me. Now I don't believe there has to be a scientific explanation for everything, in fact logic suggests science can not answer all questions because it is not possible that all science is known today. So, as an RCHB (I saw that term in a book by Jennifer Allan a real estate agent mentor extraordinary person) I'm not perplexed by the real estate market. Nothing is going significantly up in the short term. There are no indicators of UP.

Let's look at interest rates: Interest rates are pretty much at an all time low. Would you say there is a 50/50 chance that rates will go up in the next 60 days? Well, November is coming up and elections are scheduled so do you think we will see interest rates go up? I don't. Would it be logical to conclude the evidence suggests rates will remain stable? I do.

What do we know about home prices and interest rates? Do we agree lower rates do not drive significantly more buyers into all markets. Lower interest rates drive some home owners out of the buyer market and into refinance. And in times when interest rates have been historically low for many months, the majority of buyers who wanted to take advantage of historic rates got in earlier---the pool of buyers who can qualify for the best rates is rather shallow by now. If the number of buyers entering the market doesn't move the needle the competition will remain cool. Right? Right. I thought so.

Do we think more buyers are coming into the market? Maybe. There are always new buyers coming in for one reason or another. What about this: Will more homes be brought to market by distressed sellers and distraught bankers? Yup. Hmmm...supply is going to exceed demand. Rates will be stable. How about jobs? Will unemployment go up or down or sideways? Let's assume it goes down. More people working, more people fully employed might stop the slide of sentiment. That'd be nice. Until more people feel more confident, more patience is going to be required.

Seems logical to me---A reasonably competent human being.