Your Real Estate Has Two Prices

A recent sale of Riverside waterfront property saw $3M+ left on the table.

There is the price you can get in the first few weeks of  your listing, and there’s the price you get after sitting on the market for months and years.

A Greenwich seller has left $3,100,000 “on the table”. He was offered $9,600,000 two years ago, turned it down, and ended up accepting approximately $6,500,000 last week. It’s a classic case, not at all unusual in our market. In fact, the next example is likely right around the corner!

Here’s how it works (every single time):

• Seller over-prices property.
• Seller turns down early offers.
• Seller waits months, possibly years, hoping to hear those offers again.

It’s such a common scenario that one can only conclude that this behavior pattern is built into our DNA.

Will you fall into this trap when it’s time to sell? Yes, you will. What about brokers? Surely they are experienced enough to avoid such foolish behavior when they list their own property, no? No. Brokers are even worse!

At any given time, the Greenwich market contains a dozen or so broker-owned properties that are for sale and they are almost always over-priced. And they sit, and they sit, and then? They sit some more. Experienced brokers commit the same error that they (presumably) have warned their clients of.

Remember that book  Freakonomics? It is full of interesting, useful, surprising facts about human behavior, but I had to laugh at the section devoted to real estate. According to the authors, real estate agents deliberately price your property low so it will sell quickly (oh no!), whereas, when they go to sell their own properties, they price them higher (gasp!). This hideous crime was apparently revealed by the authors’ study of real estate sales statistics in the Chicago area.

Maybe there’s a different type of human in Illinois, but here in CT, while it’s certainly true that brokers price their homes higher, it is also true that the market punishes them just as severely.

The corrosive effect of sitting on the market for months and years is so obvious, so proven, it is a wonder to me that professional appraisers still  don’t acknowledge it in their reports.

So here’s my ground-breaking proposal: Every real estate appraisal should come with two prices, the “early” price and the “late” price.

A sample concluding sentence of an appraiser’s report  might look like this:

Based upon recent and similar market transactions in the area, the market value of the subject is estimated to be in the $5,000,000 to $5,300,000 value range. In the event that the subject remains on the market for 6 or more months, the stated value range should be reduced by approximately 20%.*  

This would at least put banks, lawyers, and estates on notice. Heck, it might even end up influencing the behavior of sellers and brokers!

 

* That 20% drop is only the beginning, of course. After a year or two, your value can easily drop a total of 40-50%!

 

 

Time For A New Career!

Sorry agents, your career is over, you’ll soon be replaced by algorithms!

Has there ever been a year in the last thirty that some genius didn’t predict the end of real estate agents? Yet, here we all still are, plying our trade, apparently oblivious to our imminent disappearance.

Why do you suppose that is? Why, in the year 2017, twenty years into the Internet Age, do we still have this old-fashioned profession?

As some fellow brilliantly posted in 2012, it is because we are needed; buying and selling real estate is complicated and difficult and, most importantly, it can be emotional. Almost every deal contains multiple points along the way where the whole thing falls apart without skillful handling.

Can people do it without us? Absolutely. Each year, a small number of “direct” deals are recorded at Town Hall, although, every time I look into one of them, I find that there was broker involvement, uncompensated perhaps, but present nevertheless.

Anyway, so the latest prognosticator of broker doom is this chap, “Brad Inman“. Judging by his website, Mr. Inman does lots of thinking on the subject of real estate, but I disagree with his conclusion that hundreds of millions of venture-capital dollars pouring into entities like “DealPad” or “DealPal”, “OfferPal” or one of those names, means that brokers’ days are numbered.

The concept behind these house-selling websites is that you sellers are going to accept a (likely) below-market price in order to spare yourself the trouble of selling your property in the usual way. Oh, and the sites are using fancy algorithms to determine your “correct” sales price. Wow, now that’s impressive.

But hey, what do I know? I happen to be  skeptical of any business that requires a change in basic human nature, but these venture capital guys are geniuses! We’re told we must think of success stories like Google, Amazon, Uber!, Don’t you see how those models relate perfectly to the complex nature of a residential real estate transaction? You don’t see that? Me, neither.

Below is the long, long, long! article from Mr. Inman’s site. I plowed through the whole thing, but feel free not to (you can also read it on Inman.com, but he requires you to subscribe).

Why home selling will never be the same

Data scientists are charging into the real estate village — what’s that mean for you?

In the movie Jack and the Giant Slayer, the towering giants descend from the beanstalks, provoking fear as they try to conquer the Kingdom of Cloister.

With a sudden ferociousness, data scientists are charging into the real estate village, rattling the industry by changing how people sell their homes.

Consider the well-funded techno house flippers — Opendoor, Knock and OfferPad — who together have raised a staggering $1 billion in funding. These are not mom and pops who staple signs on utility poles offering to buy your house, “call 1-800-Pay-Cash”.

Yes, whale-sized investments are pouring into flipping houses. But they are also funding smartypants data scientists and their algorithms for pricing houses and for finding homesellers. And these new companies are testing on- demand showings, instant offers, smart contracts and quicky closings.

This technology & flipping combo is compressing the transaction from the traditional timeline of 30 to 90 days to as little as 72 hours, rejiggering how homes will be sold in the future.

And it paints a sexy portrait for high-profile Wall Street and Silicon Valley investors, who are hankering to get into the $100 billion transaction side of the real estate business — commissions + mortgages fees + title costs.

Why do these new models represent such an opportunity?

First, new and improved home valuation algorithms are more exact in determining a house’s value. Early generations of Zestimates, as we knew them, were like flip phones — so yesterday.

Now, after 10 years of tweaking and improving its valuation tool, Zillow claims its median error rate is only 4 percent, and that is in heterogeneous markets. The techno flippers are operating in more homogeneous markets, where the Zestimate’s error rate is closer to 3 percent.

With more data sources, photos and user input, these new pricing models give sufficient confidence to some homesellers to unload their homes quickly (in a few days) without the uncertainty of a long, drawn-out process of listing their houses. Sellers receive all-cash offers in a few minutes from the techno flippers who are capitalized to do an endless number of deals.

It reminds me of Google when it not only came up with a better search engine than Yahoo but also introduced a scaleable and transformative business model that eventually trumped its competitors.

These polished pricing engines might be less compelling if homesellers had confidence in the current system, which many do not.

Not only is the sales process strung out over a painfully long period of time, but agent home pricing motives are sometimes suspect. We all know the criticisms: “some agents suggest an inflated price to get the listing,” or alternatively, “some agents lowball the listing price to get a quick sale.”

This is not how good agents behave, but consumer perceptions are skewed by the hucksters.

Another edge: These new companies are using data science to understand exactly when a homeowner is going to sell.

Copious data sets triangulate the homeseller — search behavior, demographics, social insights, consumer habits and purchase decisions. Sophisticated algorithms then seize the prey.

If Google knows my daughter is pregnant before she does, then these new tools will soon predict with a 99-percent accuracy rate when someone is ready to sell their house.

What does this mean for the real estate industry? Lots, but let’s focus on a few important things.

The home listing market suddenly faces a fierce new competitor (or partner) that some in the old guard underestimate.

And this time around — unlike the discounters, the portals, the IDX papier-mâché brokers, the Compasses and the Redfins — the sacrosanct home selling process is being turned on its head.

The techno flippers are not slashing commissions, not generating leads for others, not trying to control the data and not building an online consumer brand (for now). Instead, they promise convenience and pain relief for homesellers. An instant home transaction = nirvana.

Compressed transaction timelines are common in other sectors of our instant economy: we buy a car in an hour, receive an Amazon package in a day and book flights, hotels and auto services in minutes.

OfferPad co-founder and top producing agent Brian Bair’s  goal is to make the homeselling “process as simple as possible.”  He just landed $260 million in new funding to do so.

With the old model, there are “things I couldn’t do. I couldn’t tell [homesellers] exactly when their home was going to close and I couldn’t prevent the property from falling out of escrow 10 days before closing because the buyer’s financing fell through,” said Bair.

Critics argue that when it comes to homes, consumers do not place a premium on speed — but, actually, many might if acceleration is coupled with certainty.

Think about it — knowing you will close in a few days for a set price resolves the unknowns with the current process. For some, risking a lower price is worth the certainty. And this works best when you feel like you are dealing with a sophisticated service.

Uber charged the consumer more when it began, but the certainty and convenience outweighed the cost. Plus, the app seemed to know what it was doing.

These new models are all a bit different, and they are far from perfect. Stories are surfacing about sellers who are getting less than market value and paying hefty transaction costs — commissions as high as 13 percent, though the average is purportedly 6 percent to 8 percent.

On an Inman story last week, Arizona Realtor Jerry Murphy commented, “I tried OfferPad to get an offer on one of my listings. They offered $15,000 less than the offer we accepted on the property. That coupled with the exorbitant fees leave me asking what seller in their right mind would leave so much money on the table. You either really have to hate Realtors or be really desperate to do so.”

And for now, these startups can’t possibly do better than an ethical and qualified agent. Today, the dumbest pigeon is smarter than the smartest robot.

But their capitalization allows these razzle-dazzle companies to make mistakes and get better and better. Plus, with machine learning, their tools will soon be as precise as the time displayed on your iPhone.

And expect new products, like mortgages that close in minutes, prompting buyers to participate in these new models. A marketplace?

We will soon know if this is an Uber-like tipping point for the real estate industry. I think it could be. But it’s only threatening if the industry crosses its arms smugly, puts on a grumpy face and does nothing.

Broker-owners can choose to behave like cab companies — ignoring the trend altogether or casting the new models as some sort of evil Slenderman. That approach stalls innovation and puts broker-owners further behind.

Consider the history with the portals, when the industry made Zillow the bogeyman. Now, many brokers have no other choice than to cozy up with the giant portal to keep up with technology that is being built by a new generation of disrupters. The once boring back-end is suddenly sexy, if transaction compression is the name of the game, which it is. Zillow and Dotloop together can connect the dots from lead to close better than anyone.

Brokers must quickly invest in data science to understand when homesellers are going to sell and in tools that compress the transaction — wiping out weeks of wasted time for their agents and their customers. Brokers can also partner with the new fintech companies that are making the loan process quicker than watching a segment of The Big Bang Theory.

Soon, it will be “time” that brokers are competing with — not portals, bots and geeky entrepreneurs.

I hold out hope that this time around brokers will act more like Jack in the Beanstalk, showing leadership, courage and bravery to overcome and even befriend the giants.

What about agents?

Do I think these new models will wipe them out? No. They are like smart Uber drivers, once cabbies and chauffeurs, who made the switch successfully  The best drivers have multiple cars and are building businesses around car-share services.

Smart real estate agents are already changing how they manage their transactions, and they are forming teams to deliver better and faster service. They are survivors and thrivers; they will adapt, adopt and partner where needed. They are as agile as the best entrepreneurs and have leverage if they use it.

Those who don’t will suffer the consequences.

Have you stood in a grocery store line lately when someone ahead of you is writing a paper check? I try not to get impatient, but I wish I could show the person how to use Apple Pay to make their life easier.

Technology is not perfect, but some of it just makes too much sense to ignore.

Email Brad Inman

 

 

How Real Estate Gets Sold

17 Hemlock Drive, central (“in-town”) Greenwich, last ask $6.995M, now has deal. List: Marjorie Pastel   Sell: Julie Chen

At first blush, this might look like a disappointing result. It started at $11,000,000 a little over a year ago, had three price reductions, down to $6,995,000, and finally, finally gets a deal.

So, did the broker over-price it or was it the owners? I don’t even care, because either way, that one-year process is completely normal, particularly in this price range. Even if the broker had recommended an initial ask of $6.995M (which might have triggered a bidding-war), there is no way on earth the sellers would have agreed to it and, in fact, they probably would have given the listing to a different broker!

As a broker, you get absolutely nowhere in this town by suggesting a sensible asking price. There are exceptions, of course, like the case last month where a broker recommended an asking price of $4,200,000 to a waterfront seller. The seller thought that was “too high”, and told the broker to list it for $3,700,000, and guess what?  A bidding war erupted, and it’s selling for…$4,200,000!

But that sort of seller is as rare as can be. Greenwich sellers, you’ll recall have three favorite sayings:

We don’t need to sell!

We’re in no hurry!

All it takes is one!

That’s simply a fact of life around here, and brokers have had to adapt to it. You price where the sellers tell you to, and you “try” that price for as many months as they can stand. Eventually they get sick of the process and, if you’re a good broker, who’s been communicating market data to the client the entire time, you are still there when they’re ready to cut the price!

All indications suggest listing broker Marjorie Pastel did everything right.

 

How To Sell A $16.25M House

7 Cobb Island Drive, originally $18.750M, fired first broker, new price $16.5M, bingo, it has a deal. Listing broker Chris Finlay, in the right position as the “second broker”, gets the payday! (As does selling broker Marjorie Marianacci) UPDATE: Closed 12/07/2016 for $15,250,000.

107 Indian Head Road (actually, it’s the end of Meadow Road). Officially started at $28M, sells for $16.250M, listing broker Tamar Lurie hung in there for the whole process, nice going Tamar!

What I mean to say is, how to list a $16.25M property, and it’s tricky. First of all, to get paid, you’ll almost certainly need to be the second listing broker (or maybe the fifth?) because these big properties come with “baggage”, the worst of which is that they attract big price estimates from brokers and the end result is, they sit for a long, l-o-o-o-n-g time.

It’s different with normal properties. Let’s say you have an ordinary, garden-variety $3,000,000 Greenwich starter-home you’d like to sell. You call in a few different brokers and you get a fairly uniform response, with selling-price estimates no more than $100,000 apart. Mr. & Mrs. Homeowner are free to reject the advice and price it stupidly high, but the broker’s likely to argue with them about it.

With the big stuff, all that changes. Brokers compete fiercely for high-profile properties because they look great in advertisements, they possibly bring you other big customers, and, of course, the commission ain’t bad (unless you foolishly allow your share to get bargained down to nothing!). The owner often “suggests” the asking price, based on…nothing, and the brokers say, “Oh yes, let’s give it a try!”

The owners of the big ones fit two categories:  they are  hugely successful in some particular field, but let you know immediately that they are also experts in real estate. Or they are heirs who usually live out of town but also, amazingly know much more about real estate than you do!

All of the above can cause a $16,000,000 property to be priced at, oh, $32,000,000, let’s say. This sort of pricing never, ever works, so the property sits un-sold for the first year. Wonderful (expensive) advertising is created for the property, broker open houses are held, every once in a while a showing occurs, but, alas, no offers.

At the end of the year, the owners shake their heads sadly and give their broker the bad news: “We’re giving the listing to someone else”.

Now the price of the (still $16M!) house gets slashed to $28M, and, sadly, another year goes by, maybe another broker goes “bye”, too! Eventually, the price comes down, ever so slowly, inch by painful inch, and one day, it starts to look like a gosh-darned bargain and it sells! If you’re the lucky broker still hanging on to this little merry-go-round, you get the payday, hurrah! The other brokers who fell or got pushed off? No payday. It’s a tough business, friends!

 

“Our long national nightmare is over”: Gerald Ford

 

212 Taconic Road closed Tuedsay at $3,248,100. Trust me, there was nothing wrong with this house, it was just the price! Listing broker Steve Archino. Selling broker Susan Rose.

UPDATE: This property hit the market May 12, 2010, with an asking price of $5,495,000, so it’s eventual sale price was $2,246,900 less than that! (For you mathematicians, that represents a mere 40.8% reduction.)

President Ford was referring to the turmoil leading up to President Nixon’s resignation, but I always think of that quote when a listing that’s been lingering painfully on the market for years and years finally sells.

The trick with listings like this is to be the last listing broker. Sometimes there will be three, four, even five before you! Each time the seller switches brokers, the price gets a small adjustment downward (occasionally upward, but eventually downward), so usually all you need to be is the second broker.

In this particular case, the lucky spot was the fourth position, and that’s where broker Steve Archino entered the scene, listing it last February for $3,985,000, then reducing twice, down to $3,595,000, and a deal was struck.

How long did the entire process take? Well, it all began on a crisp, clear day in May, 2010, so beginning to end, around six years. And now its over, say hallelujah!

List: Steve Archino

Sell: Susan Rose

Love When This Happens

1 Grove Lane, asked $3,445,000, got $3,290,000.

This is a fairly common scenario most listing brokers can identify with: You put a property on the market “priced to sell”, yet along comes a buyer who low-balls anyway.

Being a diligent broker, you naturally then provide the buyer’s broker with copies of all the recent  comparable sales from which your thoughtfully calculated asking price was derived. But the buyers, maybe even their broker, say nope, you’re off by hundreds of thousands. They re-visit the house, bring their builder, their architect, their father-in-law, everyone agrees, it’s overpriced. They even quote Chris Fountain! Finally, they raise their bid a small amount, but that’s it, “take it or leave it, you’d be a fool not to take this offer”.

You and your sellers say no, and they go away. Days go by, maybe a month, more showings occur, but no offers. A hint of doubt starts to build inside you. You begin to wonder if maybe those damn low-ballers were right! Could it be? But you’ve got the comps! Your price is justified, dammit!

Then, salvation. A new buyer comes along. They love the house, they get it. Their opening bid is higher than the last folk’s “highest and best”. As you’re negotiating, still another buyer shows up, and they get it, too. So you make the deal easily, maybe no bidding war, but the existence of a competing bid adds the useful urgency that keeps deals moving along.

All that happened at 1 Grove Lane, and it happened at loads of other properties in this year’s weather-delayed Spring market. So what’s the moral of the story? Do you hold out for that “right buyer”? I’d say yes, if you’re really confident of your asking price, and you’ve had, say, 10 or fewer showings. But 20 showings? 30? And nothing but low offers or worse, no offers? Then the above scenario is not going to happen. Lower the [gosh-darned] price!

 

Waiting For Your House To Sell

44 Upper Cross Road took 24 years to sell. No one will beat this record.

Despite the experience of the overwhelming majority of people who do it, selling your house is not supposed to be a multi-month, multi-year experience.

The basic procedure is, bring in a few competing real estate firms, gather their opinions of what your place is actually worth, then use that number as your asking price. Sounds crazy, I know, but it works every time. And by “works”, I mean, the house sells quickly, often for more than that price!

Sadly, except for art auction houses, almost no one wants to take the “risk” of this method of pricing. . Instead, they pad the price the brokers come up with, ladling extra hundreds of thousands and/or millions, either for “negotiation” or, and these are the three dirtiest words in real estate pricing, because they “NEED TO GET” some particular quantity of money.

I think real estate is unique in that it is the only product where the seller thinks the buyer of the product can be persuaded to ignore the reality of previous sales, competing offerings, and the current state of the product’s market.

In defense of typical homeowners, they might put a house on the market two or three times in their lives; they can be excused for lacking an understanding of market dynamics. But when professional builders do the same thing, that astounds me!

And of course, the brokers themselves can sometimes be the problem, by over-pricing in order to get the listing, being inexcusably ignorant of the market, or, sleaziest of all, trying to sell the property (when it’s their own listing) to their own client at too low a price.

Anyway, that little speech was my lead-up to the announcement that two properties that sat around for a l-o-o-o-n-g time have now sold:

34 Andrews Farm Road (2008)

537 North Street (2006), “executed contracts”.

Two really nice houses! Should have sold quickly! Didn’t.

Neither of these ever showed signs of challenging the amazing 24-years-on-the-market record held by 44 Upper Cross Road, but five years? Eight years? Too long.

Print and save this article. Better yet, send it to a friend who’s had a house on the market for ever and ever. Feel free to remove my name!