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overpricing

The danger of overpricing & chasing real estate unicorns

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Overpricing. It happens all the time in real estate – especially in today’s market. I get where sellers are coming from because we’ve had so much glowing real estate news for more than five years. But that doesn’t mean we’re in a market where you can command whatever price you want. 

Chasing the unicorn: Many sellers are pricing their properties too high. It’s as if they expect record-breaking prices and multiple offers every time because of how “hot” the market is. Homeowners get so fixated on the idea of a fiery market that they price for that one unicorn buyer who’s going to mysteriously pay more than anyone else. This “unicorn” will ignore all recent sales and listings and magically offer 10% higher than anything. In Sacramento the idea is a Bay Area “unicorn” will swoop in with fat stacks of cash and totally ignore similar comps that are selling for less. It’s nice when sellers get lucky like that, but in today’s market buyers are actually much more finicky about price. Despite a legitimate housing shortage we don’t have a market where buyers are willing to pay crazy prices that are totally disconnected from reality. In other words, we don’t have a market where pricing for the “unicorn” makes good sense (unless you want to sit on the market instead of sell). Take a look at the image below that shows price reductions over the past 24 hours in the Sacramento region. These 78 properties have been priced too high for the market.

My advice? Price for the real market instead of the unicorn. Give the most weight to similar sales and similar listings that are actually getting into contract.

Aspirational pricing: If you aren’t familiar with the term aspirational pricing, Jonathan Miller coined this phrase. It’s a great way to describe the phenomenon of sellers fixating on prices that are simply disconnected from the real market.

10 reasons why sellers overprice:

1) Hot headlines are imposed on the price instead of looking at comps. 

2) Dissimilar sales are used as “comps” to price the home.

3) Too much emphasis is put on price per sq ft instead of actual comps.

4) A property is priced like it doesn’t have a busy street or adverse location.

5) Sales from a higher-priced area are “cherry-picked” to price the property.

6) The seller is too subjective and feels “my house is better.”

7) The owner believes the cost of any upgrades should be paid for by buyers.

8) A more aggressive trend from a lower price range is assumed to be present at a higher price range.

9) It’s a tricky property and not easy to come up with a price.

10) What else?

My article in Comstock’s: By the way, I wrote an article in Comstock’s Magazine this month on the value of upgrades. Check it out if you want.

I hope this was interesting or helpful.

Questions: Are you seeing sellers price for “unicorns”? What reasons do you think sellers overprice? Did I miss something?

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An appraiser’s take on that $250,000,000 house

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Have you seen that house for sale at $250,000,000 in Bel Air? After checking it out I’m certainly taken aback with its features, but I also have some things on my mind as an appraiser. Let’s kick around some ideas together. Any thoughts?

Bruce Makowsky BAM Luxury Development

Image Source: Bruce Makowsky/BAM Luxury Development

1) Listings vs Sales: Let’s be real. This listing isn’t a big deal unless it sells. If it only sits on the market at $250M, then it wasn’t a $250M house. We say things like, “This is the most expensive house in the United States,” but it really might only be one of the most expensive listings unless it sells.

2) Fat Concessions: This house comes with enormous concessions. According to Bloomberg, the listing comes with “150 pieces of original artwork, $30 million worth of classic cars (owner’s estimate), a dozen high-performance motorcycles, and a deactivated helicopter.” At the very least the owner is giving the buyer $30M in personal property, so it starts to sound like we might be dealing with a $220M house instead. This is exactly why appraisers ask agents if there were any concessions or credits in the contract price. Would the house have sold at the same price if the personal property was not included? In other words, did the sale at $500,000 only close that high because there was a $50,000 car included in the sale? If all the comps are around $450,000 and there is one “Lone Ranger” at $500,000 (with a car), then we probably have to subtract that car out of the purchase price if we’re going to use it as a comp. Here’s more information on concessions.

3) Publicity & Overpricing: For the sake of conversation let’s assume this house is overpriced. On one hand the benefit of the sensational figure of $250M is the property has generated an incredible amount of publicity. That’s huge in real estate because it can help find the right buyer. But on the other hand, if publicity doesn’t lead to contracts, then it’s really just temporary attention. It’s like Eddie Murphy’s former house in Granite Bay that was listed for $12M in January 2014. The property got some air time and print for sure, but guess what? After 954 days it is still on the market for $12M. Thus we remember the importance of being priced realistically according to the market. Does the price line up with other competitive sales and current pendings / listings? Or is the property priced far differently than anything else that is similar? Whether values are increasing or declining, we have to ask these questions and pay close attention to realistic comps (that’s what an appraiser is going to do). In this case I really don’t know if the property is overpriced, but the inclusion of personal property  at $30M+ is a tell that it might be.

4) Bathroom Adjustment: This home has 38,000 sq ft and a whopping 21 bathrooms, so if we see a comp with 20 bathrooms, we should make a value adjustment, right? I mean, we were taught by our mentors to give a standard $5,000 or $10,000 adjustment any time there is an extra bathroom, so there has to be one. Okay, hopefully you get I’m being facetious. This example reminds us to not give token made-up adjustments for differences in bedroom count and bathroom count unless it’s really reasonable to do so (and there is support to do so in the market). In this case I would be shocked to see someone adjust such a petty amount because it’s not like billionaires walk in there and say, “Shoot, I would’ve paid $10,000 more if there were at least 22 bathrooms.” More on adjustments here.

I hope that was helpful or interesting.

Questions: What else stands out to you? What is #5? I’d love to hear your take.

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Six temptations to avoid when the market slows down

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At this time of year the weather begins to change, the kids are finally back in school, AND pumpkin spice lattes come back on the menu at Starbucks. Oh, and it’s normal for the real estate market to slow down.

sacramento real estate market- image purchased from 123rf and used with permission by sacramento appraisal blog

The Truth: Real estate is usually very seasonal, meaning the market heats up in the spring and begins to slow down later in the year. This is normal, and we know this intellectually, yet it’s still easy to freak out when properties start taking longer to sell or demand changes. This is why I hope this post will be relevant.

NOTE: There is a difference between a market being slow and showing signs of a seasonal slowing. 

Six temptations to avoid when the market slows down

  1. Freaking out: Just as we expect the weather to change during the fall, let’s expect real estate to change too. The public likes hearing positive news (“values are increasing”), so reporting a market slowing seems negative or anti-climatic, but it’s actually normal almost every single year (see this post and look at the fall graphs compared to the spring). On the positive side, a slower seasonal market might provide space for a vacation, relaxation, and most significantly an opportunity for the real estate community to communicate seasonal dynamics to clients. Of course when a market slows it’s not always easy to be self-employed since paychecks also slow. Yet when we start realizing the market slows during the end of the year, it helps us adjust our expectations and make plans for life and business. There has to be more to the last quarter of the year than being stressed until the market picks up again in the spring.  🙂
  2. Projecting the aggressive spring on summer: It’s easy to look back in time to a more aggressive market and want to price according to sales from the hot spring. But when the market has changed, be careful to look at values for what they are right now instead of projecting hotter seasonal trends of the recent past onto a fading summer or cool fall. This is just the same as not dressing for summer if it is winter (I do wear flip flops year round though). We have to do what makes sense for the current time.
  3. Putting too much weight on sales: Sales tell us what the market used to be like when the sales went into contract several months ago, but listings and pendings tell us what the current market is like right now. When values begin to soften during the fall, this makes it all the more important to look at listings / pendings instead of only sales. If the listings are priced at a similar level to recent sales, but not selling, this tells us the market has changed, and we might need to adjust our expectations (and prices). The same is true with the stock market. We wouldn’t use stock prices from three months ago as our gauge for today’s prices, but instead look at what stocks are actually selling for right now.
  4. Targeting that one magical buyer: We all want to attract the highest price ever, so it’s easy to hold out for that one cash buyer from outside the market who is going to pay more than anyone has ever paid. Yet we have to consider what the rest of the local market is willing to pay (this is what the appraiser is going to be considering too). If you lined up 100 buyers who are interested in the neighborhood, what is the most probable price most buyers would be willing to pay? That’s a good picture of what market value looks like.
  5. Refusing to reduce the list price: It can sting to reduce the list price, but if the price isn’t right, it’s time to change that, right? If you had something for sale on Craigslist and it wasn’t selling, would you keep the price the same? No, you’d change it if you really wanted to sell. How do you know if the price is wrong? If there aren’t any offers, you’re not “in the market”, but only “on the market” (Jay Papasan). An honest question: If the market is telling you to reduce the price, but you aren’t willing to do so, do you really want to sell?
  6. Not listening to your real estate agent: If you are an owner and your real estate agent keeps encouraging you to do something to the property or change the list price, but you’re not listening, ask yourself why you are not listening.

I hope this was helpful.

Social Media Podcast: By the way, a few weeks back I did a podcast with The Appraiser Coach on using social media. Here it is in case you want to give it a listen in the background. It’s geared toward appraisers, but there are probably relevant nuggets in there for anyone in the real estate community. Listen here or below.

Questions: What’s temptation #7? Did I miss anything? I’d love to hear your take.

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