Part of our job as Realtors is to educate our clients on the realities of today’s real estate market. There are good realities that we get to share, like when renters are able to purchase a home, or when buyers can afford more than they expect, and when sellers see the amazing tools we have to expose their homes to the market (like our video tours!).
Unfortunately, the realities that we have to deliver are not always pleasant. It can be hard for clients to “meet the market,” or face the realities of today’s market, when the reality is not meeting their expectation. For example, a buyer will get frustrated very quickly if his budget is $100,000 and he is looking for a brand new 7,000 square foot custom home on a 3-acre lot in San Francisco. It is just not going to happen. More commonly, we see the flipside of that situation, where sellers will get frustrated when they are looking for a higher sales price than a buyer is willing to pay. The solution is to meet the market, or adjust your price (and expectations) in order to achieve a successful sale.
The most common misconception in this market for sellers is overpricing a home because it is a hot market or the home itself is heavily updated. One unfortunate reality that we have to bear is that a home’s value is actually set by the market and what a buyer is willing to pay. A home’s list price is decided by the seller, but the list price does not set the value of the home. When we work with sellers and their free home estimates, we look at what other comparable homes have sold for, and give our best recommendation based on what the market has proven to be willing to pay. In the end, the seller decides what their home will be listed for. If that list price is off the mark, then we have to make further recommendations to meet the market.
Let’s take an in-depth look at this seller’s situation. A great example of this can be found in Sacramento’s luxury market. Let’s break it down by numbers. Below is a data table and graph that represents the last year of activity for single family homes above $900,000 in the 95608 and 95864 zip codes.
It is hard to find any patterns by merely glancing at this data, but if we look closely we can see how meeting (and ignoring) the market pays out. Personally, I think the data table is easier to read, but use whichever suits you.
Zoom in on one of the extremes of the group – August 2015. This month had the longest average cumulative days on market at 221. (That’s about 7 months! That’s a long time!) August 2015 also saw the homes sell at 90% of the list price (which is 4.6% less than the average for the year), and only 82% of the original list price. In other words, these sellers had to reduce their expectations by 8% of what they were originally asking to get the house sold. These sellers were aggressive in their original list prices, and were ignored by the market for 221 days.
Let’s now focus on another extreme – March 2016. This month had the shortest average cumulative days on market at just 3 days. March 2016 saw the homes sell at 97% of the list price AND original list price, meaning there were no price reductions here. These sellers were more realistic with their original list prices and were rewarded with near full ask offers in 3 days.
This trend does not occur every month, especially with luxury homes being so unique. But, when buyers know that homes are selling very close to the list price, they generally won’t lob in a low offer. Buyers (especially luxury buyers) are smart. If they are interested in a home that they feel is priced too high, they can either submit a low offer and risk offending the seller, or keep an eye on the home until the seller decides to lower the price. Of course, the latter is more likely because the former involves the danger of ruining their reputation as serious buyers in the marketplace. Sellers that acknowledge and meet the market demonstrate that they are motivated and are generally rewarded with near full asking price offers.
Meeting the market isn’t always the easiest pill to swallow. But, our happiest clients are the ones that listen to our professional market analyses and adjust their expectations accordingly. We do our best to educate our clients on today’s market, but when it comes down to it, it is always the client’s decision!