Sellers! Hold out for top dollar!
If you haven't heard this particular twist on real estate conspiracy theory yet, you will. It's shown up in Freakonomics, it's shown up on primetime TV, and it's even been blessed by wooly academics.
So take it from me, you can take it to the bank. If you take it to my bank, the teller will have to go get manager authorization, and the manager will be locked in a conference room talking long distance to her sister-in-law in Buffalo, but maybe you'll have better luck at your bank.
Here's how it works.
You're going to sell your house. It's probably worth about $975,000. You're paying your agent 6 percent commission. He'll give 3 percent to the buyer's agent and keep 3 percent for himself. Pretty straightforward so far, but now it gets tricky. Because if your agent can talk you into taking an offer right away, not at your home's $975,000 market value but at, say, $950,000, he can rid himself of you and your home, quickly and easily, and move on to the next dupe.
So don't fall for this ploy and sell quickly and easily, no sir. You just hold out for that one buyer who really loves your home and will pay you top dollar. In fact, you're thinking of holding out, not just for $975,000, but for a cool million. Good for you. After all, your home is certainly worth more than your agent says it is. He doesn't realize how special it is. And after all, you want your agent to earn that big commission you're paying him.
Of course the size of your agent's commission is directly related to the sale price of your home. The more you get, the more he gets. So you'd think he'd be burning to sell your home for top dollar too. And that's exactly what the crafty devil would like you to think. But let's crunch the numbers and see. Believe me, you'll be thanking me.
If your home sells for $1,000,000 instead of $950,000, you've just pocketed an extra $50,000. Well, it's not that simple. You'll pay a bigger commission and maybe more transfer tax and capital gains tax, and maybe more escrow fees and title insurance, depending on how closing costs are shared by buyers and sellers in your area. But if I said all that, I couldn't come up with something short and punchy like "you've just pocketed an extra $50,000" and I need to say that, because consumer journalists always say things like "pocketed". Real Consumer Reports lingo. Savvy and hard-nosed. Brother we know the score.
So if you sell your home for $1,000,000 instead of $950,000, yes of course your agent's going to get a bigger commission check, but don't be fooled. Remember, you pocketed love that word an extra $50,000—a whopping another great word 5.3 percent more—by resisting your agent's high pressure tactics and holding out for top dollar "top dollar!" love it! So what if it took two months to sell your home instead of two weeks? It was worth the wait, wasn't it? You betcha!
But was it worth the wait for your agent? Well, his commission check was a whopping 5.3 percent bigger too, but let's look at what he got out of waiting for a higher price, not in percent, but in dollars. Here's where it gets complicated, but work with me on this. Instead of getting $28,500 for two weeks work, he got $30,000 for two months work. Now maybe you see where I'm going with this. That's six more weeks of him running ads, buying frozen cookie dough so he can bake cookies at open houses, driving back and forth back and forth back and forth in that Mercedes and whatever else it is agents do to make you think they're earning their hefty another great word! commission. All for a measly extra $1500. Heck, he probably lights his cigars with $1500 bills. And when you figure that your agent doesn't even get to keep the whole $1500—maybe only 70 percent or so, and almost half of that goes to taxes—well, his incentive to sell your home for top dollar gets even smaller. No, it shrinks. No, it dwindles.
They taught me all this chicanery at the National Association of Realtors® orientation class, the class where you learn how to blackball honest God-fearing discounters, the class where you learn how to turn alert buyers into moaning zombies, the one where you learn the magic incantation that makes home prices keep going way way way up. Of course, I'm not supposed to tell you this. Heck no! I'd get in big trouble. But you look like a guy I can trust. You won't spread this around, will you?
Cut! How did I do, Mr. DeMille? Was I convincing?
What's ironic about this conspiracy theorist's dark fantasy is that I've just sold a house the day before it hit the market, and everyone's slapping me on the back, opening doors for me and telling me how good I must feel—fast sale, dream offer, ecstatic client—and here I am thinking "I'm not going to get to do any open houses."
Because there's one real estate conspiracy theory—the one that says that open houses are all about selling the agent, not about selling the house—that's absolutely positively true. An agent can't buy the kind of marketing an open house gives him. Literally. No amount of direct mailing, newspaper advertising or Internet marketing will give an agent as much credibility with serious buyers, or with neighbors thinking about selling, as holding open his or her own listing, especially if it's well-priced, well-presented and new on the market.
And of course the idea that your agent can't wait to scuttle off to another listing is predicated on the idea that your agent has another listing to scuttle off to. For many agents in my area, where inventory seems to get smaller or shrink or dwindle every month, there isn't another listing. So the ones you do manage to get are worth milking for all they're worth. That's not true of all agents, of course, and it's certainly not true of all areas, especially these days. And no agent wants to hold the same property open week after week, month after month, but then there's usually another agent without a listing who'll be happy to do it for you and maybe pick up a buyer or seller. Anyway, just another example of how reality always puts a great big door ding in nice shiny conspiracy theory.
Now I'd like to bring on a surprise guest. I'd like to introduce you to a local seller who took this hold-out-for-top-dollar advice and ran with it. I can honestly say she's never left money on the table. But I can also honestly say that she's never sold her house. She's tried to. Or at least she's gone through the motions. Repeatedly. Futilely. Obsessively.
It's not that her home hasn't been properly exposed to buyers. It's been on the market eighteen times over the past eight years. For a total of 1339 days on the market. That's longer than French governments used to last. She's had nine different agents.
And every time her home's been on the market it's been overpriced. And always by about 15 or 20 percent. Doesn't sound like all that much, does it? Just enough to make sure she wouldn't leave money on the table. Just enough to make sure she could cash in ka-ching! on that one perfect buyer. That one perfect buyer who really loves her house. That one perfect buyer who just rode into town on a truckload of turnips.
Like a ping pong ball she's bounced from agent to agent. From Agent A to Agent B to Agent A to Agent A to Agent C to Agent D to Agent D to Agent A to Agent E to Agent F to Agent B to Agent A to Agent G to Agent G to Agent H to Agent A(!?) to Agent A(!!!???) to Agent I. You have to wonder what Agent A, who keeps reappearing like a recurring theme, is thinking. Did I mention that Agent A's office is a full two hours from the house? For that matter, you have to wonder what local Agents B through I were thinking. Why couldn't one of them spot a trend?
Bored? Lonely? Restless? Call an agent.
This exercise in futility doesn't include the unknown number of days the homeowner tried to sell her home herself. I'm driving one Sunday around noon and see her slowly and grimly pounding a store-bought open house stake sign into the ground, while an equally grim friend silently supervises. It was like a solemn burial ritual for a distant relative who wouldn't be missed but may have left money. The scene was enveloped in gloom, yet stubborn hope hoped stubbornly and hopefully.
A penny for their thoughts. "I hope that one perfect buyer hurries up."
Not only does eight years on the market presumably takes its toll on the seller. It apparently takes its toll on the house, which began its journey to nowhere a "charming cottage" with "remodeled kitchen and baths" and ended it a "diamond in the rough". I guess all those showings really took their toll.
Well, now I've got you really confused. Now you don't know what you're supposed to do. Do you hold out for that one perfect buyer who doesn't exist? Or do you sell to the first buyer who waves an initial deposit check in your face?
Let's run through the home-pricing strategy as it should be strategized.
First of all, it’s impossible to under-price a listing, even today, in a high-demand, built-out area such as mine where home sales are literally an auction. Buyers will swarm an under-priced listing like sharks after blood, competing to bid up the sales price to full market value. Buyers don’t like it, and they may wake up the next morning feeling cheap and used, but they’ll do it.
This Oklahoma-land-rush mentality may not exist in your area. But in any area, there’s a definite and recognized period of time during which your home will sell if priced right and presented properly. I call this the “honeymoon period” because the listing is new and fresh, the night is young, the moon is full and anything can happen. It’s when active, focused buyers see and evaluate your house and are most likely to make an offer. After the honeymoon ends, however, what goes through your home is the rear echelon of homebuyers: the unqualified, the uncommitted, the tire kickers, the bargain hunters and the open house junkies. Not only are these motley stragglers far less likely to get into contract with you, you’re far less likely to enjoy it if they do.
I don’t know how long the honeymoon period is in your area. It may be two weeks or two years, and it'll change depending on the fundamental strength of your market and on the time of year. However long the local honeymoon period is, exceed it and you’re in trouble, Mr. and Mrs. Seller. Coldwell Banker claims to have statistical evidence proving that if your home doesn’t sell within the normal period of time, it won’t sell for top dollar, and that the longer your home is on the market, the less it'll sell for. Whether or not this study has been blessed with the wooly academic Good Housekeeping Seal of Approval of a peer review, any competent agent can confirm its findings from experience. (So it probably runs counter to prevailing economic theory.)
This isn’t magic, just the hard reality of the marketplace. And if it sounds suspiciously like esoteric market theory, remember that even a retailer will put his slow-selling stock on the clearance table. When I say that the honeymoon is a “recognized” period of time, I mean it’s recognized by the people who count, buyers and their agents. Buyers know how long your house should take to sell, because they know how long it’s taken comparable homes to sell. They know that if your home’s price is realistic, it’ll get an offer during the honeymoon. If the honeymoon comes and goes and your house is still for sale, buyers will start asking, “What’s wrong with it?” “Nothing’s wrong with it”, you say. “I’m just making sure that every buyer sees it so I get that top dollar.” But now your home has passed its “sell by” date, your home is "stale" and you’re yesterday’s news. The real buyers have moved on to the latest hot listing. As far as they’re concerned, you might as well paint “distressed goods” in foot-high block letters on your garage door.
Of course, you really can sell a home too quickly, and you certainly do want to make sure your home is properly exposed to the market. That’s what makes this and almost every real estate conspiracy theory plausible—there's usually a kernel of truth in there somewhere, buried under several tons of paranoia and wishful thinking. You do need to have a realistic idea of what your home will sell for. If you get an offer at that price or close to it, don’t stonewall that buyer even if it’s your first day on the market. Maybe you don’t accept the offer—maybe you make a counter-offer at the terms you really want—but you never ignore it. The first offer often comes from the most motivated buyer. Turn him down or insult him with stalling tactics or a laughably greedy counter-offer and he’ll take his marbles elsewhere.
Moral: get cute and tinker with the natural timing of your market by keeping your home on the market an artificially extended period of time, and you’ll find yourself waving to potential buyers as they drive away looking for a seller who isn’t into cheesy game-playing.
You can understand why paranoiacs love this kind of conspiracy theory. You can understand why the unsophisticated believe it. But if you're like me, you can't understand why Ph.D. economists don't seem to know about the natural rhythms of the marketplace.