What Is The No. 1 Mistake A Seller Can Make?

WHAT IS THE NUMBER ONE mistake a seller can make?  It is overpricing the house.

The Silicon Valley Real Estate Blog itemizes some of consequences of overpricing.  There is actually an old real estate phrase for the rather common phenomena of owners overpricing homes in a declining price market.  The phrase is “chasing the market down.”

Owners who chase the market down go through this sequence:

First, owners know their home is the best in the neighborhood, they bought it, so naturally it is the best value.  When picking a listing price in a declining market, they insist on a price 5% or more above comparable recent sales.  Most of the other sellers in the area do the same.  In the current declining market there is about one buyer for every 6 homes on the market.  Five homes will NOT sell,  and only one will will sell.

Second, after 60 days on the market, some bright seller and agent, realizes their home is not going to sell unless the price is reduced.  The price is reduced 10% to 5% below market.  The house sells in a few days.  This is the one home being sold in six.

Third, a few sales occur over four months, and prices are now 5% below what they were when our homeowner put his home on the market 5% over fair market.  Our homeowner now reduces the list price 5%, for example from $720,000 to $684,000.  This is a $36,000 price reduction, and the owner hates it.  But our seller is still 5% over fair market value, as are all the owners just listing their homes, and only one home in every six will sell.

Forth, after six months the owner is absolutely convinced the agents incompetence is the reason the house has not sold.  The owner fires the agent, and lists the house with a different agent who agrees the house is worth $684,000, but to be “safe” the house is listed at $670,000 with the new agent.  In the intervening two months the house has declined in fair value another $16,000, or about 2%, consequently the home is still overpriced and will not sell.  And so the sequence goes, and a year later the fair market value may have declined 20%,  $144,000 in our example, and the same house still has not sold and is now listed at $580,000.  The are over 400 homes in Alum Rock actively listed today that have “chased the market down.”  Really.

McMurdie’s Real Estate Rule No. 324:  in a market declining .5% a month or more, sell only if the property must be sold, and then price the real estate 5% or more under the fair market value to avoid chasing the market price down along with saving interest and other carrying costs.  Get ahead of a declining market if you must sell.

In our example, the owner and agent should have first listed the home instead of at $720,000, at $648,000, or 5% below it $684,000 competitive market value.  The house would have sold within a few days.  The sale would have been one home that sold, and not one of the five homes that didn’t sell.

Today there is 12 months of unsold listings active on the market.  Any inventory over 90 days is a declining market.  Twelve months of inventory is a steeply declining market.  Homes listed today at competitive market will probably decline another 10% in value by the end of 2008.

Normally owners “chase the market down”.  Instead of “losing” 5%, or $36,000 in our example, they’ll loose $144,000, or 20%, and all the carrying costs.  It is a little bit like watching Buffalo stampede over the cliff.  Only a small percentage of Buffalo are smart enough to take the easy way down.

Silicon Valley Real Estate Blog has my full sympathy.