Friday, August 10, 2007

Declining home prices - Four ways to cope with a sluggish market

Friday, August 10, 2007

By Bernice Ross
Inman News

The subprime fiasco, tougher underwriting standards, and increasing foreclosure rates and interest rates are all exerting additional pressure on the slowing market many places in the country. Are you prepared to survive a declining market?

A buyers' market, where the prices are declining, is the worst possible market in which to be a commissioned sales person. Price deflation is bad for everyone. Buyers are reluctant to purchase because they fear that prices will decrease further. Sellers are unable to sell, which results in more foreclosures. Lenders end up taking back more property, and brokers end up doing fewer transactions.

If your market is declining, here are four steps that you can take to avoid being caught in the downward price spiral.

1. Price properties below the comparable sales

Declining prices make obtaining an accurate CMA difficult. Assume that a seller's property is currently worth $400,000. If property is declining at an annual rate of 5 percent per year ($20,000), then the seller's property 180 days from now is worth only $390,000. Given that few sellers price their property exactly at market value, their list price of $410,000 is now $20,000 higher than the property's value. Thus, even with a $10,000 price reduction, the list price would still be $10,000 over the new market value. This is exactly where the seller started at the beginning of the listing period. If a price that was $10,000 over market value did not result in a successful sale, it is even less likely to produce a sale as the market continues to decline.

To avoid this trap, list the property below the comparable sales. The reason for this is simple -- today's comparable sales represent what the prices were 60 to 90 days ago. If the market is declining, then the property is actually worth less than the comparable sales suggest.

2. Avoid letting the sellers "test the market"

Persuading your sellers to be realistic is challenging in any market. This is especially true when the market has been very good and is now transitioning into a buyer's market. As a result, sellers often want to "test the market." This is a huge mistake. Many sellers mistakenly believe that the initial activity on their property will continue throughout the listing period. Nothing could be further from the truth. When they first list their property, there is pent-up demand among the current buyers who haven't found a property. Once this initial surge ceases, showings will be limited to new buyers coming into the marketplace. Missing this initial "honeymoon period," which normally lasts the first 21 days a property is listed, usually results in longer market time and a substantially lower price. Do everything within your power to keep sellers from making this costly mistake.

3. When it comes to price reductions, you need a chain saw, not a pair of nail clippers

When property values are declining, reducing the price to the current market value is not sufficient. Instead, you must be slightly below market value to sell the property. To persuade the sellers about the wisdom of this approach, show them how much they lose each month they hold their property. To illustrate this point, assume that a seller is paying $3,000 per month in principal, interest, taxes and insurance (PITI) and that the prices are decreasing by $1,000 per month. The actual cost to the seller of not being accurately priced is $4,000 per month ($3,000 in PITI + $1,000 in depreciation.)

4. Tap into the seller's motivation to sell

In a declining market, many people are selling because they must. It may be a divorce, financial difficulties, a job transfer, or some other event where the seller has no choice. An important part of providing the seller with excellent service is to understand his or her motivation. While a seller's market is difficult for buyers because prices are constantly climbing, a buyer's market is tough on sellers because prices are declining. If the sellers have to sell and are reluctant to accept a reasonable offer, you can ask, "Which is more important, getting on with your life or waiting for the real estate market to improve?"

If the sellers are purchasing a more expensive home, remind them that they will be making additional money on the deal. For example, the owner of a home worth $300,000 who experiences a 5 percent price decline will see a $15,000 reduction in value. If that same individual is purchasing a $600,000 home, that home will experience a $30,000 reduction in value. Thus, the seller comes out $15,000 ahead. In fact, the higher price ranges usually experience greater drops than entry-level homes.

Helping your clients understand the psychology of a changing market will make the job of selling their home easier. More importantly, it can save your clients plenty of money as well.

Bernice Ross, national speaker and CEO of Realestatecoach.com, is the author of "Waging War on Real Estate's Discounters" and "Who's the Best Person to Sell My House?" Both are available online. She can be reached at bernice@realestatecoach.com or visit her blog at www.LuxuryClues.com.

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