Pricing your property is the biggest dilemma that all sellers face. It is the one area that the real estate industry has exploited claiming it as their biggest ‘secret’.
Real estate agents promote themselves as experts in the field and convince vendors (and some truly believe) they can accurately put a price on the property that will be achievable. They can only provide their experience, and an educated guess as most agents don’t have credentials in valuation techniques or standards. Many real estate agents work part-time, as an adjunct to their family income, some are working two jobs in other industries and many have only completed basic sales training courses.
Valuers; however, undergo intensive training in property law, tax and accounting matters, risk management, surveying, insurance, construction materials and techniques, plus a myriad of other aspects to the valuation processes.
Try getting any bank to accept an ‘appraisal’ as a reliable indication of the real value of a property. Have you ever wondered why banks only accept valuations prepared by a licensed valuer? Banks even take it one-step further with ‘approved bank panel valuers’. These are the valuers regarded as being reliable and accurate with the valuations they produce and; therefore, the bank is happy to lend money against these valuations. They are also the only ones who can afford the required Professional Indemnity insurance, so their valuations are low risk for the bank.
Why doesn’t the bank simply look at the current ‘on market’ data that is readily available? It would be quicker and less expensive for them to do this; they could churn out loans like a sausage machine and start getting interest on their loan funds in record time. They would also probably go broke in record time. The Global Financial Crisis (GFC) proved that there is value in real valuations and well administered lending processes.
Appraisals can be promoted as a reliable way of setting the price for your property; however, they are usually nothing more than a bidding process between agents. The agent that offers the highest appraisal amount to the client usually wins the listing. The reality is the only reliable appraisal, is a combination of recent data and a valuation by a licensed valuer. The valuer is bound by stringent legal and ethical constraints whereas the agent is not. These two essential elements, when viewed together, can give you a very accurate ‘appraisal’ of the price, your property can possibly achieve.
Agents have a dilemma when it comes to setting a price for a property when the facts are very different from the client’s expectations. There are many sources of reliable data available to real estate agents and most agencies would be subscribing to at least one of these sources. Many of these data subscriptions have Apps that can be used on phone or tablet devices that every real estate agent on the planet now uses, usually the latest one with all of the bells and whistles.
Usually the appraisal process goes like this; the potential seller calls the agency and arranges an appointment for them to call out and do an appraisal on their property as they are thinking of selling. The agent will ask a series of questions about the property and most importantly the seller’s price expectations. They will ask if they are getting other agents to appraise the property and when they are planning to put it on the market.
Once they have this information, the first thing that the agent does is research the recent sales and on market data for the area. This research will provide them with up to date information on real estate sales and listings in the area, usually they research this information within 3-5 kilometres from the property they are appraising.
The research will tell them that similar properties in the immediate area have sold for X and if the owner of the property they want to sell (appraise) has indicated that they think it is worth Y (a price that is obviously well above the market) they need to ‘tailor’ the appraisal. They know the client probably won’t list their home if they know the true story about the prices properties are actually selling for in their area. In some cases, the property owner genuinely does not know what their property is worth, so the agent is under even more pressure to be the highest bidder!
There are some ‘Tricks of the Trade’ used to counteract this ‘dilemma’ so that the agent ‘can appear’ to provide an appraisal that suits the client’s expectations. An example is that the agent can prepare recent sales and an ‘on market’ report from their data provider. They can filter the information they would like to show and can omit items such as recent sales and listings that would prejudice the agent’s appraisal figure. The low-end (very depressing to the seller) sales can simply be omitted (turned off if it’s an App) from the report providing a false average sale price on a like for like basis. The same can be done with ‘on market data’ it’s the ultimate party trick made for real estate agents.
False averages are used commonly, and market averages are constantly rising because properties are being put up for sale at unrealistic prices. These tactics, which are basically deceptive practices, are doing serious damage to the real estate industry. They are creating a crisis of confidence in vendors who are experiencing increasing time on the market and listing periods. This not only disappoints and aggravates vendors, but it also causes ever-increasing animosity towards real estate agents.
Real estate agents are renowned for encouraging a seller to put a price on their property, which is often unrealistic, and not based on actual market conditions or true sales data. The agent then sets about slowly conditioning the seller to ‘meet buyer expectations’ this is shorthand for, drop the price to what it should have been in the first place.
Why is this so? Why pressure the seller to meet buyer expectations? Why not pressure the buyer to meet seller expectations?
The answer is quite simple; Open House Inspections, which are the favoured way for real estate agents to sell houses by attracting a group of stranger’s unknown to the real estate agent. The agent has no knowledge of their financial situation or their motivation for looking at the house for sale, on the other hand, the agent usually knows a lot about the seller.
During the appraisal process, the seller may have disclosed why they are selling, they may have mentioned certain financial pressures, a separation or divorce, or their plans to buy a new property and at what price point. This information allows the agent to get a clear idea of the seller’s personal circumstances, pressures, timelines and motivating factors.
The agent does not have the same level of information about the buyers, so it is easier to pressure the seller to get a result. The agent has no idea how much the buyer can afford, how many other properties they are considering, or by how much they may, or can, increase their offer.
This is one of the great conflicts of interest in the traditional real estate sales process if the seller can be convinced to drop their price, bingo! The agent has another sale and another commission; downward changes to the price have only a small impact on their total commission so why should they worry.