The Misguided Non-cents of Real Estate 'Experts'

Posted by Nick Niesen on November 8th, 2010

A few words about self-proclaimed experts on Realtors and pricing your home, especially those self-proclaimed experts who aren't Realtors or haven't read the studies. Generally, in my readings, I find two diametrically opposed 'expert' opinions on how Realtors price your home. Both can't be right because they contradict each other. And as a Realtor, I can tell you that both are wrong. What are these two expert opinions? And what is the truth? Keep reading.

First, some experts claim Realtors try to get your listing by telling you your house is worth more than it is. This is a bit like waving a really big check in front of someone's eyes while they sign the listing papers half-hypnotized. They're not really hearing anything you say; they are just seeing dollar signs. Of course, this sounds like a great way to get a listing, but it doesn't really work this way, or if it does, it doesn't work long.

The experts say that Realtors do this and immediately start pressuring the client to 'lower' the price. Well, truthfully, if a house isn't selling, lowering the price will get it sold, but listing it too high to get the listing may not be the best business move. Now think about this, what good is a listing if it is listed at such a price that it won't sell? How much money will the Realtor make on it? I'll tell you: none. So, else the home eventually sells for a price far below what the Realtor originally said it was worth, or it doesn't sell at all. Neither produces a satisfied client.

Realtors succeed in business (and about 95% of all Realtors fail and quit) through a process of referrals. That's logical. It works like most businesses. My wife uses this analogy: no woman, period, will ever go to a hair stylist without a referral from a trusted friend. All the advertising in the world isn't going to increase the stylist's business (from women). Referrals drive the business, and Real Estate is just like that. Now, given this, how many referrals will a Realtor receive from a client if the client feels the Realtor lied about the value of his or her home in order to get the listing and then constantly pressured him or her to come down on price? My guess is none. Probably yours too. So, this expert opinion about how Realtors get listings really doesn't stand up to pragmatic business sense. It doesn't work in the long run, because it doesn't build a loyal client base. So to all you 'experts', listing above fair market value doesn't work. It produces dissatisfied clients, it doesn't sell houses, it doesn't produce income, it doesn't produce referrals, and it damages a Realtor's reputation.

Now, there exists a whole 'nother set of self-proclaimed experts that say Realtors like to list homes BELOW market price in order to get a quick sale and make a quick buck. Duh! I assume I'm talking mostly to potential clients, so ask yourself this? You know 'about' what your home is worth, and you know what your tax value assessment is, so would you jump at the chance to list your home for significantly below what you think it is probably worth? No way. Such a strategy would rarely produce a listing for the Realtor. Realtors don't get listings by underpricing the property - who would ever list with them? No one. Of the two 'expert' opinions on Realtor pricing, this is the dumbest.

So, what do Realtors do? Well, they run a Comparable Market Analysis. They try to find at least three homes (more, if possible) that are comparable to the 'subject' property (your house). Then they use this information to establish a recommended price that they think is close to fair market value. Not a price that's too hot, nor one that's too cold, but one that's just right. Now, Realtors aren't appraisers, and if the property is quite unique, they might ask that an appraisal be done before listing it, but for most properties, the Realtor is trained to get pretty close to fair value, though, by law, they can not establish with certainty the fair market value of a property.

Why would a Realtor want to price a home at what it is worth? This may sound like an odd question, but it is one whose answer is quite important. Here are some facts produced by the National Association of Realtors. On average, homes that are intially priced either significantly above or significantly below fair value eventually sell below fair value. Did you get that? Houses initially priced too high, end up selling below fair value! Why? Well, here's why?

It's the law of Days on Market, or DOM. People like to see how long a house has been on the market, and the longer it has been on the market, the more suspicious people become as to why it hasn't sold? What's wrong with it? Well, if it was initially overpriced, no one bought it, because, well, it was simply overpriced. Nothing may have been structurally wrong with the house, but time passes while it remained overpriced and as the Days on Market (called DOM in the industry) starts to accumulate, buyers become cautious. If the situation isn't corrected quickly, then no one will touch the house for fear something is wrong with it. Eventually the seller withdraws the listing, or is forced to sell below fair value because the house now has a DOM stigma. NAR (the National Association of Realtors) confirms this nationwide statistic every year using the millions of homes sold over the past year.

Now, the opposite is also true, but is really almost pointless to discuss. If a home is priced below fair market value, it will sell below fair market value. Duh! The problem is who would knowingly list their home significantly below fair value? Unless the seller is under duress or highly motivated for some reason, they won't. But if they do, it's pretty much a given, listing it below fair value will produce a sales price below fair value. But generally speaking, most people won't list their house so low, and getting such listings is hard (and rare), if not downright impossible for a Realtor to do.

So, the self-proclaimed critics of Realtors are, well, I hate to be so cruel, but if they can talk about me and my profession in such slanderous terms, then I guess I can return the favor: they are idiots.

For a Realtor to survive financially and professionally, they must build a loyal client base. This is paramount to success. Overpricing homes is the fastest way to a pitiful reputation in the business, to no sales, to no clients, and to no referrals. Underpricing homes just isn't even possible, plus, I haven't mentioned it yet, but per the Laws of Agency, it is questionable that such a practice, without the consent of the seller, is even legal. I am not an attorney, but a real estate agent must place the needs of the seller above his or her own needs, and knowingly underpricing a home for a quick sale without revealing to the seller its approximate fair value probably violates the Laws of Agency. Legally, at this point, I'm obligated to say that if you want to validate this supposition, you need to talk to an attorney. I'm not licensed to practice law, but I am familiar with it, and I would be very concerned about engaging in such pricing practices.

In closing, I read a book recently that noted a study that showed Realtor's own residences sold for a higher average price than the clients they represent. The authors of this study concluded that Realtors must be taking an unethical advantage of their expertise in pricing for this to occur. However, in my experience, in more than 90% of the listings I take, the client wants to 'start the listing' at the highest possible price (or higher) that I can remotely justify. Rarely does a client actually take my advice on pricing their house. Given the results of the annual studies by NAR mentioned above such a strategy would result, on average, in a sales price below fair value.

Realtors, on the other, do have an 'advantage in expertise in pricing'. They know that to obtain the highest possible price on their house they should initially list it at something very close to fair value. And they do. And guess what, the study meant to show that Realtors aren't that ethical actually prove that if clients just followed their realtor's advice, they too would have, overall, nationwide, higher sales prices. This independent study just served to prove that you really should listen to a professional when it comes to pricing your home, especially if you want top dollar for it.

The study proved that realtors know how to get top dollar. They simply price it near fair market value. It's odd that such information is used to attempt to prove that Realtors aren't ethical, when, if simply analyzed a little more deeply, it would uncover that Realtors know exactly how to get top dollar, it's just their clients usually don't take their Realtor's advice.