We spend a lot of time thinking about pricing and valuing real estate. Whether our clients are trying to buy or sell real estate, it always boils down to one question – what’s a fair price for this property?
The word “fair” is the critical part of that question and to be clear, we’re not using it in any moralistic sense. It’s not about whether the price is equitable or justifiable from some external objective perspective, it’s about what number will make a deal happen between a buyer and seller.
That number needs to be in a range that both parties to the sale agree is the value of the home. If the gap between what the seller thinks is the value of the property and what the buyer thinks is the value is too big, then a deal doesn’t happen.
When a real estate agent lists a home for sale, they do all they can to present the home in as appealing a fashion as possible. Cleaning, decluttering, updates, staging, professional photos – they are all done to increase the value of the home in the minds of a buyer.
Whenever a home doesn’t have the work done to present well and it is listed for sale “as is”, that simply means that the seller has decided they are comfortable with prospective buyers seeing less appeal and value in the home. The seller likely doesn’t want to take a lower price, but they nonetheless aren’t doing anything to make a buyer value it higher. Such listings can still result in a deal where a “fair” price was agreed upon, but make no mistake, that means the seller lowered their value rather than the buyer increasing their value.
In a shifting market like we’re experiencing, pricing real estate is tremendously difficult there are lots of properties where the agent is getting it wrong. Whether they are telling their clients to list the home for too much money, or the seller has valued the home at too high a price for the current market, we’re seeing lots of properties not sell and then relisting at lower prices.
In July 2022, there were about 12,000 listings that came on the market within Toronto and the GTA. More than 3,300 of those “new” listings were in fact re-listings of properties that failed to sell initially and are now trying again with a different price. In July, 27.7% of all listings were re-listings, and that clearly means sellers are having a hard time agreeing on the value for their home with buyers.
One of those re-listings is a property that clearly illustrates what happens when buyers disagree with a seller about the value for their home. It’s a property that we saw with clients a number of months ago and we’ve been watching the agent struggle to get it sold. It finally sold, and the sale price is a staggering 35% below what they originally wanted.
Let’s review what happened and the lessons that come from such a story.
Stage 1 – Wishful Thinking
The sellers had built a pair of brand new, custom luxury semi-detached houses just steps from Lakeshore Road West in Oakville. While it wasn’t smack dab in the middle of the best part of Old Oakville, it was not too far a walk to cross over Sixteen Mile Creek and then into the wonderful shopping and restaurants of Old Oakville. The home we’ll focus on here was the left side of the semi-detached pair.
With three bedrooms, five bathrooms and over 3,000 sf of finished living space, including an elevator and oversized garage, the sellers were right to think they would have a valuable asset when it was completed. The real question of course, is how valuable?
The property was listed for sale in October 2021 for $2,700,000. It was a bit of a premature listing, as the home was still under construction, but you can’t fault the sellers for wanting to get going on finding a buyer.
The listing was with a brokerage that was providing what is called a “mere” listing. It was put on MLS for a flat fee and while technically there was an agent who had his name on the listing, many of the things that you associate with having an agent were not being done.
There are three crucial tasks that Realtors should do in order to earn their commission on a listing.
- Price the home properly
- Market the home effectively
- Negotiate the sale aggressively
With a mere listing on MLS, the sellers decided on the list price themselves without advice from an agent with market knowledge and experience. The marketing consisted of the MLS listing and two photos. No negotiating took place as far as we can tell, because after 53 days on the market, the listing was terminated.
Stage 2 – Call In The Pro
In January 2022, the property was relisted on MLS, this time with an experienced and respected local agent who specializes in high end listings. Listed at $2,399,000 this time, the sellers had obviously received the benefit of their agent’s market knowledge.
The dropping of the list price by $300,000 to this $2.399M was likely painful to the sellers, but given their previous experience listing for a couple of months with no sale, they were starting to see that the value buyers were attaching to the home was not what the sellers thought.
With their new agent came new marketing and the support of the agent in co-ordinating showings and putting the word out about the home. Construction had continued over the winter and the home was nearing completion.
January and February were the high points of the 2022 real estate market and would have been their best opportunity to sell the home before the market began shifting to a more balanced market in March and April.
We showed the listing with clients in early March and while lots of aspects of the home appealed, there were a couple of curious layout choices that meant it ultimately wasn’t suitable for our clients. We discussed the price and agreed that while the home was nice, it was still an aggressive ask at $2.399M for the property. Put another way, the seller had lowered the value they placed on the home by $300K, but in the eyes of our buyers, the home had a significantly lower value.
The market as a whole agreed, as after 84 days on market, the listing was terminated without a sale.
Stage 3 – Keep Tweaking!
In mid-April, right after they terminated the $2.399M listing, the home was back on the market for $200,000 less, now listed at $2,199,000. The home almost completely finished at this point, with virtual staging added to the photos online, open houses most weekends and efforts being made by the listing agent to make sure the market knew about the lowered price.
The biggest change in this listing was the price, and while we’re sure the seller was hopeful that the new price was more in keeping with the value that buyers saw in the home, that hope would have been dashed over the next month and a half.
44 days after this 3rd listing attempt went up, it was terminated with no sale.
Stage 4 – Motivate Buyers By Motivating Their Agent
On June 1st, the 4th kick at the can took place, with the property relisted at $1,999,000. Along with this lower price came an increase in the commission offered to the buying agent, up from 2.5% of purchase price to 3%.
While we can’t know exactly why this decision was made, it does speak to the seller being determined to get the home sold. The normal commission in the area and this price point is 2.5%, so it wasn’t as if the home was being hurt by an attempt to save money on the commission. Increasing the pay out to the buyer agent can be effective at pushing buyer agents to go back to their clients to see if they’re interested in the home.
At the same time as the sellers made it more attractive to buyer agents, they also made it more attractive to buyers by lowering the price by $200,000. Dropping the price below $2M would have been a difficult decision. It is always psychologically hard to go below major thresholds and given their initial hopes for a sale price of $2.7M, seeing a list price that starts with a one would have been hard.
While we don’t know whether the lower price and higher commission resulted in a flurry of showings, we do know that it only took 8 days before this listing was terminated.
Stage 5 – This Better Work
The final listing for this home came out on June 9th.
Despite having just dropped $200K a week and a half ago, the sellers dropped the list price another $100K, and came to market at $1,899,000. That is about $800,000 lower than what they originally hoped for the home. They had been trying to sell the home with this second agent since the start of 2022 and were approaching the mid-point of the year with no sale yet.
The higher buyer agent commission approach was tweaked to say if a firm sale happened by June 22nd, they would pay the 3% commission. It clearly didn’t work as intended, because the commission was dropped back down to the 2.5% it has been for most of the listings on July 4th.
20 days into this listing, they dropped the price another $100K, putting the list price down to $1,799,000. A week after they did that, a buyer agreed with the seller that that value seemed fair and the property was sold conditionally. On July 7th that conditional deal fell through and the listing was once again available.
It took another three weeks before another offer submitted and the home was sold conditionally again. The deal fell through again and the home was back on the market again. Five days later, on August 8th, the home finally sold firm. We can’t know if it was to one of the earlier buyers who had bought it conditionally or a new buyer, but with three offers in about a month, the list price of $1,799,000 was clearing in keeping with the value that buyers thought the property possessed.
With an initial listing of $2.7M in October 2021, and a final sale of $1,760,000 in August, 2022, it took 311 days and dropping the price by $940,000 before this home sold. That works out to about $3,022 a day that the sellers lost in hoped for value of the home. It took a long time for the seller to adjust their valuation of the home to the level that the market was using. Given the shifting market during this time, it seems apparent that the seller was unfortunately lagging just a bit behind the market as a whole. Every time they agreed to a lower value, the market had dropped while they came to that conclusion.