Even after a year of government tax credits tempting buyers to jump into the market, some real estate agents still didn’t sell off their excess inventory. Now that the discount window is closed, what do they plan to do to get the property sold?
If the government tax credits were supposed to stimulate demand and help sop up a saturated housing market, then it’s clear they failed. Most economists recognize that any buyers who were “induced” by the credits were going to enter the market anyway. They simply entered earlier to take advantage of an unexpected bonus. So no new “demand” was created, and the number of homes sold barely made a dent in the available inventory: In some markets, analysts are estimating years of foreclosures in the marketplace; The Las Vegas Review-Journal reported a 21-year supply of condos in the downtown market.
Perhaps more interesting was that consumers didn’t go crazy picking up all of the supposed bargains, even with other people’s money thrown at them. Funny, those consumers; they still know a bad deal when they see it, even when someone else is paying. All of this leaves many real estate agents stuck holding excessive inventory.
If those listings didn’t sell with tax credit stimulus, just what is going to get them to sell without it?
May’s home sales numbers plummeted to the lowest point in 40 years, off nearly 32% across the boards. Buyers are sending a clear message to the market. Low mortgage rates, tax credits, even “record affordability” won’t compensate for an unrealistic price. More simply: get the price right, or get it off the market.
Conveying this message to sellers won’t be easy, but the alternative is to keep spending money on improperly positioned inventory. What will it be: voodoo economics or lemonade stand basics? Still, what do sellers really care? While it’s true they are losing money every week they don’t properly price their home to sell, it’s the real estate broker who is losing money at a faster rate, carrying the marketing-management costs for essentially unsellable goods.
All of which leaves real estate professionals with a few simple – but bold – choices left to get the property sold.
1. Start billing for costs. A fundamental flaw in the commission-based real estate business model is the element of “time.” Even when markets are balanced, and the average days to list and sell a property somewhere between 100 and 180 days, the research shows barely $175 left over in profit margins per property sold. If you’re taking twice as long – say, six months to a year – to properly price and sell a home, then essentially you’re losing money on every deal (and try as you might, you can’t make it up in volume). Every decision has a cost: and what brokers need to do is raise the costs to sellers who resist properly pricing. Charge more – up front, preferred – for the burden of representing unsellable marketing. Consider it an up-front consignment fee.
2. Stop paying high co-broke fees. If you didn’t skip this bullet point already, congratulations for bravery. Now, take a deep breath and declare the co-broker-fee-model dead. Just why are sellers paying half of the commission (notice the wording) to an agent they didn’t hire? Because it has “always been done that way.” Yet it’s only after all of the halves are subtracted from the proceeds that the real meaning of co-broking is discovered: both agents are broke. And so is the process. Note that we’re not suggesting real estate agents stop cooperating with one another; just change the fee-sharing model. There are plenty of options for agents representing buyers to get paid. Using half of the commission from the seller’s agent is an expense incurred by the seller they might otherwise have put into a lower offering price. Imagine if all inventory suddenly dropping by 2-3% because funds weren’t needed to pay another party’s representative.
3. Proceed with one-month listing agreements. Six and twelve-month listing agreements send the wrong message to sellers: The broker is happy to stay on the hook for months of your bad pricing decisions. In fact, it’s very name – a “listing agreement” – is a mistake, because it says the parties will “list” the house – not necessarily “sell” it. Get serious about selling by only investing your time, effort and capital on representing a home in one-month increments. Everyone knows the longer it sits on the market, the harder it is to sell anyway: so why do we agree to possibly be on the hook for a year?
4. Auction every remaining listing in the next 30 days. At the rate some listings are going, they’re going to end up at auction anyway, just under more “unfortunate” conditions. Why not compress everything in ideas 1-3 above into a single moment in time: A one month listing agreement to promote it to the marketplace, setting a date to auction it to the highest bidder, where buyers can bring their own representation and pay them on their own. As for costs, brokers could probably significantly reduce their costs to the seller – which can translate into a lower offering price – since the broker won’t have to run months of newspaper, direct mail, magazine and internet advertising. Even agents can afford to take a lower commission because they won’t have months of showings, open houses and other labor-intensive activity to recoup. Auctioning the house gets real-time pricing data from the only people who matter: buyers willing to buy the home right then on the spot. Set a reserve price (the minimum the seller will accept) and then let the excitement of competition work to your advantage. Unlike endless open houses, where visitors stop by, eat the cookies, but make no offers, an auction brings everyone in and gets them to name a price. You can still offer them cookies, if you like.
Any way you look at it, remaining unsold inventory from the tax credit days are a serious dilemma for brokers, and their sellers. Consumers might see these listings as “stigmatized.” If they didn’t sell with tax credits, then something must really be wrong with them. Right or wrong, the consumer has too many other choices to take left-over aging inventory seriously these days. Real estate agents need to get creative – and serious – about reshaping their markets. It’s going to take much more than just another price-reduction to make it happen. It might just require them to reshape what it means to sell real estate.