With record low mortgage rates and record high affordability, it’s clearly not the economic fundamentals that are holding back buyers from the marketplace. Now it’s time for creative REALTORS to address the buyers’ sense of fear.
One of the best parts of my business is the opportunity to spread good ideas from smart people. There are few smarter than real estate education and sales veteran Roger Turcotte, co-author of Buyer Representation in Real Estate, winner of the Educator of the Year Award, and author of the Certified Negotiation Specialist Course. With more than twenty years in the industry, Roger has helped tens of thousands of agents weather recessions, and develop the skills that make it possible for the kind of “next generation” industry we’ve been working towards at our company.
In a recent conversation about various ways we can help REALTORS get the market moving again, Roger quietly slipped in one of his usual simple but spot-on ideas that he’s graciously allowed me to share with our readers. And, much like our approach to making change, Roger’s idea is wonderfully contrarian.
Right now, Roger notes, everyone is running around trying to fight the war of “price” with sellers. With some exceptions, it’s still a losing battle, as large swaths of listing inventory remain significantly overpriced, and equity-stressed sellers are running out of wiggle room to give much more away – if they insist on selling in this marketplace. But other than making the home more “attractive” in value to the buyer population, dropping the price further doesn’t address the main reason why buyers are still sitting on the sidelines of the marketplace. As Roger puts it, adjusting price is one strategy and in some markets that might work very well. However another strategy is to show the seller how they can enhance their market position by addressing a buyer’s fears.
That Fear? That after they buy the home, it’s value will fall further.
Granted, buyers are less interested in the “investment” proposition of a home these days and smart REALTORS will re-focus their buyers on the “personal and emotional” needs of home ownership. Still, no buyer of any commodity wants to worry that their purchase is going to lose significant value in the first year – even if they plan to live in it for 5 or 10 years. It’s just part of the human psyche.
This is where Roger’s idea comes in. Rather than drop price (a certain immediate loss), sellers could set aside money in escrow to act as a “shared risk” or hedge-fund against potential future loss of value. That’s the fear that’s holding the buyer back, and the shared risk fund addresses it better for both parties than a one-sided price drop.
The amount of the shared fund depends upon the market and house price, but consider a hedge on a $200,000 home that protects against a 5% market loss. That’s $10,000 in escrow. If the home loses 5% value in the first twelve months after purchase, the funds automatically cover the buyer’s first $10,000 of loss. On the other hand, if the home’s value drops less than the escrowed amount, or not at all, the money reverts back to the seller.
The idea is so smart because addresses the root cause of buyer hesitation. Even when buyers deem a home to be properly priced in today’s market, they are bombarded with media information about “further drops in value” on the horizon. Sellers can’t “pre-price” those drops into their selling price because they have to protect their current equity (in order to buy their own next home). Yet they need to take some steps to address the fear that is keeping buyers from making the purchase.
By using an escrow hedge fund, the seller and buyer enter into a kind of partnership to get the sale done.
The positive outcomes are plenty: the property has a hugely competitive feature that other homes in the same price range do not; and the hedge fund creates an atmosphere of collaboration between all parties, which makes it more likely to negotiate to a win-win outcome during the current transaction.
While many real estate professionals are well versed on why people do buy, we sometimes forget to address why people don’t buy. We focus on why they should buy when we talk about historically low mortgage rates or high affordability. Now it’s time for us to focus on the kinds of things it will take to make the buyer likely to buy. In today’s market conditions, that’s not just getting a good purchase price, but lowering the fear of rapidly losing future value.
The hedge fund idea is simply brilliant. Setting up clear terms for evaluating the home’s value – such as using an appraisal process with specific guidelines – the hedge fund targets buyer concerns about short-term loss, even when they agree there may be long term appreciation. The amount of money needed – $10,000 for example – is often far less than what sellers are dropping the price of their homes to “induce” buyers to take action. And with external inducements like government tax credits gone, a future-value protection plan creates a value-based, not price-based, competitive advantage for smart sellers and their agents.
Think about it. And then visit Roger Turcotte’s website to thank him for such a great idea.