What is "RANGE PRICING" and will it help you sell your home

This is an article from the North Country Real Estate news blog. Not sure how this would work in our area but it's an interesting read.

Does Range Pricing Help Sell Homes?

I'd love to hear if anyone has had any experience with this and the results.

NY TIMES Article: A Reality Check for Home Sellers

NY Times September 23, 2007

By AUSTAN GOOLSBEE

ECONOMISTS and other humans don’t always see eye to eye. “Economists tend to think people are crazy because they won’t sell their houses for less than they paid for them — and people think economists are crazy for thinking things exactly like that,” said Professor Christopher Mayer, director of the Paul Milstein Center for Real Estate at Columbia Business School and an authority on real estate economics.

With house prices falling in many markets around the nation, this particular quirk of the human psyche might end up costing the economy a great deal, Professor Mayer says.

Classical economics can’t explain this behavior. That’s because people who refuse to sell their houses for less than they paid for them are violating a cardinal rule of the market: stuff is worth what it’s worth. It doesn’t matter what you paid for it. But when Professor Mayer and his co-author, David Genesove, a professor of economics at the Hebrew University in Jerusalem, studied the Boston condominium market in the 1990s — scene of one of the biggest real estate busts in recent American memory — the actual patterns of human behavior did not seem to follow the standard rules at all.

From 1989 to 1992, prices in Boston fell sharply, with condominium prices dropping as much as 40 percent. For a great many of those who bought condominiums during that period, selling could be done only at a significant loss. And, basically, many people refused to sell.

Their study, “Loss Aversion and Seller Behavior: Evidence From the Housing Market,” appeared in The Quarterly Journal of Economics in November 2001. The professors gathered data on almost 6,000 Boston condominium listings from 1991 to 1997 and showed that for essentially identical condominiums, people who had bought at the peak and were facing a loss generally listed their properties for significantly more than those who had bought at a time when prices were lower.

Properties listed above the market price just sat there. In the Boston market over all, sellers listed their properties for an average of 35 percent above the expected sale price, and less than 30 percent of the properties sold in fewer than 180 days. In other words, much of the market went into a deep freeze as many people held out for market prices that no one would reasonably pay.

In classical economics, that’s not supposed to happen, but the episode did comport with the behavioral economics theory of loss aversion: people have a visceral — some might say “irrational” — hatred of losing money. They try to avoid doing so, even when it goes against their own best interests.

Move ahead to September 2007. Many regions may be starting down a path like that of Boston’s market freeze of the 1990s. Wherever prices decline, look for lots of sellers holding out for unrealistic prices in a vain attempt to recoup their losses. It’s a hang-up that people have, and it can cause big problems. A number of houses with high prices just sit on the market while everyone waits.

One source of difficulty arises from a basic fact of real estate economics: about half of home purchases are by people moving within a metropolitan area. If sellers can’t sell their houses because they want too much for them, they also can’t become buyers of new homes.

“The buyers and the sellers are the same people in this market,” Professor Mayer said. “So if the sellers price so high that they, effectively, put themselves out of the market, it shows up on the buying side, too.”

He notes that economists at the Federal Reserve and elsewhere keep close tabs on this kind of behavior because the purchases of durable goods like furniture, appliances and televisions tend to run hand in hand with home purchases — and durables have a disproportionate influence on the business cycle. Further, because the freezing of the housing market makes it harder for people to move, it reduces the likelihood that they can quickly relocate for higher-paying jobs. Dysfunction in the housing market can spill over into the job market, too.

So by being hung up about whether your condominium will sell for what you paid for it, you aren’t just driving yourself crazy trying to get a buyer. You may be threatening the very performance of the economy and driving up the unemployment rate — provided that many others behave in a similar way.

What is to be done? Well, if you are holding out for an above-market price to recoup your losses, perhaps you would do well to hear the advice that Professor Mayer gives his own family members.

“If you want to sell your house then you list it at the market price and you sell it,” he said. “If you don’t really want to sell then don’t put it on the market. But don’t say you want to sell and then set the price so high that you spend the year cleaning up every morning, having people walk through your living room and look in your medicine cabinets and reject you. That’s just painful — and expensive.”

His research offers a simple lesson for everyone out there waiting for a high price to push them back into the black: Get real.

Won't lose money if I buy a house now, before the market "hits bottom?"

Certainly no one can say for sure what home prices will be 6 months, 1 year or 2 years from now. You can listen to 5 different industry pundits and hear 5 different predictions. So what do you do if you want to buy a home?

First you have to look at WHY you are buying. If you want to buy a property with the thought of turning around and “flipping” it in a year or so to make a huge profit as people were doing in the early 2000s - forget it. Until the available inventory of homes for sale starts to drop and prices start to rise, you are not likely to make any short term gains.

The one thing that is generally agreed upon is that at some point, the market will, as it always does, hit a bottom level and then prices will begin to rise again. When that will be and how quickly the prices will go up is impossible for anyone to say.

If you are buying a home for your family and are looking for a place to enjoy life, liberty and the pursuit of happiness, you have to look at how you’re living now and ask yourself if you want to continue as you are or is moving something that will improve the lifestyle of you and your loved ones. If it’s important to move, then don’t be afraid of buying. Real estate is considered by many to be an investment- and that's fine - but let's not the forget the primary reason that we even build houses - to live in!

Take your time. Educate yourself on what areas you’d like to live in, what type of home you need and what kind of financial situation you’re in. In other words how much money will you be able to contribute in the form of a down payment and how much of a mortgage can you get approved for?

Once you know where you want to live and how much you should spend, start looking at specific houses with a Realtor. Find the house that makes you and your family feel like you are “coming home” the first time you walk into it. These houses are out there for sale – right now. There are many more choices today than there were over the last few years.

So unless you’re investing for the sake of investing – don’t be deterred by the market. Find the home out there that is calling you and buy it.

I don't need a broker to sell my house, do I?

People do it every day. So the answer is, obviously, no - you do not NEED a broker. So the underlying questions are

1. What are the advantages?
2. What are the disadvantages?

The advantages really are twofold. First, you don't have to pay a fee. The entire sale price of your home is yours. Secondly, many people feel they have more control over the situation, they can set their asking price based on what they want, they don't have a lock box on their door which allows them to control the access to prospects instead of giving access to agents from all over the county.

There are some potential disadvantages - here's what they are.

1. Marketing. Most "For Sale By Owners" advertise by putting a sign in their yard. This works well if your potential buyer happens to drive by your house. If you think about it, this is an incredibly limited way of exposing your home for sale. Unless you live on a main road or highway, the same cars usually drive by your house again and again. Within a few days, it's likely that everyone who is going to see your sign, will have seen it.

The second form of advertising is to post your home on a website that is specifically for the "For Sale By Owner" market. There are a number of these sites. This gives you a little bit broader exposure than the sign but it is still very limited. Think about it. People who are looking to purchase a home are not likely to really care about whether or not the seller is paying a real estate fee. They simply want to buy a home. Most buyers go to real estate agents.

Realtors all have (to varying degrees) structured advertising and marketing plans for all the homes they list. In looking for a Realtor, make sure to ask about the marketing plan - it is the most important component in how they can help you. You can find out about the Coldwell Banker marketing plan by contacting me -- it's the most comprehensive plan out there. There's a lot to advertising and marketing a home -- way more than a sign, a newspaper ad and Internet listing.

2. Qualifying your buyers. If you should happen to get a prospective buyer, who calls after seeing your sign or seeing your listing on the Internet, you will, likely invite them to preview your home and perhaps even make you an offer without having any knowledge of their financial situation and their ability to actually get a mortgage. A reputable Realtor will have worked with the prospect in advance of showing them homes. This provides a much higher probability that the people who are viewing your home are capable of actually making the purchase.

3. Setting the price. When you are setting the asking price for you home, what are you basing it on? It's a fairly complex process. Realtors have tools and experience to help you set the price correct. The danger is that if you set it too high no one will be interested in making you an offer and if you price it too low, you risk not getting as much for your home as you possibly could.

4. Getting the highest price possible for your home. Aside from the asking price, you also have to be concerned with the final price that you settle on if and when you do get a buyer. When selling it by yourself, you are likely to be dealing with a single prospect. The negotiating scenario is the typical back and forth, where the buyer offers a low price, you come down a little, he comes up a little and eventually you meet somewhere in the middle.

When working through a realtor, if your house is priced and marketed correctly, there is an increased likelihood that there will be multiple prospects interested in your house. There's no guarantee that you'll have multiple offers, but the increased exposure and marketing increases the chances. When your Realtor does receive multiple offers, the negotiating mode changes from a back and forth scenario to an "auction" environment. This is where the multiple buyers each put forth their highest and best offer, always keeping in mind that if they bid too low, they will not "win" the house. This type of negotiation will make you comfortable that you got the best possible price and didn't "leave any money on the table".

The bottom line is that while in some cases it may seem at the outset that you'll save money by selling yourself, you have to consider the "net equity" of your sale. In other words ask yourself the following question: "If I save 6% in commission but get 7% less for my home, what did I save?"

Why are homes prices falling?

WHEW? That's a tough one. There are a million different components that go into the answer.

The bottom line of it all, though, is pretty simple. There are many more houses on the market today than there were a while back.

Real Estate is one of the few places you can go to witness a textbook definition of "marketing 101" - the law of supply and demand.

When supply is high or demand is low -- prices drop.

When supply is low or demand is high -- prices rise.

Real Estate is in an intensely local market so you'd have to look at your own area specifically but in many areas today, the number of homes available for purchase may be 200%, even 300% higher than 2 years ago.

There are people buying houses - every day. The difference today is that they have many, many more houses to choose from. When this happens there are two big results:

A house takes longer to sell and the prices being offered are less.

These two phenomenon feed off of each other in what seems to be a self-perpetuating cycle. When a house takes longer to sell, the seller reduces his asking price. He must do this in order to attract the buyers. Once he lowers his price, his competitors (the other home owners who are trying to sell) must also lower their prices in order to attract the same buyer pool. This continues to drive prices down and makes a buying decision even tougher. The buyers want to wait out the sellers to make sure they are getting the "best" price they can.

The recent sub-prime debacle has made this situation even worse because many of the home owners who got in over their heads a year or two ago now find they can't afford the payments on their homes and they are adding their properties to the already crowded market.

When it will end remains to be seen - but it will turn around at some point. It always does.

If you have a need to move - whether you are buying your first home or selling yours to buy a new one - you can do it. Consult a Real Estate professional and figure out a plan to accomplish your goals. In spite of all the problems with too much inventory and falling prices - people are buying and selling houses every day.

At what point during my home search should I apply for a mortgage approval?

The answer is quite simple – AS SOON AS POSSIBLE!

There are number of good reasons to apply for what is known as a pre-approval at the very beginning of your home shopping process.

First of all, if you don’t know how much of a mortgage you will be approved for, you really have no valid way of deciding what price range to look in. In other words, you may really like a certain community where the homes run, let’s say, between $350,000 and $400,000. If you can contribute $50,000 as a down payment and you can obtain a $250,000 mortgage you are probably not going to be able to purchase in that community. If you’re really determined to move there, then the sooner you know about the difference between what you have and what you need, the better.

Secondly, if you do find a house that you want to make an offer on, your offer will be a much “stronger” offer if you have a pre-approval letter than if you don’t. In the event that you are competing with another buyer for a specific property, your offer, with a pre-approval will likely be taken more seriously. It could even convince the seller to take less money.

Think about it. If you were selling your home, worth approximately $300,000 and you had two offers. One is for $294,000 from someone who has it in writing that they will be able to get a mortgage and close on your house. The other offer is for $297,000 but the buyer has nothing more to give you than his “word” that he has enough money and borrowing power. Which one would you take?

Let me also explain the difference between a pre-qualification and a pre-approval. A pre-qualification from a lender, could mean nothing more than a statement to the effect that “based on the information provided by the consumer” he would qualify for a mortgage of XX”. This is based, strictly on self-reported information by the consumer and carries very little or no weight when it comes time to enter a legitimate transaction.

A pre-approval is a formal letter from a lender that states that the lender has taken a credit application, run a credit check and that the buyer is approved for a mortgage of XX based on specific conditions. The conditions might be a loan-to-value ratio or a specific sized down payment, etc.

Most reputable lenders will not charge you anything for a pre-approval. There’s really no “downside” and plenty of “upside” to getting approved as early as possible in the game. When you do find a home you like, you will be glad you did.

I shouldn’t sell now – after all I’ll lose money since prices have dropped in the last year. RIGHT?

The math of whether you will make or lose money on the sale of your home is a simple calculation. Sometimes we complicate it with emotional issues that muddy the whole thing.

Here’s how it works. The price you paid for you home + any capital improvements you made equals your basis. Capital improvements are things like remodeling the kitchen, adding a deck, finishing a family room, etc. Take the basis and subtract it from the probable net selling price and you have the profit (or loss).

Hypothetical example:*

• You paid $200,000 for your home in 2001.
• You made $20,000 in improvements. Therefore your basis is $220,000.
• You are being offered $295,000 for your home.
• After Closing costs, Legal fees and Real Estate fees, you might net about $275,000.
• Subtract $220,000 from $275,000 and you will see that your profit is $55,000.

Here’s where it’s easy to muddy it up in your mind. 2 years ago you were told that you probably could get $340,000 for your house. (Net would likely be around $320). The temptation is there to subtract $275,000 from $340,000 and decide that you will be losing $65,000.

Here's what you have to keep in mind. What the value of your home would have been had you sold it last year or the year before is mathematically irrelevant.

The fact is – you didn’t sell it then – you are selling it now. The value of your home today, less what you paid is how to determine the profit.

There are certain situations where you might actually show a loss in these calculations but it's still based on facts - not feelings. If you purchased your home in the latter part of 2005 or early 2006, you may indeed have bought at the top of the appreciating market and you will see a loss when you do the calculations.

If this is your situation, you have to have a frank discussion with yourself and decide how important it is to move right now. If you do decide to move anyway, keep the good news in mind. While the real estate market is intensely local and things vary from community to community, it is entirely possible that whatever depreciation you are experiencing will also exist in the community where you want to buy.

*The numbers and calculations in this example are just to demonstrate a process and should not be construed to represent any predictions of profitability on any particular property.