The following article written by Matt Jones was originally published in Broker Agent News on May 22, 2006. It is presented here in its entirety as it was originally published. While non-commercial use of this copyrighted material is encouraged, unauthorized, commercial use is strictly prohibited.
Inside Part Two
- The Ultimate CMA
- Putting the Pieces Together
- Two Ways to Sell the House
In part one, we talked about your becoming the best agent for the job. I mentioned the importance of learning your market statistics and told you exactly how to do that. I discussed how you could increase your credibility and power by arming yourself with some very specific knowledge. I’ll assume that you’ve done your homework now and are ready to learn the actual listing presentation that made me one of the top listing agents in the country.
I want you to notice that I haven’t referred to myself as one of the smartest agents in the country because there are plenty of agents who are smarter than me. I haven’t claimed that I’m the hardest-working agent in the country because there are lots of hard-working agents. But I do maintain that I’m one of the top listing agents because there are very, very few agents who have listed as many homes in a single year as I have, and even fewer who have listed all of their homes for 8% or more. And there are fewer yet who have netted their clients 2.7% more money at closing while selling their homes twice as fast as most of the agents in their markets.
So how do I do it? I use a unique system that I call “the traffic approach.” In a few minutes we’ll get into this approach to listing, but first we need to examine how I go about doing a CMA (comparative market analysis).
The Ultimate CMA
Anyone who knows numbers can tell you that, as a listing agent using the traditional method of doing a CMA, you can make the numbers say anything you want. Here’s what I mean.
With the traditional CMA method, the agent selects three recently-sold properties that closely represent the subject home (or the home being valued). In most markets, it’s easy to find three properties that sold high, three that sold average, and three that sold low and still have many other comparables from which to choose.
What many agents do (and what they teach) is to use the least expensive set of comps for the CMA. This method makes the case for listing the home as inexpensively as possible and allows it to sell quickly. However, as a seller’s agent you should be getting your client the most money for his property, not co-conspiring in a giveaway.
What I do in preparing a CMA is to take data from three sources: tax records (sale and assessment data), the closed comparable listings in the MLS, and the active comparable listings in the MLS. Let me explain.
First I look at the tax records to determine what I feel to be the “adjusted” current value of the home. For example, if it sold three years ago for $150,000, and there’s been an appreciation rate in that area of 12-14% per year, I calculate the appreciation (3 x 13% = 39%, or $58,500), and then I add that figure to the purchase price. If the home hasn’t been on the market for a long time, I’ll use the most recent assessment value and adjust it the same way. Certainly this particular method is rather subjective, but an experienced agent who knows his market can get close to a realistic number by using it. However, this is only one part of my valuation.
Next I pull up all the closed comparables in the area or subdivision, going back a reasonable period of time, and I can usually find between ten and twenty of these. (In extremely hot markets where homes appreciate at double-digit rates, you shouldn’t go back farther than a few months or so in order to prevent the CMA from being skewed downward.) Don’t forget that the amenities and how nice a home looks will affect the curb appeal and saleability of the property but have very little impact on appraised value, so it’s best to use as many comparables as possible. In selecting my comps, I use the subdivision, the square footage (with a range of plus or minus 10%), and the number of bedrooms and baths. I then calculate the average sale price of the group, eliminating any outliers up or down (e.g. homes that were foreclosures or distress sales).
Finally, I pull up all the active comparable listings. Again, I use the subdivision, the square footage, and the number of bedrooms and baths, but your market may be a little different in how the appraisers select comps. The point is to get as much data as possible!
Now we put it all together. Take the adjusted value from the tax records, add the average price from the closed comps, and then add the average price from the active comps. Now take that number and divide by three, and you’ll have the true average value for the subject property. Write down this new number somewhere, add 5% and subtract 5% from it, and you’ll have a “reasonable range” for the value of the home, which tends to be plus or minus 5% from the average. In most markets it’s reasonably easy to support a value within 5%; so once the property sells, getting the appraisal shouldn’t be an issue.
I know this is an out-of-the-box way of doing a CMA, but it will absolutely stand any amount of scrutiny by clients, other agents, or – most importantly – appraisers. Moreover, using this method will protect you from accidentally over-pricing or under-pricing a property. Most importantly, it will reinforce the fact that you’re a market authority and know what you’re talking about. If a seller client should be harboring a suspicion that you’re trying to skew the numbers, his or her fears will quickly be allayed because you’ve considered every possible comparable in the current value of the home. Nothing except pre-appraisal could be fairer.
Putting the Pieces Together
Now let’s take the pieces and put them together into a “lethal” listing presentation. For quick review, what are the pieces?
- Knowing your market statistics so that you’re truly the best person for the job.
- Knowing the value of the subject property so that you can get the top dollar for your seller client.
Beginning the process without laying this foundation simply won’t work. It’s absolutely critical that you go through the first two steps before you learn the listing presentation, simply because the presentation builds on this foundation! Without a suitable foundation on solid ground, you’ll be building your presentation on quicksand and won’t be able to list properties using my unique method. Why? Because you won’t have the most important element of any sale: the believability factor. This approach is counter-intuitive, and, as such, it demands that you have credibility. If you don’t have credibility, the listing approach will never sell because you’re asking the client to place his faith in an approach that, in all likelihood, he’s never heard of before.
Two Ways to Sell the House
There are more than 1.1 million REALTORS® in America , and I guess you could say that there are 1.1 million ways to sell a house. But the truth is that there are really only two ways to sell a house: you can sell it by price, or you can sell it by traffic. Every other sales method is a subsidiary of one of these two. We’ll explore the two different approaches at length and discuss how they differ and how one of them will yield far better results for your client while making you more money.
The Traditional or Price Approach. I’ve read dozens of books – probably hundreds of books – on the subject of real estate. Many of these books speak of the importance of listing real estate, and all of them describe nearly identical listing approaches, with only slight differences. Now, the reason for all this sameness is obvious: it’s the way listings have been done since the beginning of real estate. It’s the old “if it ain’t broke, don’t fix it” thing. Well, I’m here to tell you that it’s broke! If you expect to make a lot of money in real estate, you need to determine what everybody else is doing and then do the opposite.
Okay, here’s the basic formula for the “traditional” or “price” approach. As you’ll recall, we talked earlier about building a CMA, or comparative market analysis, for your client. The traditional approach teaches us to find the “reasonable range” of value and then try to list the property on the low end of that range.
If the home doesn’t sell within a month or so, we’re all taught to…what? You got it! To ask for a reduction in price. Then if the property still doesn’t sell, we lower the price again, and again, and again, until eventually we find a buyer for the place. Think about it: we’re selling the house by price. We’re using the price as our marketing tool. That’s why we continue to lower the price, or wait for appreciation in the market to lower the price for us, until the house eventually sells.
One of the reasons this approach works well for the agent is that it places the entire burden of selling the home on the seller! Another reason for using the traditional approach is that the agent doesn’t have to spend a lot of money marketing the house. He doesn’t have to spend a lot of time or effort devising a marketing plan or promoting the property because the price is doing the selling for him. There’s no doubt that this approach will work, of course: it’s been working for decades with good and bad agents alike. However, there are a few drawbacks to the traditional approach that are seldom mentioned.
First and foremost is the agency issue. It’s your job as the listing agent to represent the seller’s interests, which include getting the absolute top dollar for the property. However, most agents don’t get top dollar when they use this approach, and the reason is as simple as supply-and-demand. When there are fewer buyers competing for a home, the sale price may need to be discounted substantially in order to attract interest. In economics-speak, “with a fixed supply and a scarce demand (i.e. fewer buyers), prices drop.”
Another drawback to using this approach is lack of speed: several months may pass before the traditional approach begins to have an effect. In the process, the home often becomes stigmatized. After several reductions, it’s not even shown to potential buyers because it’s been on the market “too long” and is now assumed to have something wrong with it. If the agent starts the process too high and then reduces the price too slowly, the home becomes very difficult to sell at any price.
Many times, listing agents unwittingly become de-facto buyer sub-agents; and even though I don’t know a single listing agent who would intentionally sell out his client, it’s entirely too easy with the traditional listing approach to help the buyer rather than the seller. And, yes, I realize that my judgment may sound harsh, but if you’ll honestly examine this method, you’ll have to agree that, very often, it doesn’t yield the best results for the seller.
The Traffic Approach. To understand the traffic approach, we need to turn our attention again to the “reasonable range.” Real estate is entirely different from liquid investments with absolute values. For instance, anybody can look up a share of stock and immediately see its current price. But because values are subjective in real estate, there tends to be about 10% flexibility in the price range. Consider a home that’s valued at $100,000. It’s not worth exactly $100,000! It’s really worth between $95,000 and $105,000. If the price drops below $95,000, nearly everyone will agree that the house is a good deal; and if the price goes above $105,000, nearly everyone will agree that the property is priced a little too high. However, within the “reasonable range” there is little price resistance.
Here’s how the traffic approach works. Instead of listing the home at the low end of the range, you raise its price to the high end. The problem? Now there’s no compelling reason for anyone to show it or buy it. Okay, here’s the secret weapon: you raise the commission by 2%! What you’re doing, effectively, is “bribing” agents to include your listing on their show lists. What I do is raise my commission from 6% to 8%, and then I raise the price about 10%. The client then nets about 8% more money before any negotiations!
Sometimes, not often, the appraisal knocks the price down a bit. When that happens, it’s usually a minor adjustment, and then the seller has the option of lowering the price to match the appraisal, or else the deal, as written, falls apart. The buyer also has the option of paying, out of pocket, the shortfall in the appraisal or canceling the deal if there’s an appraisal contingency. When that happens, the client knows that he got the absolute top dollar for his home.
Now, I know that almost any agent will immediately say, “I never look at the commission when I’m working for a buyer.” But I don’t believe that noble-sounding claim because statistics clearly indicate that it’s not true. I don’t know any agent who would willfully sell a buyer client a home that wasn’t right for him; but if there are sixty homes in the market that generally match the client’s criteria, and if three of those homes pay higher commissions than the rest, it’s certainly not unethical to make sure that those three properties end up on every show list. In addition, there’s nothing wrong with hoping that your client chooses to buy one of the three. If he doesn’t, no big deal; but if he does, you just got a big bonus!
One of the questions I’m often asked is why I don’t just offer a bonus to the selling agent. Once again, the answer is simple. Every buyer’s agent knows that if he doesn’t present a full offer, the first money to come off the table will be the selling bonus. Since most homes don’t sell for full offers, the selling bonus doesn’t happen very often, so the buyer’s agent can find himself torn between not getting the bonus and not representing his client. If he advises his client to offer less than the listing price, he knows that his bonus is most likely gone. On the other hand, if he encourages the buyer to pay the listing price, he’s probably not fully representing the buyer’s interests. For that reason, the selling bonus is often a disincentive rather than a legitimate incentive.
So now you have the theory behind my listing approach. Next we’ll discuss the presentation itself, and I believe you’ll find it to be the most powerful listing presentation you’ve ever seen! Look for it in Part Three of this three-part series in the next issue of Broker Agent News.