Which Approach: Price or Traffic?



According to the 2011 National Association of REALTORS® Member Profile there were a total of 1,024,669 Realtors® as of Oct. 31, 2011.  Add to that the other half of the licensed real estate agents who are non-members and you have roughly two million agents who are practicing residential real estate today.  You know what that means?

It means that there are potentially about two million different ways to sell a house.  That is a lot.  But the truth is there are really only two: the Price approach and the Traffic approach. In fact, nearly every single agent practicing today uses a version of one of those two approaches.  Sure, each might put his or her own spin on the approach they choose, but at the end of the day, it’s still one of those two approaches.  But here is something you might not suspect:

The vast majority of agents today use the Price (or traditional) approach, while only a very small number — probably less than one percent — use the Traffic approach.  And if you think about it, the crowd is almost always wrong.  That fact alone should help you decide which approach you should master.  Nevertheless, if you’re still not convinced, how about this:  The Traffic approach actually sells homes in about half the time and nets the seller more money in the process, or at least that’s what the numbers indicate.

Oddly, since it clearly produces better results, you would expect that every agent would use the Traffic approach, but unfortunately the vast majority don’t.  And they don’t for a variety of reasons:  Some have never heard of it.  Others who have are uncomfortable using an approach that is not like everyone elses.  A few know about it, but still don’t use it because they are afraid of what sellers might think, or worse, afraid of what their brokers or their colleagues might think.

As someone who’s personally shared both approaches with hundreds of sellers, I can tell you that most sellers, when given the choice, actually prefer the Traffic approach.  I’ll go out on a limb and predict that  if you present it properly, you will prefer it as well.  After all, it will serve your clients better, get you paid faster, and it will put more money in your pocket.  But wait — I am getting ahead of myself.

Here’s what I’d like to do:  First, I’d like to review both approaches, explain them both in detail, and then contrast and compare the two.  After fully understanding how they work, you’ll be able to make your own informed decision as to which approach is better for you and your practice, and you’ll have the added benefit of being able to better explain both approaches to your clients when you go on listing appointments.

The Price Approach.  The Price approach, also known as the traditional approach, is a listing approach you probably know like the back of your hand.  Nevertheless, stay with me, because there are parts of it you probably never thought about. Let’s take a minute to examine it in detail.

As you probably know, the centerpiece of the Price approach is the CMA, or Comparative Market Analysis.  Coming up with a competitive price is essential to using this approach.  In fact, the CMA is the most important part of the traditional listing presentation.  Have you ever wondered why?  Why is it so paramount?  Why do agents who use the Price approach for their listing presentation spend hours tweaking their CMAs and then use just the right paper and printer to make them look just right?

The reason is simple if you think about it — in fact, it should be self-evident: Using the Price or traditional approach, the price is how you are actually selling the house.  And because you are using price to sell the house, the CMA is the most important part of the presentation.  If you get the CMA wrong, you might scare the seller and not get the listing,  or even worse, you might “buy the listing”, or over price the house and have a listing that will never result in a sale.

The traditional or Price approach uses just one thing to sell the house: a competitive price.  But how does it go about that?  Easy enough.  Although most agents have never really thought about it, the Price approach uses a CMA methodology that ultimately leads to a low or competitive price.  Think about it.  Even the very use of closed comparables (selling prices) to arrive at a listing price (asking price) by its very design skews the value to the low side by at least the list-to-sale ratio.

We’ll cover the CMA in greater detail soon enough, but suffice it to say, the traditional method of doing a CMA will allow you to place the value exactly where you want it — at a price that will make the house sell.  Why is a competitive price so all important?  Because if the price is low enough, it will attract buyers to the home, and if that is all you are relying on to sell the house, you better make sure your price is competitive.

So when we list a home using the Price approach, we either start or attempt to start at a low or competitive price.  Then if we are lucky enough to ultimately list the home, we put the new listing into the MLS and hope for the best.  If the house doesn’t sell in a month or so, we ask the seller to reduce the price and the cycle starts over.  And if it doesn’t sell in another month, we ask for another reduction.  We incrementally move from a price that is already low, to even lower, and lower still, until we eventually attract a buyer for the home.

The good news about using this approach is that it works every single time, assuming it’s executed just that way.  The seller continues to drop the price until it gets so attractive that some buyers can’t pass it up.  But if we’re really being honest, we have to wonder whether or not the seller’s primary objectives are being met.  Let’s think about what the seller wants.  He wants to net top dollar for his home and to sell in the least amount of time.  And this approach almost guarantees he won’t do either one.

The Price approach, by its very design, yields a price that is at the low end of the market and a selling timeframe that is longer than necessary because it prolongs the sale, while waiting for the reductions to incrementally lower the price.  So why has it been used throughout the years?  Because it will result in a sale every single time if it’s executed according to the plan.  And more importantly, it requires very little skill on the part of the listing agent, because price is doing all the selling.

The Traffic Approach.  Unlike the Price approach, the Traffic approach uses a different, and much more accurate valuation method — a method that prevents the agent from underpricing or overpricing the home.  It starts by identifying a property’s reasonable range of value, and then, depending on a choice made by the seller, prices the home accordingly.

The Traffic approach, and its valuation method, are based on an economics principle known as price elasticity.  The concept of price elasticity says that real estate and other unique goods don’t tend to indicate one specific value, but rather a range of value, inside of which there will be little resistance to price.  In other words, a reasonable range of value.

Actually, if you think about it, it’s a matter of common sense.  What any particular home is worth depends on many factors, from location, to features, to size, to motivation, to the number of buyers in the market, to the prices of competing properties, to the mood swings of the appraiser, to the results of the home inspection, and frankly, to a certain extent, luck.

That flexibility of the value, or that elasticity of pricing for residential real estate tends to be approximately 10%.  Or in other words it can best be understood in terms of a range of value plus or minus 5% from a central or average value.  And that 10% range of value is what is known as the “reasonable range of value”.  Here is what happens:

If you were to increase the price above that reasonable range, there will be some push back as to the property being over priced.  By the same token, if you were to decrease the price below that reasonable range, most people would consider the price to be “a deal”.  But anywhere within that reasonable range of value the price is typically received without much resistance.  And that reality is what’s known as price elasticity.

Here’s an example:  Let’s say a home is theoretically valued at $200,000.  It not actually worth $200,000, but rather it’s worth somewhere between $190,000 and $210,000, depending on any number of factors, like whether the buyer or the seller is more motivated, how many other competing properties are currently on the market, the number of competing buyers for the home, and so on.  And as long as the house is priced somewhere within that range, there is little price resistance.

Since the Traffic approach doesn’t use the price to sell the home, the CMA is no longer the centerpiece of the listing presentation. Instead, what becomes most important in the Traffic approach is generating additional traffic to the listing.  That’s where the name the Traffic approach comes from.  It is typical for listings using this approach to have several times as many showings over the same period of time, as homes listed using the Price approach.

So how do we generate the additional traffic?  Easy.  We do it the old-fashioned way — we buy it! Here’s what I mean.  Remember how we priced the home at the high end of the range instead of the low end?  That difference between the low and high ends of the range is typically about 10% of the price — remember price elasticity?.  So when we price the home on the opposite end of the reasonable range, we’ve effectively raised the price by 10%.  Now, we take 2% of that increase and use it as additional commission.

It may not seem like much, but those two percentage points mean that for a typical listing at 6% that is now raised to 8% then we have raised the commission by a third — 2% is a third of 6%.  And since we’re no longer relying on price to sell the home, instead of asking for a reduction when the home doesn’t sell, we simply raise the commission again.

If you think about it, the initial increased net to the seller is 8% (10% increase less 2% additional commission paid), and if the approach requires increasing the commission further, there is plenty of room to raise it while still netting the client more money at closing.  We can still raise the commission 8 more percent and still net the client the same money.

And what is really nice about this approach is that as long as we’ve properly identified the reasonable range of value, the price will almost never become an issue.  And finding the reasonable range of value for a property is easy and extremely accurate using the CMA methodology we will cover in detail in an upcoming segment.

But is “bribing” agents like that okay?  I believe it is.  Obviously, my use of the “B” word is for effect, but our entire economic system of free market capitalism is based on providing monetary incentives.  It is as basic to our system as supply and demand.  Monetary incentives is the very cornerstone of capitalism.  And this method has been used in commercial real estate and in new home sales for years.  Offering a monetary incentive to a buyer’s agent only increases the traffic; it doesn’t sell the home.

I suppose it’s possible for an agent to steer a client into a home just for the money, but I don’t know of a single agent who would knowingly put his clients into a home that was not right for them.  However, by the same token, I don’t know of a single agent who will knowingly throw away money.  If he can do the same work and make a third more money, he will be glad to do it.  He may not push the clients to buy, but you can bet that houses with higher commissions will be on every show list when available.

So let’s take a second to look at the scoreboard and compare the two approaches:

Comparison

Price

Traffic

Days required to sell (DOM)

Nearly twice as long

Nearly half as long

Net dollars to client

7-8% less money

7-8% more money

Agent compensation

A third less commission

A third more commission


Which one do you like better?  I thought so.  Me too.  And besides it being just a better approach, you will soon discover that it is easier to present, your clients will like it much better, and it will set you apart to sellers in your community as someone who is able to sell homes more quickly than other agents, and to other agents as someone whose listings to always look for first.

I can’t tell you how many times I’ve gotten a call from an agent asking me if I had a listing in such and such a price range or in a particular part of town.  Word gets around.  If you consistently use this approach, your life will be easier, your listings will sell quickly, and you will earn more money.  How cool is that?!

Well, now you know the basic underlying theory to my Traffic approach and how it differs from the Price or traditional approach.  Next we’ll go into a lot more detail — we’ll take a very close look at the Traffic approach, and I’ll show you why it works and I’ll show you when it works.  Only then will you completely understand it, and once you understand it, you will almost surely use it in your own practice.  You’ll see.

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Matt

I give away about 99% of all my technology and digital training content, completely free of charge, because I want to see other agents have the same kind of success that I've had. But one thing I charge for is my Ultimate Website technology. This is the web technology I created for myself that turned my real estate practice around overnight, and now I license it agents everywhere. But right now it's too popular and is currently waitlisted. Click here to get on the website as soon as possible and I'll notify you as soon as new invitations become available.