Silicon Valley Real Estate Guide

There is a less than admorable side to the practice of real estate that involves agents “buying” listings.   Buying a listing is when a real estate agent artificially overvalues a seller’s home in an effort to convince the seller to list the home with him/her.  The scenario usually goes as follow.  Seller contacts three agents to interview about selling the home.  The agents provide the seller with a comparative marketing analysis (CMA) of the home detailing current listings, homes that are under contract and homes that have recently sold that are similar to the home in question.  Usually the information is taken from the local multiple Listing Service (MLS) and possibly county records.  The seller uses the CMA and the information contained in it as a foundation for pricing the home. 

Some of the strategies that I have seen agents use in order to buy a listing include (but not limited to): 

1. Not including lower priced yet similar comparable homes in the CMA
2. Overvalueing a feature(s) of the home in an attempt to make it appear that buyer demand for that feature is extremely high and worth more
3. Claiming to have special inside information about a home(s) under contract that shows an upward trend in the market.  

Why would an agent want an overpriced listing? 

Marketing homes can be an expensive undertaking.  Local print advertisements alone can burn up a marketing budget real quick.  However, the key to buying a listing is the agent’s belief that he/she can get the seller to reduce the list price quickly.  The quicker the reduction the better…for the listing agent.  

Another agent benefit is the collateral business that comes from having a listing.  An agent is likely to pick up one or more buyers and /or sellers from an open house, from a call off of a “for sale” sign or from a “contact for more information” widget on their web site/blog.  These contacts can lead to future business.  Just think, how many of you know someone who walked into an open house and bought that house?  Now think, how many of you know someone who found their real estate agent at an open house?  Food for thought,  many more people find their realtor through an open house than buy the home during an open house.

How agents buy listings!

I have seen agents take a listing and within one week reduce the price of the home by 10%.  The scenario usually goes as follows.  Marcia, the home seller, interviews three agents (Jan, Greg, and Peter).   Jan convinces homeowner Marcia that her beautiful Los Altos home (which really is a tear down) is worth $1,700,000.  Marcia is so delighted that she is going to get 10% more for her house than either Greg or Peter thought it was worth and signs an exclusive listing agreement with Jan.  Apparently both Greg and Peter don’t know and/or understand the Los Altos real estate market because they valued the home at around $1,550,000.

The house hits the market and the agent community view it on the Friday Broker’s tour of new listings.  The house is open both Saturday and Sunday.  Unfortunately, not many people outside of a few neighbors come through the open house.  The neighbors seem quite happy, hoping the home sells for close to its list price.  There is only one showing the entire week.  Marcia begins to wonder….has something gone wrong?  Why aren’t people looking at my house?  After all, Jan said it was so beautiful and well priced. 

Marcia should be thankful that she has Jan working for her because Jan aptly notices a sudden downward change in the Los Altos real estate market.  She calls Marcia and says “Marcia, Marcia, Marcia… the market has changed and we must drop the price or we’ll be chasing the market down.”  The next day the list price is reduced to $1,649,000.  Marcia is excited in anticipation that her home will now sell and she can move back to her childhood town of Santa Monica.

Unfortunately, things don’t go as planned.  The home still isn’t having any showings, yet the open house traffic seems good.  Jan is meeting lots of good buyers, unfortunately none of them are for Marcia’s house.  Jan talks to Marcia about another price adjustment.  Fortunately for Marcia, she is still ahead of the game compared to what Greg and Peter recommended.  The home continues to sit.  It is reduced several more times until the list price is now $1,498,000.  Marcia is getting frustrated, its been over two months and the home has had 4 price reductions.  Finally, Jan receives an offer from Alice.

The offer is for $1,435,000., Marcia is mad and even more frustrated and flat out emotionally spent.   When this all started, Marcia had dreams of vacationing in Hawaii before moving to southern California.  Now she is looking at selling the home for $115,000 less than what Greg and Peter thought it should have sold for.  Why was Alice’s offer so low?

Mike, Alice’s agent, tells Jan that Marcia’s home has become stale and stigmatized because it has been on the market for so long.  After all, the average days on the market for a home in Los Altos hovers around 25 days and Marcia’s house has been on the market for almost 3 times that.  In Alice’s mind (and every other buyer), something must be wrong with the home and its reflected in Alice’s offer.  Marcia counters the offer and the home eventually sells for $1,470,000.  

As a home seller, what can one learn from Marcia’s situation?

• Get the right data.  If the homes (ie. the data) used in an agent’s CMA is different, ask why?  Why was one home included and another excluded?  Ask how recent the information is?  Do the comps go back 3 months, 6 months, or a year?  Why?  Is the neighborhood real estate market going up, down or even?  What type of home is currently selling well?  Is it the remodeled 4-bedroom home or are there more buyers looking for tear-downs/lots?  Lastly, have the agent explain specifically how the subject house compares with the homes used in the CMA.  This can weed out agents who really haven’t seen the homes and don’t know the market.  It’s common sense, but the more detailed the information, the better you can rely on it.
• It’s the Marketing Plan that leads to a higher sales price!  Talk to each agent about what they bring to the table and how specifically that agent will market your home.  The agent should be able to provide you with information about where buyers are coming from (Hint…Online!) and how to market to them (again, hint…Online!).   The agent should be able to give you a likely time frame on how long the home will take to sell and provide you with a realistic number that you can expect at closing.  What pre-sale inspections should you get (if any) and why?  What should you do during showings?  Will the agent walk you through the mandatory disclosure documents and explain how to complete them? 
• Don’t hire an agent solely on their commission schedule.  What I have found is usually the agents who try to buy listings also are the first to reduce their fees.  The seller is told their home will sell for more and it will be cheaper for them to do it.  What seller wouldn’t want this scenario.  It looks like a win-win to the seller, but in reality it isn’t.  I’m not bashing agents who discount, but rather want the seller focus on the services provided, the agent’s track record and then the agent’s fees associated with providing their service.  
• Take a step back and view your home as a buyer.  One of the easiest things to do when analyzing the value of your home is to look at it from the perspective of a buyer.  When you bought your home, you looked at all the market comps to see where the home fit into the market.  Do the same as a seller and you’ll be more realistic and the results will be better. 

Seller’s need to do your homework, be knowledgeable, ask questions, be realistic and don’t let anyone paint a picture that doesn’t mesh with reality.