‘Time for a price reduction’: Having the tough conversation with your sellers

This April, one of Inman’s most popular recurring theme months returns: Back to Basics. All month, real estate professionals from across the country share what’s working for them, how they’ve evolved their systems and tools, and where they’re investing personally and professionally to drive growth in 2022. It’s always smart to go Back to Basics with Inman.

Overpriced listings are an issue in any market, but with talk of a recession looming ahead, the ability to persuade your sellers to reduce their price is more critical than ever. The good news is that tried-and-true strategies still work, but there is also a whole new set of AVM-based tools that make it much easier to persuade sellers to reduce their price when needed. 

Since late last year, my gut has been telling me that the next major downturn is around the corner. When I look at the demand, the demographics showing that millennials have hit the prime age where they purchase homes, and the failure of the market to provide enough new housing to meet that demand, the numbers totally contradict what my gut keeps saying. 

With much of America living from paycheck to paycheck coupled with soaring inflation, sky-high gas prices, and increasing interest rates, we may be much closer to a market slowdown than anyone anticipates. 

To illustrate this point, the Great Recession began in December of 2007. The early indicators that a downturn was ahead, were already evident two years earlier as I noted in my December 9, 2005 column:  

The San Francisco market has seen a 36 percent increase in inventory in just two months. All over the country, days on market have jumped dramatically. Experts predict a steady increase in interest rates in 2006. With each increase, the number of people who can afford to buy in a given price range decreases. Foreclosures are up on both coasts. With few exceptions, multiple offers have virtually disappeared. All these signs point to the shift from a red-hot seller’s market to a potentially devastating buyer’s market.

Early warning signs

The two most important harbingers of a slowing market are an increase in the number of months of inventory and days on the market (DOM). What’s fascinating is prices usually continue to increase for 6-18 months before the shift shows up in the comparable sales. 

The pivot from a seller’s market to a transitioning market occurs at six months of inventory. If there are seven months of inventory, your market has already shifted to a buyer’s market.

Using the Rate of Absorption to persuade sellers to reduce their price

The “Rate of Absorption” references how long it would take to sell all the listing inventory in today’s market provided no other listings were to come on the market. 

Using the “Rate of Absorption” to persuade sellers to lower the price works exceptionally well when the early indicators are signaling a slowdown, but prices are still climbing.

The following script is based on a market where there are five months of inventory. 

Mr. and Mrs. Seller, you have an important decision to make. Currently, there are five months of inventory on the market. What this means is the probability your property will sell this month is 20 percent. The probability it will not sell this month is 80 percent. The question is will you price your property where it will be in the top 20 percent that will go under contract this month, or will you price your property where it will be in the 80 percent that will still be listed next month? It’s your choice, where would you like to position your property in the marketplace? 

Two ways to capitalize on your MLS data to persuade sellers to reduce their price

Your MLS is an excellent source of data that can help you catch a market downturn early on. Here’s what to track: 

• Expired listings and price reductions 

As the market starts to flatten or decline, price reductions and the number of expired listings increase. Start tracking these numbers now. If they start to increase, your market may be beginning to shift. 

• Using CMA data to spot a slowdown

When you create a CMA, search the comparable sales for the last six months and divide the comps into two groups: the first group includes the properties that have sold in the last 90 days. The second group includes the properties that sold in the last 91-180 days. 

The next step is to check how much each listing sold for on a price-per-square-foot basis and calculate the average price per foot for both 90-day periods. 

If the average price per foot for the most recent 90 days is lower than the price per square foot for the last 91-180 days, property values in your market area have already peaked. 

Old school meets new school

In the interest of full disclosure: Both Zillow and Realtor.com have sponsored my conferences in the past.

Realtor.com has begun posting price reductions on its site. I was shocked to find three pages like the one below for Winter Park, Florida indicating that the market had peaked and is now declining. The average of the nine price reductions for properties priced from $289,000 to $350,000 was $11,777. 

Imagine showing the page above with all these price reductions to a seller who was thinking about overpricing their home. Moreover, because Realtor.com is a third-party site, many consumers are more willing to trust these numbers than those from a Realtor. 

Using the portals and iBuyer offers to persuade sellers to reduce their price 

One of the best ways to overcome the objection, “But Zillow says my house is worth more” is to point to the values from the other portals based on AVMs such as the Chase Home Evaluator, HomeSnap, Realtor.com, Redfin, Trulia and Zillow. Realtor.com has also begun posting preliminary offers from Opendoor, which can also be a resource. 

Here’s how to explain the numbers to your sellers: 

• When three separate AVMs and/or two AVMs coupled with local MLS statistics agree, that snapshot of the price is usually the best estimate of your property’s value. 
• Realtor.com also posts preliminary offers from “Opendoor” on many of their listings. When Opendoor’s offer is in alignment with local MLS price-per foot evaluations as well as at least one other AVM, those three factors also provide another strong estimate of the property’s value.

Three additional powerhouse AVMs to persuade sellers to lower their price

Realtor.com recently started providing the valuations from three powerhouse AVMs on their site. The three sites are CoreLogic, which runs many of the MLSs nationwide, and two sites you may not have heard of — Collateral Analytics and Quantarium. 

• Collateral Analytics has created 12 different AVMs that are widely used by appraisers, estate professionals, lenders and Wall Street for pricing property. 
• Quantarium is the only AVM currently available that uses “computer vision” to evaluate the price using over 900 features from each property. The algorithm does what no Realtor or appraiser can do — determine the value of these features and factor those values into the final price for the property. The screenshot below gives you an idea of how sophisticated the Quantarium AVM actually is: 

How to use AVM data to secure a price reduction

Realtor.com currently displays the valuations from these three powerful AVMs in two different ways. The first is the Home Value chart as illustrated below. (Please note when two or more AVM values coincide with the Realtor’s evaluation as in the case below, this is usually an accurate estimate of the property’s value.)  

The second graph on Realtor.com is interactive, and it allows you and your sellers to see how their property value has shifted over time. Merely move the slider to the month you want to check, and it will generate the valuations for that month. 

The graph above shows the subject property reached its maximum value of $645,000 in September of 2021 and has already started to trend down. Based upon the data from the first Home Value chart from March 2022 above, the Realtor for this property nailed the list price correctly at $624,000. 

When you’re working on a price reduction, taking a listing or negotiating an offer and want to access this data, click on the “Home Value” tab on the home page of Realtor.com. Also, search the prices on the other portals as well. When you locate three different resources that have similar prices, include those in what you show the seller. Showing the seller prices from multiple AVMs is much more persuasive than a single CMA with only a few comparable sales. 

Will your market shift anytime soon? 

In case you believe that a major market shift will take a long time to occur, in the early 1990s I saw the Los Angeles market plunge by 35 percent in six months. 

Now is the time to start tracking DOM, months of inventory and the pricing trends using the various AVMs so you will be prepared to persuade your sellers to lower their price and avoid getting caught in the next market downturn whenever it finally does occur.