In Pursuit of the American Dream…How to win the Competition for ‘The Best’

competition2There is always competition for the best…of anything. Good market or bad, ever since air conditioning became available (1947) there’s been competition for the best homes in sunny Arizona. Home ownership is what the majority of Americans want. Now to Arizona come the dominant demographic of retiring boomers and international buyers with boatloads of cash.

This article is about giving buyers and seller’s strategies for obtaining the best, most successful outcomes in buying and selling a home in today’s market.

Defining the best:  As a buyer, the ‘best’ home is not just the perfect match for what physical criteria you may be looking for—the right neighborhood, the right amenities, the right features, etc. It is also very much a matter of the right price. The ‘right price’ equals market value.

Low-ball offer myth: Misconceptions arise because many of the properties that are for sale are not listed at market value. They are not competitively priced. An original list price is very often not the eventual list price at time of sale. That difference (between the original list price and list price at time of sale) can be substantial…but not always. By definition the best homes are competitively priced. Competitively priced homes sell. Overpriced homes do not. The idea that buyers make low-ball offers on overpriced homes is a myth. Usually they don’t get much attention at all.

The action is in the Trading Range: the relatively narrow list-to-sales-price range where offers are made and properties sell.

Competitive Pricing: A home is competitively priced when the price is within the Trading Range. For example, when you look at the ratio of what price properties actually sell for relative to what they’re listed for at time of sale, we invariably find a Trading Range‘ (list-to-sales-price ratio) that is 2 to 5%. The exception is higher price range areas where we may see a Trading Range that is as much as 8 to 10%.

The current Trading Range in Phoenix is 3%, meaning again, that the negotiated sales price is, on average, 97% of the asking price at the time of the offer. Scottsdale is 5%; Paradise Valley it’s 8%.

The point is that there is always an identifiable narrow range where comparable properties sell. The Trading Range can easily be identified at any level—city, zip code, or subdivision—down to a square footage range within a subdivision. This is something that’s not well publicized or understood, but easily generated (as you see above in those sample city stats).

The money point in this discussion, in a word, is how ‘efficient’ the residential real estate market is.

Activity-versus-timingThe early bird gets the nest:  Savvy agents know that the activity on a listing is heavily skewed to the first few weeks a property is listed. It’s that early competition that will drive the best price for the home. The mistake agents and sellers will make is padding the price of a new listing in anticipation of lower offers. While there’s almost always ‘wiggle room’ in negotiating, the problem with padding the initial asking price is that when a listing is outside of the sweet spot of market value, or the ‘Trading Range’, it generally will not produce offers. Rather, it sits and becomes ‘market worn’. The competitive edge is lost.

The consequence of becoming market worn is that subsequent price reductions to find that sweet spot only result in offers lower than if the property had been priced within the Trading Range to begin with.

Staying with our theme of competition for the best, any property which is perceived as overpriced is clearly not the best value, regardless of how otherwise ‘special’ it is.

Illustrating this point further, there’s a statistic we use in analyzing the market called the ‘Listing Success Rate’. The percentage of properties that come on the market that actually sell is the Listing Success Rate. Valley-wide the Listing Success Rate is about 76%. In Scottsdale it is 71%. In Paradise Valley it is 57%. See an implicit pattern here? As the average price goes up, the Listing Success Rate goes down. One reason is that clearly there are more qualified buyers competing for the available inventory in the lower price ranges. However, another reason is that in the luxury market sector sellers are more resistant to pricing their properties competitively. Many don’t have to sell. Don’t want to take the downturn market ‘hit’.

So, finding a luxury property competitively priced can be challenging. When luxury properties are priced competitively they sell. There’s always a market for high quality homes…so long as the price is ‘right’, there are buyers who will step up to the plate. In the moderate and lower price ranges, there are many more ‘ready, willing and able’. When properties are priced competitively there are frequently competing offers. In fact today, in the Valley of the Sun, a shrinking supply of homes under $400K has created what is being called a feeding frenzy, not unlike what we witnessed in 2005.

Connecting the dots: It’s fair to say that the Trading Range and Listing Success Rate are connected. The higher the percentage of listings that are priced within the trading range, the higher the Listing Success Rate.

Real estate agent’s who work most effectively on behalf of their buyers know how to secure the best properties for their buyers and secure the best price for their sellers. It’s not complicated, but it really helps to have an understanding of the dynamics discussed above.

…And there’s more. Buyers buy by comparison. Value is relative. There are always tradeoffs. For example, if you want golf course frontage at a certain price point, you may have to tradeoff the addition square footage those same dollars would buy in a golf course subdivision, but not on the golf course. This notion of tradeoffs is part of the education process for buyers.

Cutting to the chase in successfully competing as a buyer or seller:

Buyers succeed in the competition for the best home when they learn the markets of interest well enough to understand the always present tradeoffs, know value when they see it, and make an offer quickly. Unfortunately, the industry is replete with stories of ‘the one that got away’.

Sellers succeed when they understand the power of creating the most competitive environment possible, by pricing within the Trading Range.

Because there is always competition for the best: At any given time, in any given market segment, there’s always a group of ready, willing and able buyers ‘hovering’, just waiting for the next ‘best’ property.

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