The Realty Classroom Podcast Episode 86: Why You Should Become A Pricing Expert!

The Realty Classroom Podcast Episode 86: Why You Should Become A Pricing Expert!

It’s important to realize that most people are initimidated by math for no reason. Learn the basics about math and how it affects real estate prices and relate that to the differences in property features to become a pricing it right expert

 

In this episode, I want to talk about why you should become pricing it right expert. This is a subject that bothers me. As you know, if you listen to this podcast regularly, I do what you do if you’re a real estate agent. And if you’re hearing for the first time, I actually have real-world experience every single week. I’m in the thick of one, two, three, four negotiations, right now, as we speak, and that’s why I want to talk about pricing because it bugs me.

Let me give some advice as to what I see and how I think it could be solved, and how we can all do better. Because, after all, this is market-making. You are dealing with another agent on the other side and you are making the market go by going back and forth with buyer and seller about price. That’s what this is. What will the money buy? What am I getting for features and benefits? And is it a reasonable number?

There’s always tension in there, like any marketplace. What do you think it’s any different down on Wall Street? It’s the same thing, and now it’s even… the pressure of negotiation there is now spitting out by algorithms, which, by the way, people are trying to do in this business too, so you should pay attention to that. These are all the pressures on trying to price property, residential property, correctly. So let’s deal with how you deal with it as an agent.

 

Stop Guessing and Lying

Number one. Would you please do me a favor, stop guessing, and worse, some of you are lying. Don’t do that. Have integrity. All of us want the realtor community to be seen in the best light, don’t we? So if you guess or lie because you’re desperate and you have to get the listing, for example, when you’re trying to get it, it just doesn’t do you any good. It doesn’t help your reputation. Now you have to go through all this stress of dealing with that lie or that guess. And really, they’re both as egregiously wrong. Of course, lying is never good when you know intentionally you’re saying it, but I get why some people do it. They panic. I have to have that listing. I’m not making any money. Whatever the seller says, yeah, that’s right. Or, in fact, I’ll say it’s worth more than everybody else who just came in here. Oh, I can get you more than that. That’s just the lie based in desperation to get the business, to make the cash flow. It’s not a good one, don’t do it.

But, if you have the integrity moment and you’re still guessing, that’s almost as bad. Because now you’re putting somebody through this stressful process that they have to go through anyway and you’re elevating it, because you’re not telling them the truth. And I get why, again, is that you’re nervous about coming up with the wrong number, so you’re guessing at what they might want and maybe cheating it a little bit, or too much to the high end. Again, I get the problem. So there’s the statement of the problem, you get it. So how do we get out of this?

Learn The Basics Of Math

Point number two. Just learn the basics of math. I know, everybody freaks out when you hear the word math. I’m not exactly a math guy by birth. I’m blessed enough to have ended up in the investment banking business where there was some basic analytical math, where we were trying to analyze companies, and I brought that into real estate. When I looked at a piece of real estate, I said, why would the basic fundamentals of valuation be any different? It’s not. In fact, anywhere where there’s a purchase, think about the grocery store. How do we find the price of eggs? How do we find the price of bread? Water? Anything? It’s a market mechanism that is establishing what’s reasonable. Why is a filet mignon worth more than a loaf of bread? You see what I’m saying.

There’s so many factors that go into market making and pricing. If you’re going to be in this business, you need to become a student of it. Now, it doesn’t become that hard. That’s my only problem with all the education in this industry is we’re always off talking about something esoteric when we need to get back to the basics of practical business. You see, the multiple listing service is a marketplace, and in the marketplace rests this inventory that you go out and get. Now, all of a sudden, there’s a price and a huge list of features and, of course, we write up the write up to show the benefits of living there. That’s it. Those are basics of any marketplace.

So now the greatest news for us as realtors is that we’re able to go in there and look at this. We can look at four or five of them in a row and compare features and benefits for the money. So those term comparables I think often screws us all up in this business, when the truth is, just get away from that word as a, almost a personification, a comparable. The manifestation. The physical comparable. This thing we print out. Whereas, go back to the process of comparing, what can the money buy? If you’re going to go in and visit a seller, what math matters the most or just statistical, a number. It doesn’t even have to be we’re doing mathematical equations. How about just a number? How about just starting with S-O-L-D? That’s it. Solds.

Now I know. I get it. You’re all saying, what are you talking about, that’s rudimentary. Everybody teaches that. You just go and look at the solds and you start to compare. Yeah, but don’t be in such a rush to say that you already know how to do this. I meet top producers all the time that are just wildly lying. And I’m talking some of the top people in the industry. The best. And they don’t have a clue as to how to start off right. How to have the right conversation with the seller about math where it’s not intimidating to the seller, where it’s not intimidating to them, where you’re actually guiding them about the reality of the math, you’re not trying to play this game.

So the basics are, well, starts with sold. The most recent thing that’s sold in that neighborhood. See, on Cape Cod, in Boston, it’s a little bit different in both places. In Boston, let’s say I’m in Beacon Hill or Back Bay, there’s a certain homogeneity of the type of product. There’s a lot of brick and a lot of brownstone up there, so they tend to generally look alike. Now we get into exact location. Is it the sunny side of Marlborough Street or not? Can I take one street over to the Charles River or Newbury Street or not? So it gets very hyper-locational. Then flat out square footage. See, a lot of you go to the statistic, or the number, of price per square foot. That’s more relevant in a condoed market where a lot of the square footage lives very similarly.

But if you come to Cape Cod, my other marketplace, wow, things really change. It can be a long drive to the beach, versus a walk, even though it’s only, let’s say, a quarter of a mile. Somebody doesn’t want to walk that far. So there’s a lot of these little mathematical data points, or statistical data points, that somebody looked at that property, as a buyer, and they weren’t fully cognizant of what they were looking at with all these features and benefits. But they looked at it comparing it to something else, and whatever feature was most important to them. Style of the property. Age of the property. See, all these things are data points and they have some math attached to them as a number.

So think about it, if you look at one house. Let’s just take Cape Cod for example. I’m out with a buyer right now and we’re looking at certain high-end properties. Now, one is relatively new, at a 2003 build. By the way, this is just bizarre for Cape Cod, that we’d start with a 2000, everything’s so old in New England, but in 2003, built by high-end builder, and it’s sexy. The features are really cool. It’s kind of farm-housey. Cape Cod. Shingle style. And back in 2003, I’m sure everything was high-end for the day. The other house that we’re looking at, in a similar price range, almost exactly. One’s at 1.357. This happens to be a luxury deal. 1.35, and these other at 1.399. And when you look at these two properties, they’re in the exact same price range within 50 grand, but my goodness, they couldn’t be any more different.

Now the next one gets even younger. It’s only a 2014, and it’s a redo of an original cottage. But all of a sudden now there’s a view. We’re staring at Chatham Village in the distance over this beautiful sea grass and you can see the oyster pots and the boats coming by. You get what I’m saying? All of a sudden there’s all this value in this locational play. So it becomes a mathematical benefit. How much more would this client pay to see the water. And worse, for the person who has the house that has no view and is older, is that they’re actually priced higher. Now, they have a beautiful beach down the end of the street, so if that’s more important to somebody, getting right to the beach, you could probably walk from the other one. It’s a little bit of a long walk, but you could probably walk, and the other ones definitely a car ride, but not a long one. Like three minutes.

So, here we have, I’m going to call them numbers, but I’ll keep referring to it as math. A little bit of math to start off. I have a 1399. I have a 13.5. I can also look at the history. Were these things priced higher? Yes. The one at 1399 was in the 16’s, a head-scratcher. Scratching my head. How in the world?
Now, the next data point I go to is similar to what you see all these online algorithms using, which is public data. In your MLS sheet you have this public data. What is it? The assessed value. And I know, I know, the teaching in this industry is, well, the assessed value has nothing to do with. Wrong. It has a ton to do with it.

That is a mathematical data point that the town or municipality looks at that property and is directed by the Department of Revenue to say you must approximate what are ready, willing and able buyer would pay for this. I know it’s not market value, but that’s dictated by the Department of Revenue to the local town so that the local taxpayer doesn’t get completely screwed. What’s the formula for determining what a ready, willing and able buyer would pay?

Well see, there’s the only problem, is that the assessor’s department is not in the game every day like we are, as real estate agents, so there’s a disparity. So they can only take big chunks of public data, as things happen. Let’s just say, in 2019, all these new solds happen, they can spit that into an algorithm that begins to help adjust assessed values across an entire town, municipality, whatever it will be. And I understand, California, a lot of my California coaching clients have a very difficult time with this because some of that stuff will stay way down low as an assessed value because they have this proposition. I think it’s proposition two and a half, they call it. Where you can’t increase the tax base by more than 2.5%, so if somebody doesn’t move, there’s no big jump. There’s a lot of other places that don’t do that. Maybe why California struggles a little bit financially, could be because of that. Math runs the world. You got it. You tracking me now?

So I have an asking price. I have an assessed value. I have two opinions of value that are numbers. What could I do with these things? What could I do with these things? And then I have the solds that are around it. Now, this is where I want to go to the next point here. At this point in time, especially if you’re working with a buyer, don’t think this is just for sellers, this is for buyers too. You have a responsibility to help the buyer understand value, just as much as you do a seller. There’s no difference. That’s your obligation. You’re the pro. They’re looking for guidance.

As my clients ask me for guidance the other day, I told him what I thought based on math. And I love both these other,  agents, by the way. Super, super awesome people. I’ll say that right off. Love them. Super great. Two of the nicest people I’ve done deals with in a long time. But one of them said to me, “Oh, it must be tough when you’re a math guy.” I don’t know, but I haven’t seen the math lie to me in a long time. I can tell you, if the property is below average, at average, or above, I can tell you pretty much where it’s going to trade, based on the recent math. Within a pretty reasonable margin, not some big one.

By the way, I just noticed when I was doing my market update for Griffin Realty Group, I just noticed, they’re giving up more and more and more on Cape Cod in negotiation. We, last year, were at 96% of the final asking price, we’re at 91% on average now. What do you thinks going on? The market’s starting to soften? Everything’s overpriced? Negotiations are harder for the seller? You’re seeing it in real life, we’re not making this stuff up. This is data. This is math. These numbers.

Slow Down & Study Property Differences

And I tell you a stupid simple story, so what do you do here? Slow down. Study the property differences. But especially as the market begins to cool, look heavily at those solds. Share those solds heavily with your buyer and your seller, and say, look, here’s the deal. Here’s what’s happening right now. Now, it’s very difficult. Like I say to most sellers and buyers, there is no such thing as a comparable, unless it’s absolutely a perfect duplicate of the other one. And even then, the sun comes into it differently.

Somebody designs it differently. There’s always some difference. There’s no perfect comparable. There’s only a data point against which we can compare, and that’s how people will make buying decisions, by the way. What can my money buy? Is that the best buy for my money? And does it afford me the lifestyle that I want?

So I really slow down with people and say, look, in this case, and I’ll stay with this case study. In this case I have one house that’s 11 years older, and it’s neat and it’s cool. But I look around on the outside and I look for data points too, and that neighborhood has not caught up with that build. That build was a new build for that neighborhood, everything else is older, probably started forties, fifties, sixties, whenever this neighborhood originally started down by the beach. So we also have a drag on value. I’m not staring at properties that are worth more when I go out onto the street. Yes, I can drive there and see water front, but not across the street.

Whereas, if I go back to the other one and I go out and say, okay, we’ve got some positives here already. 2014. Relatively new build. I step out front and there’s a house right next to it that has a panoramic view, and that sold with a two in front of it, not a one. So, viola, even if I have one data point, I now can see the pull upwards on value. There’s a safety in that.

I’m now not just looking at property differences between these two. I’m not just looking at locational differences. I’m beginning to look at neighborhood effect. What is the uplift? Can my client extract value? See, I always think about it this way. If you’re going to pay a certain number, just because you’re in love with it, you better always think about exit strategy. See, even though most people buy residential property for themselves to enjoy a new lifestyle, to upgrade their lifestyle, you have to think about exit strategy. And us, as the professionals, what if they turn around to you in a year and say, okay, you sold it to me, go sell it. Now, I know we don’t have a crystal ball for the direction of the marketplace. But as I’m working with a lot of buyers right now, because they see these great interest rate. They see there’s a lot of inventory. They see there’s some negotiation. It’s a good time for buyers. But, what if we have a little crash? Are they cool with that? Are they ready to ride it out? What’s their horizon? So their math could be based on, I don’t care, I’m not selling this thing for 10/14 years anyway, and who cares by then, I have to live my life.

So I slow down and I study the property differences, then I look at the neighborhood effect. Now I come back to the assessed value and the asking price and say, okay, you like these two. And in this case my client made an offer on both properties to see which person really was going to come back into the reality range for the math. So how do you come up with that? And how do you deal with these really two nice brokers on the other side? Well, first of all, you take your first swath at it and you have your own math and you say, look, you can come in at the X number that you want to come in at, but I don’t have any real math on the waterfront one to show you that, that’s going to be reasonable. And we know they rejected an offer, so this is really just to vet the whole situation. What did they reject? Well, once we made that offer, which was the same price as the other, we went at the same number, we got responses back.

Now I’m going to break down the… well, we got responses back. We got no response back, which I hate, by the way. I just can’t stand that, when a seller, and I’m not going to critique my fellow brokers in this case because I like them both, like I said, and they’re very good. Very good. Their company, one of them is one of the top brokers on Cape Cod, period. It has been several times. So I’m not going to question his methodology, but I’m representing the buy side. So what I do now?

Well, I have to guide my buyer to move upwards because the value’s there. Because I’m looking at the math and saying, look, you came in almost a little bit above their assessed value. In things like this, here I go, back to the solds, are trading at a premium to their assessed value over the last couple of months. They’re trading from X percent to Y percent, as a premium over their assessed value. If I were to use… and this is pristine condition, pristine location, the one detriment is, it’s only a two bedroom, septic, and it’s a small house, not a three bedroom. So we’re starting to move away from what is pretty standard.
But, I can make the case that there 135 ask is somewhat rich because they paid, here’s another data point, they paid $1,000,012 back four years ago, and they didn’t really do anything. So, did this thing really increase 35%? 30%? No. No. But, there is a premium because the market has increased over that time, in that area, and this is waterfront, and there’s not a lot that’s clean. So they know what they have. So they’re looking for a premium. They made a smart buy back then and we have to pay a premium. So we came up. We came up and we came up significantly. The other one we just dropped.

When that guy didn’t respond, we knew that… and ironically, the owner is a Wall Streeter who knows math. But this just goes to show you how when people get emotional, no matter how smart they are, no matter how educated they are, and no matter if they use math themselves, they just don’t get it, because they’re emotional. So we can’t deal with somebody that’s emotional because we’re not going to overpay because they’re angry at us for coming in smartly or whatever. They want to win. I don’t know. There’s a lot of things there. But we have our property differences, we stopped bidding on that one at all and talking about it, and we zeroed in on what was the better value mathematically. Because we can buy this property at a premium to its assessed value, which is another data point, without going crazy. And they can win this excellent lifestyle and have the younger house. Cool, huh.

Let me come back to one concluding point here. The reason why this all happens, and I thought about starting this podcast off with this point, but, we’re getting caught up in this game of pricing it right bingo. It starts on the sell side. And that’s what really screws up the marketplace and why we have a pandemic of expireds. There are, my fellow coaches out there, who have made their entire coaching career based on how to pursue expireds. It’s a pricing problem. I don’t care what anybody says, it’s a pricing problem. Yes, the pricing problem is motivated by a lot of different things, especially the sellers unwillingness to be reasonable, their lack of motivation to truly sell, their fear of where they’re going. There are a lot of things that screwed that up. But we just keep getting caught up in this pricing it right bingo game.
In other words, imagine four people are lined up and you come in forth, and there’s all these people, and there’s the seller staring at you and waiting for you to go through. How are you going to market my house? And what are you going to do? All the while, you know in your head this is all about price. And all of a sudden you don’t know what it is and you know you’re sort of guessing and you say, well, let’s list it for $975,000. Bingo. That’s the number I was thinking of. You win the listing. How ridiculously absurd is that?

Here we are, the professional realtors, allowing people to wag the dog because we’re undereducated on pricing and we’re afraid. When you’re undereducated, you go into a listing presentation in an insecure way. A lot of you won’t even go to listings. I can’t do the math so I can’t do listings. Really? Well, what’s the difference on the buy side? You’re going to tell somebody, just overpay for a house. And when I say overpay, certainly we’ve got to get it out of the way at some point. Like I’ll get out of the way of this negotiation pretty soon. It’ll just be, I’m good with the data from here to here, so whatever you see in value, I think you’re fine. I think that’s the best piece of property, with the best lifestyle. So I’ll get out of the way. But I will have made sure that I’ve educated them and empowered them to make the best decision possible.

A lot of people have to have a number. So you have to also know if you’re going into a distress sale or distressed situation where they’re really banking on all this. By the way, a lot of people don’t even do the math of a net sheet. That’s another thing. It’s not just trying to figure out within which range this asking price belongs. I call that a trading range, just like Wall Street. Within which range will this house truly trade? But what about taking the low end of that range and the high end and doing a net sheet for them? And saying, look, here are the possibilities of what you could walk away with. Because what I find is that they will listen to me much more about pricing it right if I’m able to educate them on what they’ll actually walk away with. And in my experience, and it’s vast, 20 years of doing this and teaching it for, oh, gosh, what, 15. Now, you have a situation where they’re empowered with what they really will have in their hands when they’re done.

See, you’re all afraid to talk about the commission and what it costs to have us. You’re all afraid to talk about the right price range. But you wouldn’t be if you could just run down the high and the low end of the range and say, what do you think when you see this? See, it’s about this transparency with people that will get you out of that pricing it right bingo, where you’re starting to guess and lie because you’re undereducated, you’re scared, and I know you need the deal. So try to do better at this.

Stop Getting Stuck In A Game Of Pricing It Right Bingo

Let me just hit these points again. Why you should become a pricing it right expert. The first point is, stop guessing and lying. And the second point is, do that by just learning the basics of the math that’s involved in our business. Next, slow down and study the property differences and how they affect the math, and look at the solds. Take one sold to the next sold and see the difference in price based on the difference in features that will educate you on how to do it in the case that you end up in. And lastly, stop letting the tail wag the dog. Don’t get stuck in a game of pricing it right bingo, trying to guess what the seller wants, and don’t be afraid to talk to the buyer about what’s reasonable.

So to chunk that whole thing up in one key line. A couple of key lines. It’s important to realize that most people are intimidated by math for no reason, other than they just don’t learn it. So learn the basics about the math in real estate and how it affects real estate prices and relate that to the differences in property features to become a pricing it right expert.

 

 

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