The Five Forces Of Your Market

The Five Forces Of Your Market

Real estate markets across the country are becoming increasingly tough for sellers and if you live in California, Florida or the Washington D.C./Northern Virginia metro area you've probably seen the biggest turn in the market. But, regardless of where you live, being an educated seller is crucial to making the right decisions about pricing and negotiating. Michael Porter, the renowned Harvard Business School professor developed a model for analyzing competition within an industry. That same model can be adapted and used by sellers to help them understand their market dynamics and put them in a position to make the best decision regarding the sale of their home.

Supplier Power is a force exerted by new home builders. Home sales are their business and they have to keep inventory moving. They also have significantly higher equity positions in the homes they are selling which gives them greater flexibility in pricing. They can also lure buyers with upgrades galore, which they can provide at a fraction of the cost a typical home seller can. Sellers should know what prices builders are selling new homes for comparable to their own. In the information age, buyers can too easily compare prices and value on the Internet and if you aren't competitive, you won't even get a nibble let alone a bite.

Substitutes are the second market force. As prices adjust, you must know not only what comps are selling for but what substitutes are selling for as well. In my area, I'm seeing a compression of prices in that single family home prices have come down significantly more than townhouses so even though there are more buyers in the lower, but many times over-priced townhouse market, many of them are changing their sites to single family houses because the prices have compressed to reflect a much higher value in the SFH than the townhouse.

Buyer Power seems to be increasing every week. As more and more sellers reach "motivated" and "bring all offers" states, buyers know they can ask for the world in a contract and if they don't get close to what they want, are willing to move on to the next motivated seller, who in my market is right around the corner. Buyers also have the power of market knowledge. The Internet give buyers the ability to compare all their options in a relatively short period of time and believe it or not, they probably know the market and inventory better than most sellers. They should, they're actively in the market whereas many sellers put their house up for sale and sit back and hope a buyer comes by who is willing to pay too much for it. If you are getting lots of traffic (in the house, not just taking flyers) and haven't seen an offer, there is a very good chance your value proposition (what you are giving a buyer for his/her money) isn't competitive in the market and they are finding a better deal someplace else. Every house will sell at one price or another.

Barriers to Entry applies mainly to new home buyers but to second and third time buyers as well. The market run-up of the last few years was driven mainly by two things - low interest rates and more demand than supply. Now we have the exact opposite, interest rates have gone up which decreased the buying power of the entire country. Since there is a lag it the market, homes continued to be listed at the high prices and inventory has built for the last 6 months. So, what do you do with this information? Be open to price and don't get offended with a low offer. The buyer is offering what it is worth to him, not what it is worth to you. And remember, buyers set prices, not sellers.

 Finally, there is the internal competition of what the seller needs, what he wants and what he thinks he deserves. This is the most difficult force to understand and manage because it is charged with emotion. Just because your neighbor sold last year for $50,000 more than you, doesn't mean a thing. Good for him. All that matters is what it will take to get you to your goals. The market is what it is and we all have to deal with these five competitive forces as they are exerted on sellers. Sellers as individuals cannot change the market so holding on to a price is nothing short of foolish. Consider your bigger financial picture of what it costs to own the home every month it is on the market - mortgage, insurance, taxes, utilities, HOA and Condo fees and maintenance.