Chapter 7. Methods of Sale
AM sure by this stage you will agree that some schools are better than others, some cars are better than others, some doctors are better than others and some real estate agents are better than others. Likewise, some methods of selling your house are better than others. Selling a home is not a one-size fits- all situation. For various reasons, you might have a preference for using one sales method over another, or your chosen real estate agent might have a preference based on their process and the buyer preferences in your area. In this chapter we look at the various sales methods, one of which you – together with your agent – will have to decide upon to give your property the best chance of selling above market.
For sale by owner (FSBO)
If you are selling your home yourself, then it will be ‘for sale by owner’, which means, in effect, it is simply offered for sale and the price is either fixed or negotiable, depending on how you market it, if at all. As a real estate agent, I can’t recommend this sales method to anyone for any reason. When you list your home to sell with a great real estate agent, then together you will choose one of the remaining methods of sale.
For sale with fixed price
Together, you and your agent agree on the anticipated final sales price (see chapter 8) and your home is listed with that asking price. You may allow some wriggle room, but as far as buyers are concerned, you have a clear asking price on the home. Buyers will then decide if the asking price for the property is good value or not. You may decide you want $500,000 in the hand after sales costs for your home, so you put an asking price of $539,000 to attract buyers to make an offer of no more than $539,000. If the home is attractively priced and buyers are actively inspecting the home, then there is no reason why buyers won’t make an offer.
They are, however, unlikely to offer more than your asking price and most will offer less than the asking price as part of their negotiation. When you offer a home for sale at a fixed price, it’s very rare for the owner to achieve the full asking price for the property. It’s just human nature for buyers to offer less. Buyers will make lower offers to find out for how much less than the full asking price they can buy the home. After all, no-one wants to pay full price.
The same goes for any fixed price item. The car dealer is asking $29,990 but expects you to negotiate to pay less. No-one walks in and says, “Thanks, I’ll pay the full price”, so the dealer has a range of bonus extras he will throw in to make you feel as if you have got a better value deal.
A good agent will work with every buyer who has made an offer to encourage them to put forward their best and final price for the seller. Buyers rarely make their first offer their best offer, so the agent needs to extract their best offer from them. If the home is priced competitively, the final sale result is likely to be a price below or at best $539,000 – after all, that was the highest asking price, so buyers are unlikely to offer more than you’re asking.
Fixed price properties are usually overpriced
Consequently, sellers who choose the fixed price sales method often inflate the price of their home in the first place to counter the fact that buyers will want a discount. Unfortunately, what often happens is that the house goes on the market so overpriced that buyers don’t consider it. They believe the house is outside of their price range so they don’t inspect it and, consequently, they don’t make an offer. In some cases the seller doesn’t receive a single offer at all. There’s nothing more soul destroying than preparing a house for sale every day for months on end and never once receiving an offer. Worse still, if the market is falling and the asking price remains unchanged, then the house ends up so overpriced that buyers are laughing behind your back. One of the problems here is that the sellers of overpriced homes start to believe that the over-inflated asking price really is the correct price and that all the buyers are simply bargain hunters.
Even if they were to offer a fair market price, the seller still wants more.
In some areas, the fixed-price sales method may be the most common method to sell a house. If the other homes in the neighbour hood are fixed price, and your real estate agent recommends fixed price because buyers are comfortable with it, then fixed price may be your best option.
However, in my experience, fixed price only attracts downward negotiation by buyers and properties take longer to sell and often force the seller to accept less than market value over time. When a buyer finds a home with a fixed price on it, they expect to pay less than the advertised price. They believe that’s what the seller expects as well.
Buyers usually inspect homes that are priced 5% to 10% less than the one they
eventually end up buying.
For sale with price guide
The alternative to ‘for sale with a fixed price’ is ‘for sale with a price guide’. So what’s the difference?
Instead of overpricing the property with a fixed price for sale figure, the property is offered for sale with a price guide range or for ‘offers over’ a realistic market price. This gives buyers a guide to the market price but also makes it clear that there is no ceiling limiting the opportunity to achieve a premium price.
Taking our previous example, rather than have a fixed price of $539,000, with the owner hoping to achieve $500,000, we offer the home for sale at: ‘offers over $500,000’. Buyers will see that the property is being offered at good value in relation to other homes on the market and it doesn’t isolate the property with an artificial and unreasonable asking price-tag. Instead, buyers who are looking to spend $500,000 will certainly include this property on their inspection list and it will also attract buyers with more to spend if it ticks the boxes for them. It will attract buyers in the $475,000 range too who could stretch to try and buy it if it’s the right home.
The price guide indicates to a potential buyer that if they are hoping to purchase a property in the vicinity of the price guide, then they should inspect this home. The price guide is not an asking price; it is a guide price to encourage buyers to inspect the home and compare it with others they have seen. This broader price range increases the number of potential buyers who will inspect the home and, if a buyer loves the home, they’ll be encouraged to put their best offer forward in a bid to buy the home. Naturally, it will compare more than favourably with other similar but overpriced, fixed-price properties, making your property stand out from the crowd.
Competition is the key
It’s worth remembering that the more interest from buyers in a home, the more buyers your agent has to negotiate with. Competition drives a better sales result. When you place your home on the market to sell, it’s never in isolation. There will always be other homes for sale for buyers to look at and compare with yours. If your property is overpriced then you will be helping your competition to sell first, as their home will look better value to buyers than your home. The more interested buyers there are, the more emotional buyers become, and the better their offers become.
Remember, everyone wants what everyone else wants, so competition is the essential ingredient to achieving a higher price. Buyers set out to look at property rationally but when they see a property they really like, and once they become engaged and appreciate the benefits and lifestyle the property has to offer, then they will become emotionally connected. At this point, they’ll pay the highest price to secure the home through a fear of missing out. This price could be well in excess of their initial budget, particularly if there’s another buyer who feels the same way and is competing against them to secure the home.
Importantly, unlike buying at auction, when a buyer makes an offer for the property, their offer remains private and confidential. The agent doesn’t reveal the actual offer amount to another buyer, however, every buyer is told that the agent is holding a genuine offer and is negotiating above the guide price. Buyers are told that if they have interest in making an offer, they should put their best offer forward in writing for the owner’s immediate consideration.
One of the biggest disappointments for sellers with an overpriced, fixed-price property is that, even after months on the market, they never receive an offer. With an ‘offers over’ sale, you will likely receive an offer in the first week or two. In fact, if you don’t, then the price guide may be too high and you should lower it to attract more interest, without necessarily having to revise your accepted price expectations.
The first offer you receive may be at the lower end of the range you are prepared to accept but it’s still an offer and it gives your agent the ability to encourage other buyers to start a conversation and make an offer as well. Those buyers who make offers at the lower level compete with each other to force the offers up to a mid level. Buyers with more to spend will pick up the offers at the mid level and compete against each other to take the offers to the higher level.
There may be only one or two buyers prepared to pay a premium price for the property but this is the level at which they join in, as the other buyers who have less to spend have already driven the price as high as they can. Remember, in this active selling environment, none of the buyers competing with each other to increase their offer is aware of the actual dollar amount of another buyer’s offer. This is critical to the success of this method of sale. If a buyer knows the other buyer’s offer then they will simply increase their offer by the smallest margin to be holding a higher offer. If they don’t know the other buyer’s offer then they must increase their offer by as much as they are prepared to spend rather than simply enough to be in front. They are only told with each offer whether they are the leading offer or if the agent is already holding a higher offer. This means offers can jump substantially as the buyer has little reference to go by and is forced to offer as much as they can rather than just enough to beat the other buyer.
Unlike fixed-price homes, where the only way for negotiation is down, ‘offers over’ only allows for negotiation up. This method of sale creates an emotionally-charged, competitive situation between buyers who stretch themselves as far as they can go in a bid to secure their ideal home and lifestyle. The result is the highest price for your property, often well above the estimated value. Even a great real estate agent can be surprised by how much more a buyer will pay through ‘fear of missing out’ and this ensures that no money is left on the table.
For sale by auction
The auction method has been used for hundreds of years as an open forum around the world for the sale of the most precious, valuable and rare possessions, including property. One of the most renowned auction houses in the world is Christie’s which regularly auctions a range of goods including paintings, jewellery, artworks, classic cars and property. Christie’s more often than not attracts prices in excess of even their trained and professional valuers’ estimates. That is the goal, after all, to secure the highest price possible for the seller and possibly set a new category sales record.
The auction process has been adopted as the preferred method of sale for prestigious property worldwide. In Australia, the auction method is most popular in Melbourne and is now the preferred method in many other locations where homes are highly individual, offer something out of the ordinary, or are simply sought-after and difficult to price compared with other homes in the area. If you’re not familiar with the auction process for property, keep an open mind. The auction process is growing in popularity as a sales method all around the world. When selling by auction, the seller controls the sale of their property by setting the terms and conditions of the sale and choosing the auction date as the date they wish to sell. They can, if they wish, sell prior to the auction date should they receive a premium offer. However, the auction process provides a four week timeframe for buyers to establish their interest in a property which further creates a call-to-action and effectively accelerates the sale.
The auction timetable schedules ‘open home’ inspections, providing buyers and sellers with agreed inspection times to make the open home process smooth and manageable. Traditionally, higher-end auctioned properties don’t have an advertised price guide at all. These days, with auctions becoming more popular, however, buyers have indicated that they’re frustrated by any property which doesn’t include a price guide. Many buyers may be from out of the area and unfamiliar with local prices, with no idea what a property may sell for. It can be a waste of their time to inspect a home that is
unknowingly not within their budget.
Consequently, there’s a trend emerging for real estate agents to now offer a property for auction with an accompanying price guide, as an example, ‘bidding from $500,000’. In Victoria, there has been a lot of push-back from buyers that agents are underquoting price ranges, wasting a lot of buyers’ time and dashing their hopes! The auction process is a structured format allowing three opportunities to sell the property. The first is during the marketing lead time to auction day. Buyers are required to do all their due diligence and, if they wish, undertake building and pest inspections to be ready to purchase the home, unconditionally when it goes under the hammer. There is no cooling off period when a home is sold under auction conditions.
If interest is strong, there is no obligation to wait until auction day, so buyers are encouraged to put their best offer forward for the owner’s consideration at any time. If an offer exceeds the owner’s own expectations, a sale may result ahead of the auction date and it is recorded as ‘sold prior to auction’. The second opportunity is to sell ‘under the hammer’ on auction day, which as I’ve just stated is an unconditional and final sale on that day with no cooling off period. The auction day will achieve the highest price anyone is prepared to pay on that day. The third opportunity is to sell after auction day. Many buyers wait to see what level of interest there is in a property and, if it doesn’t sell on auction day, they start negotiating at a level indicated by the agent after the property has been ‘passed in’ at auction.
Setting a reserve
If you sell your property at auction, you are protected from the possibility of underselling by setting a ‘reserve’ price, which is not revealed to buyers but may be referenced when bidding passes that figure on auction day. If bidding fails to meet the reserve price, the highest bidder has first right of negotiation with the owner, which often leads to a negotiated sale within hours. Under auction conditions, when the bidding passes the seller’s reserve price, the auctioneer may (or may not) call the property as being ‘on the market’ to be sold. If there are competitive bidders, knowing that the property will be sold to the highest bidder often encourages additional bids between parties, and the property may then achieve a price well in excess of the reserve price and often well in excess of the owner’s expectations, sometimes to the surprise of all present.
If, however, one of the bidders reaches his limit and no longer bids, the lead bidder may be able to purchase the property for a small margin over the other buyer, even though they may not have reached their own limit. It’s possible that they may have been prepared to pay a higher price but had no further competition on auction day so they didn’t have to.
Auction is a proven sales system which follows a tried and tested formula. When run correctly, an auction campaign will generally sell a property faster than a For Sale campaign because it creates a sense of urgency among buyers. There’s a date to which they must work rather than an open-ended For Sale period. The auction process requires a real estate agent who understands how to conduct a comprehensive auction campaign and an experienced auctioneer who can read the crowd, control the bidding process and extract every last cent in the room.
Tender and expressions of interest
The tender process or ‘expressions of interest’ method is sometimes used in the sale of property when the seller and the agent do not wish to put a price on the property at all but rather want to leave it open to all buyers to The process is reliant on buyers declaring their interest in a fixed time period with no advertised price guide offered, though a verbal guide may be given. Interested buyers are invited to submit a written best-offer bid to the agent before the closing date. All offers may be considered by the seller at any time. The highest offer may or may not be accepted. Often, the terms of sale form part of the buyer’s tender offer. This process has no transparency. Offers are not revealed and no-one knows if anyone has even made an offer. The owners are under no obligation to accept any offer.
Option to purchase
Sometimes, a passive buyer will see a property that they decide is ideal for them, however, they may not be actively looking to purchase right now and, consequently, are not ready to act immediately. Rather than pass up the opportunity to engage the owner with an outright offer, the motivated buyer may make an offer which is effectively an option to purchase the property, if certain conditions are met.
Conditions may be related to the sale of their own property which is not yet on the market and may include the sale of their own property within a certain timeframe and possibly even for a certain price. Conditions might be related to a future development of the property of interest. For instance, the buyer may only wish to proceed subject to receiving approval from the local council for extensions or redevelopment or even re-zoning. This may take weeks or months. Conditions may also include the acquisition of a neighbouring property as well so that two or more properties may be acquired and developed together. Once a seller has entered into an ‘option to purchase’, they are effectively unable to sell the property to any other buyer until the option expires. The seller will require a nonrefundable deposit as compensation for this option.
Deceased estate and mortgagee sales
Sadly, death affects us all and often properties form part of estates which need to be sold to divide the proceeds between family members to finalise matters. It’s all part of the cycle of life but the question remains: does a property that’s marketed and advertised as a deceased estate achieve a price in line with or better than most other properties on the market? Or does it achieve less?
Should the fact that the home belonged to a person who is no longer with us even be mentioned in the marketing campaign? Is it the way to attract premium buyers? It’s my belief that when a property is to be sold, it deserves the very best chance of achieving the highest price regardless of why it has come on the market. I don’t believe that you should market a property as a ‘deceased estate’, as it reeks of ‘sell at any price’ instead of standing on its own merits to be appreciated and desired as any other property would otherwise be. I also believe that offering any home as a mortgagee sale is not in its best interests. Bargain-hunters are not known for paying top price. The home needs to be sold but the sale can be controlled to avoid being seen as a desperate situation, regardless of the causes.
The quiet sale
Would you sell your house if you didn’t have to put it on the market? For many people, the answer is a resounding, “Yes!” As a real estate agent, I’m constantly talking with people who would like to sell their home but don’t wish to go through the marketing process. Some have had a bad experience in the past and others may be high profile or high net worth clients who don’t want to attract attention to their changing situation.
Do quiet sales achieve great results? The answer is yes and no. I know of many successful quiet home sales achieved by matching buyers and sellers off market. I’ve also heard of several sellers who’ve had no success finding a buyer off market. The key to achieving a premium price is competition, so I would always recommend engaging an experienced real estate professional in the first instance. Allow them to buyer-match your home off market for a short time but be prepared to launch into a marketing campaign to have your property sold above market if a quiet sale isn’t achieved.
Extract from Sold Above Market by Geoff Grist