Working with sellers in a shifting market- seven dos and don'ts

Whether or not you have noticed, the market has already begun to shift. Those who accept the new reality and successfully coach their clients will prevail.

As we reviewed the data with each client, they all realized that the market had indeed reached a tipping point. They were all extremely dissatisfied with their timing, but appreciative that we had a plan for the future.

Daily communication with our sellers led to price adjustments and incremental increases in traffic for some of our listings. We also received lowball bids from buyers who, smelling blood in the water, perceived a possible opportunity to score a deal.

We have fine-tuned our strategies for each market change over the years, as the market has undergone numerous shifts. Understanding the fundamentals of underlying behaviours is crucial to the success of any strategy.

Reasons for the rapidly declining buyer pool

In this instance, it is essential to comprehend what is happening to prospective buyers and why we not only have a dwindling buyer pool but also hesitant buyers who remain.  

1. Increasing prices and mortgage rates have eliminated a significant number of buyers.

As home prices have soared over the past year, many would-be homebuyers have been priced out of the market. In addition to rising home prices, mortgage rates have also been on the rise, pricing out yet another demographic. 

2. The declines in the stock market have eliminated a second tier of buyers.

A significant number of people have stock options or portfolios that they intend to use as down payments. As interest rates have skyrocketed, the stock market has begun selling and redistributing assets in anticipation of future losses in potential gains.

As a result, individual portfolios have shrunk, and in some cases, funds designated for home purchases have vanished. These buyers, whose incomes still qualify them for the higher interest rates, are delaying purchases due to their diminished ability to make a down payment.

3. Buyers have begun to anticipate price cuts.

In an overheated market with limited inventory, buyers must compete and pay whatever price is necessary to acquire a residence. Once buyers realize that the market is weakening, however, their strategies change immediately. In lieu of submitting multiple offers, they adopt a wait-and-see stance, which, overnight, slows offer activity and extends the number of days homes remain on the market.

As the number of days a home is on the market increases, some buyers, anticipating long-term price reductions, withdraw entirely from the market, assuming they will have better opportunities if they wait. Others, perceiving an immediate opening, initiate lowball offers.

4. Buyers are becoming increasingly picky

As a result of the combined effects of these factors, the number of active buyers has decreased dramatically, and the inventory of available homes is beginning to increase. With more homes to choose from and less competition from other buyers, those still in the market begin cherry-picking, selecting properties that they believe offer the most amenities at the best price.

Alternately, some begin sifting through the rubble in search of desperate sellers who have had to reduce prices to facilitate a quick sale.

Aware of these factors, listing agents must begin advising their sellers to adjust to the new reality. The quicker they adapt, the greater their likelihood of success.

Once sellers in any region realize a shift is occurring, wholesale prices begin to decrease, resulting in two occurrences: It confirms to buyers that they have more opportunities and eliminates the possibility that a single seller could have anticipated a market shift with a preemptive price reduction.

We outline seven key strategies for sellers.

1. Don't: Buy before selling

A defining characteristic of overheated markets is the difficulty homeowners face in attempting to move up. Although selling existing homes has been simple, it has been exceedingly difficult to find replacement properties.

Some homeowners have been purchasing a replacement home before selling their current residence. There have been a variety of approaches to achieving this goal. The idea is that, after the closing on the new home, the existing property is quickly sold to pay off the mortgage.

Now that the market appears to be shifting, strategies must also change. As long as it was certain that existing homes would sell within a few days for top dollar, move-up buyers did exceptionally well.

As we have seen in recent days, however, in a market shift it takes longer for homes to sell, thereby increasing the financial burden on those who have recently purchased a new home and are attempting to sell their old one.

In the emerging market, it may be preferable to sell a product before searching for a replacement.

2. Don't: Set a minimum price you expect to receive.

Once a market shifts, it becomes impossible to match the prices of previous comparable sales. In a recent conversation with a seller, he stated, "We must sell above a certain price for our plans to be successful." He clarified, "We've examined recent home sales in the area and, based on those figures, we've determined that our homestay worth X amount."

This strategy disregards the fact that the buyer, not the seller, determines the price.

Two key factors demonstrate a fluctuating market:

• Initially, homes remain on the market for a longer duration of time.
• Second, because buyers now have more opportunities and leverage, offers are submitted at lower prices, effectively decreasing market values.

Regardless of how much a seller insists they must earn from a sale, they have no control over it. If a seller immediately rejects an offer, it may be some time before the next one arrives, and there is no assurance that it will be higher.

3. Do not underprice your listings

We have always advised our sellers to list at a price at which they would accept a single offer. Ironically, due to other agent pricing strategies, some buyers examine realistically-priced listings and then assume they will need to add a substantial amount to that price in order to purchase the home. This assumption has prevented prospective buyers from submitting offers in many instances.

In a slowing market, ridiculously low-priced homes may receive offers, but at a level that falls below the seller's expectations. The practice has resembled bidding with a hidden reserve in that offers are rejected if they fall below the seller's "minimum." This appears to me to be deceptive advertising

4. Don't: Price higher than comparable properties

When setting a home's price, sellers must always be market-driven. In a rising market, it is acceptable to set prices at or above those of previously closed comparable sales. In a market that is declining or trending downward, sellers want to price below previous sales to get ahead of the market.

5. Respond quickly

Typically, a market shift occurs within a short period of time. Although agents who have completed previous shifts can typically recognize early warning signs, a significant proportion of currently active agents have never completed a shift and may not recognize the signs until it is too late. Listen carefully to market analysts in order to maintain an active understanding of the current market, and when it appears that a shift is occurring, respond as quickly as possible.

It is one of life's ironies that the segment of the market that is most affected by a change is also the segment that is slowest to comprehend the implications and respond effectively. When the market increases in value, disadvantaged buyers frequently refuse to submit winning bids, claiming, "The home is not worth that much."

The unfortunate reality is that once another buyer pays the going rate, the house is indeed worth that amount, and the buyer who missed out will have to offer even more to secure the next available home.

When a market shifts downward, buyers immediately recognize the change and submit lower offers.

The sellers, on the other hand, refuse to accept the new market reality and will reject any offers at the new, lower price points. Before the majority of other sellers wake up and smell the roses, competent agents will recognize this and enlist the sellers' support with effective responses.

6. Maximize the property's potential.

When buyers observe an increase in available inventory accompanied by a decline in activity, they become exceedingly selective. Since they now have the opportunity to purchase a home on more favourable terms, they will begin to prioritize listings that stand out from the competition.

The objective of buyers in an overheated market is to acquire a house, any house, so they can begin to enjoy the benefits of homeownership. In a market that is softening, they have the opportunity to search for and purchase a home that more closely matches their stated preferences and requirements.

In a fluctuating market, the message to sellers is straightforward: Ensure that homes are well-prepared, staged, priced, and marketed better than competing homes in the neighbourhood.

7. Practice patience

In most cases, a few days' worth of sales will evaporate, so advise your clients to prepare for a longer timeframe. Encourage them not to panic if their home does not sell within a few weeks; in a weaker market, sales simply take longer.

We have no idea how long this shift will last or how far we will fall down the rabbit hole. Keep up with the latest of market conditions, pay attention to the news, network with other agents, and do whatever it takes to remain competitive.

This is not an instance of Chicken Little proclaiming, "The sky is falling!" We are on the cusp of a significant shift, and those who accept the new reality, coach their clients effectively, and respond swiftly will succeed.