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How to Beat the Overpricing Cycle

Along with the deciding on the right estate agent, one of the most important decisions to make when selling your home is to decide on the correct asking price. One is mindful of the fact that buyers tend to make offers lower than asking price – on average about 5% less if the house is accurately priced. Unless you want an immediate sale, you don’t want to underask on price, because then the odds of getting higher than asking price are very slim.

If my house is worth R4.8m, I should be asking between R4.9m and R5.2m. Who knows, I may get lucky and have 2 parties competing and get a lucky full asking price. At the same time if I ask over R5m, I will get far fewer enquiries as many buyers search on the web in price brackets – ie R4m to R5m. At each million rand bracket, the number of enquiries drops off considerably. So, you may have sixty buyers looking in the R2m to R3m bracket, but only 35 buyers looking in the R3m to R4m bracket. There certainly are figures where that cutoff is even more exaggerated. R10m is one of those figures.

Most sellers have an idea of what their house is worth, and almost universally, that value is higher than the actual market value of the house that a buyer will pay. It’s worth saying that again. Almost universally, that value is higher than the actual market value of the house that a buyer will pay.

Sellers usually base their assessment of value on what they’ve seen the Jones’ up the road asking for their house. Or, the prices they see in the Weekend Argus Property Guide. Or, even worse, dinner party talk. The problem with that system is that the seller does not actually know that although the Jones’ were asking R6.5m for their home, they actually settled for R5m. And the lady telling the story about the huge sale up the road thought she heard R8m when in fact the person who she overheard talking about it actually said R6m.

A seller could call in a profession valuer to assess the value. Whilst this is not a bad idea, the problem is that most professional valuers operate in a very large geographic area, and therefore may not have a great deal of knowledge on your specific area within your suburb. Importantly too, professional valuers use a few tools, but one of their most important tools is analysing deeds office data reflecting sales and patterns within an area. They probably don’t know that in the past 2 months in your immediate vicinity, 4 significant sales may have happened, but they have not yet passed through the deeds office, and consequently are not included in the data they use. (The average home takes about 3 months from date of sale to date of registration in the deeds office.)

The professional person who really knows exactly what your home is worth is your local well-known estate agent. (Not your cousin’s estate agent friend who actually operates in the Cape Point area). The problem is that although an experienced and professional estate agent can reliably and accurately forecast within a few percent what you home will sell for, in the majority of cases, they simply lie.

Why would they do this?

Imagine that you call 3 estate agents to sell your home. Each is personable and professional, and has a good image. You like all 3. You think your house is worth R5.5m.

  • Agent A happens to be quite busy, so doesn’t want to return for a second visit, and thus tells you on the spot that your house is worth in the late R4m’s – but the second you look unhappy with that figure, she ups her estimate until she leaves your home assuring you that you will get in the mid to late R5m’s.
  • Agent B is an honest and experience agent, and takes a good look at the property, then spends a few hours analysing the home and reflecting on the various pros and cons. Agent B initially felt the house may be worth R5m, but after giving proper consideration to the data of recent sales, and considering the two houses that sold recently in your area, Agent B reckons R4.8m is likely a selling price, with the perfect asking price just under R5m. Agent B prepares a comprehensive assessment, with multiple examples of recent sales in the area, and all sorts of relevant data such as the size of your home, the size of the land etc. Agent B takes the time to come and see you, and to explain how and why he reached his conclusion.
  • Agent C also reckons the house will sell at R4.8m, but from experience knows that you are likely to choose the agent with the higher assessment, so she tells you that you could ask R5.75m, and she thinks you should achieve mid R5m’s.Which agent do you think will NOT get the mandate to sell your house? Of course, Agent B. That’s almost a certainty.
  • Eventually, if Agent B continues to be honest, he will go out of business, as he will very rarely be rewarded for his integrity. Or, like many agents, he will eventually simply add 10 to 15% to every assessment he does. If he really thinks R5m, he will say R5.6m, even R5.8m.
  • At the end of this article, there is an elegant solution to the problem, but before that a question.Surely the agent will not purposefully overvalue your home because  the consequence is that they will have an unsalable product? The truth is that certain of the largest real estate companies in Cape Town use this exact process as their business model. Let me explain.An agent in a large company will often have 15 to 25 homes that they are working on at any given point in time. Imagine in the case above that that agent takes on your home at R5.75m asking price. Around the corner, they have a similar home that they took on 4 months ago at the same price, but now, having not sold, they have convinced the weary seller to drop that price to R5.3m.They can take a new buyer to your house – and the buyer whispers to the agent that the house is really overpriced. The agent quietly agrees, but tells the buyer to come and look at the really good value to be had around the corner – at R5.3m asking price it is really a good deal in comparison. The buyer knows the house has been on for months, and makes a cheeky offer of R4.8m and the house is sold – albeit 4 months later the much inconvenience and unnecessary hassle for the seller.You may find this incredible, but even more incredible is that the agent will still get paid their commission, with no penalty for having overvalued in the beginning. In fact, many sellers will pay more, as the poor agent has been working on the house for so long! This crooked cycle has been playing out in the markets that I know here in Cape Town ever since I’ve been in property in the mid 1980’s.So the question is:How to get an agent to tell you what they really think your house is worth? It’s really simple, but it’s vital that you do this BEFORE the agent gives you the valuation.Call in 3, or even 4 agents. Tell them that you will be paying commission on a sliding scale, relative to how accurate their valuation of your home is. An experienced and honest agent will have no problem with this approach.If they tell you you will get R5m, and you do, they should get paid their 5% plus vat commission. But if they tell you that you will get R5.5m, and they want you to accept an offer of R5.2m they should get 2.5% commission, and if the selling figure is R4.8m, then they should agree to accept 1% commission.You can’t lose with the sliding scale system. At the very least, the agent will be much more cautious and diligent with your valuation, and will certainly apply their mind carefully. They are very unlikely to purposefully overvalue, as this will result in a long campaign with a punitively low commission at the end. And even if the agent genuinely believes your home to be worth R5.5m, what a pleasure for you to only have to pay 1% commission if the correct value really is under R5m.Of course, the agent will come with all sorts of excuses:My manager simply won’t allow it……….I can’t be held responsible if the market suddenly turns…….Valuation is not an exact science…….The truth is that if they really believed in their assessment, they would be happy with that dispensation. And if they won’t agree to it, I guarantee you, you can find a great local agent who will.Chances are, that agent is Agent B.

    PS: The fact that an agent honestly thinks your home is going to sell for R4.8m does not mean that you can’t decide to ask R5.8m. And in certain cases, especially with really beautiful homes, and especially with exceptional views, I may even take on a property at R5.8m even if I really think it’s only worth R4.8m. The final decision on asking price is yours – but at least with the sliding scale method you’re making decisions and taking risks based on accurate information!

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