Setting an appropriate listing price is both art and science. The listing price should be high enough to provide some negotiating room and to learn what the market will pay. It should be low enough to arouse several buyers’ interest.
Smart listing brokers suggest a price that will promptly obtain realistic offers. Our team often sets the initial listing price about 10% above what we think the appraisal value will be.
The Listing Presentation
Excellent brokers shift from explaining truth in the listing presentation to focusing on advocating for the seller’s property. Like a masterful attorney, they discover the truth, explain that truth to their client and frame their case to help their client win. Then the market takes over.
How the Market Works
You will sell the future potential income of your property to a rich stranger who will probably never do business with you again. That rich stranger is as close as you will ever be to the rational actor that the economists believe in.
The market, hundreds of capable buyers and thousands of owners decide what prices make sense. When buyers have better deals than what you offer, they won’t buy your asset. When sellers expect a better future than owning their known asset, they don’t sell until it makes sense
San Diego may have 300 apartment buildings sell this year. More than 1000 owners have seriously considered selling and more than 1500 millionaires considered buying. The 2000+ millionaires who did not buy or sell, in effect affirmed the choice of the smaller number who did. No seller nor any buyer nor any broker can change the truth. A great broker can discover the truth. Buyer and seller can trade at market price or not. No single person can cause the market to go up or down 5%.
Smart investors will compare your opportunity to several others. They’ll buy your property if, and only if, they’re convinced it’s their best option. In other words, it will be just like when you bought the property, except this time you’re the seller.
The Buyer’s Broker
The buyer’s broker usually does the initial screening. That broker must believe your property is reasonably priced. Brokers don’t waste time on unrealistic listings because they are paid for results, not for educating somebody else’s client. So, the greedy fool who lists a property far above the market will receive few, if any, offers.
A buyer’s broker who thinks your property is fairly priced will notify the buyer. Your broker’s reputation plays an important role here. If other brokers know that your broker’s listings usually sell, they’re more likely to decide that your listing is realistic and tell their client about it. For example, because my closing ratio is far higher than the average in San Diego, brokers are more likely to forward my listing to their clients.
When you receive serious offers, you know the property has a chance of selling. In San Diego County, if you haven’t gotten an offer in the most recent 60 days, then your property is overpriced. If your property is somewhere else, your broker can tell you about your market.
There are other details, like financing, which matter, but I won’t cover them in this post. For five units and more, lenders insist that the loan be low enough that an ordinary borrower will have $120 of cash flow for every $100 of mortgage payment. Now that means 30%-35% down in a working class zip code and more than 50% in prestigious areas. Investors may pay 50% more for a rent dollar that comes from a coast zip code compared to a rent dollar from a lower income area. If you want to learn more about how that works, an appendix in my book explains how lenders determine the loan amount.
Terry Moore, CCIM is an investment real estate broker with a proven history of success in creating value, 1031 (tax deferred) exchanges, and building wealth through apartment investments. He has taught at UCSD, National University’s MBA program, the Appraisal Institute, SD County Tax Assessor, California Association of Realtors and is a National Certified Commercial Investment Member. For more information contact Terry at [email protected], call 619-497-6424 (Direct), 619-889-1031 (Mobile) or visit www.SanDiegoApartmentBroker.com. (License #0091851).