A car parked along the side of a road is a universal signal for one of two things. It is either broken down and unable to move, or it is for sale. If it is for sale, and if it is the sort of car you might want to buy, there’s a chance you’ll stop to take a look at it. If the sign in the window that tells you it is for sale is small, you might have to walk close to the car to see what the seller is asking for this fine automobile. But if the sign is large, or the seller has smeared something like soap over the windshield with a price on it, you won’t have to get out of your car. You’ll just have to slow down and squint. When the price is too much, you drive along. When the price is right, you consider stopping. When the price started at one high number and then the seller put a big smear through that large number and wrote a much lower number next to it, you stop.
As with cars or with real estate, lower prices get attention. The trend at Geneva these days is, in spite of solid market activity, towards price reductions. This should not be confused with a valuation decline, instead it is merely a function of the market to see where the bid is and adjust the ask to within a reasonable striking distance. Even as some lakefront homes sell, others are being reduced. Even as some lake access homes sell, for each sale there are three reductions. This is a market on solid footing, but shaving of asking prices is like the shaving of a face. It occurs rather often.
The danger in price capitulation is that there are all-in moves that can backfire in serious ways. There have been several examples of late of sellers making dramatic price reductions to their already somewhat quasi-attractive pricing. This is happening all over the market but it is especially noticeable in the lakefront market where list prices are fat with many extra zeros. If a seller of a lake access cottage moves in price from $250k to $225k, this is a large enough move that will garner at least some attention. But if a seller at $3MM moves to $2.69MM there is a reason to believe that this move will generate far more attention even though the percentages are similar.
If I’m a seller and I’m asking $5MM for my lovely lakefront home (now with hammock!), and I decide to reduce my price in order to gain a little market momentum, an expected discount will be in the 10% range. If I move a $5MM home down to $4.5MM, this will draw the attention of the market without causing me to bleed too much. (It should be noted here- red carpet open houses with horses and leprechauns only produce results on television in Beverly Hills. The rest of the world responds to price reductions first and to price reductions last.) If I make this reduction and I do not sell, this isn’t much of a problem because I still have $4.5MM hypothetical dollars left on my gilded table. I’m going to be all right, and I haven’t made a move that the market deems to be rash or somehow desperate.
But what happens if I make that price cut to $4.5MM and I get itchy and make a similar price cut to $4MM a few weeks or months later? Am I still in control of this pricing situation? Obviously not. And if I make another move, because my broker tells me I must do so in order to flush out the property quickly and efficiently, and now I drop to a rock bottom price of $3.5MM, because that’s my bottom number and I might as well cut directly to the chase, what have I just done? What I’ve done is tell the market that not only am I motivated, but my motivation borders dangerously in favor of desperation. I have lost my edge.
To sell quickly at a much reduced number is fine. If I’m selling a $500k house and I want to move it, and I decide that a $429k list will indeed accomplish my goal, I’ll make that move. If I sell within a few weeks at my new, low, number, I’m a winner and I’m happy and I’ll buy my wife dinner on Friday night to prove it. But if I don’t sell at my new, low, number, and weeks and then months pass, I am now at a supreme disadvantage. I have ineffectively negotiated with myself and lost any ability to further adjust as market time piles higher.
This is happening in the lakefront market right now. There have been several major price reductions over the past month, and instead of moving decisively and capturing a motivated buyer, sellers have moved decisively and been left wondering what on earth they did wrong. To cut a price from $2MM to $1.6MM is not to expect a $1.55MM sale unless that sale comes quickly. Instead, to move from $2MM to $1.6MM is to incite an agent like me to email a client like you and encourage an offer of $1.3MM. There are still plenty of agents out there who would suggest a $1.55MM bid on a $1.6MM ask, but I am not one of those agents. If I were, I wouldn’t expect you to be reading this.
While this advice today applies to sellers, buyers have much to learn from this behavior as well. If a seller isn’t willing to cut his list price, don’t let this be a deterrent to you. Just because some sellers refuse to negotiate with themselves and constantly tinker with their asking price doesn’t mean they aren’t motivated. Buyers looking for a seller to reveal her number to you in the form of their ask are buyers who are content to forever sit on the sideline and wait for their buying signal. Sitting on the sidelines, as we know, is a dreadful way to spend a summer.