Pricing Confusion

Pricing Confusion

Pricing Confusion

I guess I knew this was going to happen. With the hysterical and frenetic year we’ve had, this was really the only likely outcome. What happens when you have a year where everyone who ever thought about buying a lake house emerges as real, live, lake house buyers? What happens is prices increase. Supply shrinks, because sellers know if everyone wants their home then they, too, should want it. A majority of sellers at Lake Geneva are either cyclical varieties (grandma died, and it’s time to sell her house because no one can agree on how to keep it in the family), or move-up sellers (selling this house for $2M to buy that one for $4M), and because of this we generally will have a steady supply, albeit a small supply, of inventory. This year, those sellers still exist, but with someone using grandma’s house this year (to escape a city and its implied Covid risk), and without grandma’s house hitting the market then there’s no $4M house for the $2M owner to move up to. These are the conditions that created this year, and those are the conditions that created what we see in the market today: Mass Pricing Confusion.

There’s another interesting ingredient in the recipe that created this messy dish, and that’s a tide of new and aggressive agents pushing their way towards the prize of the Lake Geneva market: the lakefront. There is no secret that newer agents need to create their own market share somehow, and the easiest way to do that is to jump all over listings that the established agents don’t want. I passed up on two larger lakefronts over the past 18 months simply because I didn’t think I wanted to handle the stress created by working on aged inventory held by unrealistic sellers. But someone will take this inventory, because they have nothing else to take, and they’ll work and they’ll spin and if a worldwide pandemic hits then that inventory might indeed sell. This is one way to gain market share as an inexperienced agent.

Another way, and the way that’s providing significant market issues at Lake Geneva, is to overprice listings to such an extent that sellers have no choice but to list. If I have a $3M house that a seller thinks is worth $3.3M, I’ll take that listing and run to market with it. The spread between the market and the supply side is not too great to overcome, so it’s worth the effort. But I’d do this because I know that a $3M buyer is still a $3.3M buyer. In the same way, a $5M buyer is a $5.5M buyer, and a $9.5M buyer is a $10.5M buyer. This is just simple market math. What’s happening, instead, is you have a tide of agents playing in a sandbox that they don’t understand very well, and they’re pricing that $3.3M house at a $4.5M and the $5M house at $7.5M. They’re doing this because they don’t understand the difference between buyers. And in their defense, this isn’t something they could understand without a lengthy and complicated career in this exceptionally nuanced market segment.

In a way, this applies to most price ranges. One of the things I’ve come to know in our market is that there are very few $900k buyers. There are lots of $800k buyers. And there are $1.3M buyers. But $900k capped buyers? Few and far between. In the same way, our example earlier runs into fundamental market issues that most agents cannot understand. That $4.5M house will indeed have a $4.5M buyer. I’ve made a nice career proving this segment. But in the same way, a $4.5M house might be a $4.95M house, even though it cannot be a $6M house. There is nuance to the lakefront pricing, but it is nuance best considered with a pause and contemplation, rather than something you can take a hammer to and pound into resigned submission. Agents are busy trying to make $6M properties the new $4M properties, and they’re going to fail. What happens then? How is the market going to respond to these attempts that are based on a lack of market understanding?

The market reaction will be purely binary. It’ll either spit these properties out and ignore them, forcing the sellers into a long-term hold where they subject themselves to significant and often fatal pricing deterioration (see several recently closed examples of this), or they’ll get lucky and snag a buyer who doesn’t know better. There’s no real in between here, no softened outcome where everyone might win. Either the seller wins for presenting a grossly overpriced product to the market, or the buyer wins, a year later, when the seller succumbs to a lower price than he might have otherwise achieved if he prices his property better from the start.

This new pricing habit is leading to much market confusion, both on the buyer and seller side. Sellers see their neighbor list for a billion dollars and they call me to tell me if Jim’s house is worth One Billion Dollars, then certainly their house is worth Two Billion Dollars. Ah, but Jim’s house is only worth six hundred million dollars which makes your house only worth six hundred and five million dollars. This is how the conversation works on the supply side, and this is how overpriced listings skew the market before the inventory is even known. On the buyer side, one hundred buyers see Jim’s one billion dollar asking price and ninety-nine of them scoff. They text me and we make fun of Jim. One buyer has unique motivation or an advisor who doesn’t necessarily understand the market and that one buyer might bite. Now Jim laughs and says the other ninety-nine buyers and their agents were wrong, and now the neighbor lists with another agent for one billion three hundred million because if Jim’s was worth one billion, then certainly a 30% premium should be applied to his. This is the cycle, and in a small-volume market it can be perpetrated on individual sales. (The pricing above has been made hypothetical to save market participants from shame.)

What does this all mean for sellers of lakefront homes on Geneva Lake? It means you should be cautious, that’s all. It’s tempting to list for the highest possible price, but be wary of what that might mean for your ultimate sales price. Often sellers in this situation take the approach that suggests the worse thing that can happen is they don’t sell. They’re fine with that, usually. But the worst thing that can happen isn’t that they don’t sell. It’s that the market softens while they’re in no hurry to sell and then they decide that they would indeed like to sell. Then they look at their list price and are faced with a very painful decision. They must hack their own valuation nearly to death to find a new audience, and often times their ultimate sales price will be far below what might have initially been possible had they sought better advice.

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