Home-sellers beware of the quick sale
Lately, there’s been a lot of media coverage on “house flipping” in Vancouver. Quick sales are common in many real estate markets. Real estate agent ads will boast “gone in one day,” “sold over list,” and “buyers in bidding war.” These boasts are badges of honour that realtors use to trumpet their skills and attract new listings. But are these claims really in sellers’ interests?
The market for houses, like many other markets, is a market where sellers search to find the buyer that will pay the most for what they are selling. Markets differ greatly in the amount of search necessary to find the most eager buyer.
At one extreme are markets where the objects being sold are identical and where there are many potential buyers and sellers at any time. The market for Telus shares is such a market. The shares are identical so buyers do not need to pick and choose among them. More than one million Telus shares are bought and sold on an average day, so there are many buyers at any time. As a result, sellers can with little effort find the most eager buyers in a virtual instant. A seller could gain only a few cents at most by holding out for a higher price.
At the other extreme are markets for unique or rare objects. Sellers of rare Qing dynasty vases must spend time and effort to find the buyers who will pay the most. Potential buyers are few and are scattered throughout the world. They will want to inspect the vase to determine its authenticity, the quality of the workmanship and its current condition. Sellers of such objects may need to exhibit them in major cities such as New York, London and Shanghai. The sale could require months of effort to assure the highest price. Such effort could be rewarding because gaining an extra 10 per cent for the vase would bring in hundreds of thousands, or possibly millions, more dollars.
The market for housing lies between these extremes. Houses differ in size, layout, construction quality, upkeep, location, exposure, school district as well as many other qualities. Possible buyers may be awed by some features and turned off by others. The match between the house and buyers is not easily predicted.
Agents selling houses will have lined up rosters of potential buyers for their listings. Other agents will have leads to other possible buyers. Still others can be reached through real estate ads or other means. It may take time for the most eager buyers to emerge.
Savvy sellers seem to understand that greater time on the market produces higher prices. Newly constructed homes offered by builders tend to stay on the market longer than others. Agents are inclined to take longer to sell their own homes than those of customers because they gain the full extent of the higher price on their own home but only their commission on their customers’ homes. Research has shown that Chicago realtors took more than nine days longer to sell their own home than those of customers, and realized a 3.7 per cent higher price in doing so.
Agents may benefit from quick sales and the lower prices needed to make these sales possible. A quick sale requires less effort than one that drags out over weeks or even months. A quick sale also increases the likelihood that clients of selling agents or their colleagues buy the house so they get both the buying and selling agent’s share of the commission. Unfortunately a quick sale can allow the agent’s friends and colleagues to buy before others have had a chance and flip the property for a quick profit. Quick sales are often symptoms of under-pricing.
Most people heed the phrase “caveat emptor” or buyer beware. Homeowners planning to sell their house need to brush up on “caveat venditor.” Seller beware.
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