Why are you selling?
For most of us, the decision to sell our home is not made overnight. It tends to be the culmination of other events in our lives. Real estate agents sometimes refer to the four D’s that drive property sales: Divorce, Death, Debt and Desire.
The first three D reasons are obvious. The fourth, Desire, is when the owner wants to upgrade, change to a different type of property, or invest in property.
I would suggest two other “D” factors here: Demographics and Departure. An example of Demographics would be when a couple has young children and wants a home with a bigger yard, or when the children have left home and a couple wants to downsize. Departure is about moving to another location because of a job transfer, or for lifestyle reasons, such as Victorians relocating to the warmer climate of Queensland.
It should not come as a surprise then that the motivation behind selling implies potentially different time frames, different processes of selling, and potentially different price outcomes. For example a “Debt” situation where the bank is knocking at the door may require a quick and guaranteed sale. Stressed sales often are sold by auction for that reason (although auction is also used in many other circumstances).
If you need to move soon the preparation you undertake will probably be much less than if you’re a middle aged couple considering downsizing. Selling the family home that contains the fond memories of raising the children will be an emotional event, and there may a reluctance to sell. There may even be dispute between partners about whether to sell at all. Health reasons will often come into play here. Where one partner is uncertain about selling, it may only be at the stage of considering a formal offer that the decision to sell or stay is confronted.
Some sellers are less than candid with their agent about why they’re selling, sometimes to their detriment. Of course, there is no obligation to tell your agent if you’re in financial trouble, or getting divorced. But you should only use an agent you feel you can trust, and being open about your circumstances will help you and your agent work out the best strategy to meet your needs, for example the timing of the sale, the likely price range it will sell at, the most appropriate selling method, and the way in which the property would be most effectively marketed.
Below are several examples that show how different motivations might influence the selling process. This is not a definitive list. The selling process options are explained in Chapter 2.
Example: A couple in their sixties wants to downsize from the family home
Price Goal: Maximum possible market price (so they have some funds left over)
Time Frame: Willing to wait out until the market is near the peak. Could take months/year.
Possible Selling Process: Exclusive private treaty.
Example: Couple in separation have trouble agreeing on anything
Price Goal: One wants out; the other wants to hold on.
Time Frame: Quicker the better for all parties
Possible Selling Process. Auction with 21-30 day campaign and 30 day settlement. One party can buy the other out at the auction.
Example: Family wishes to dispose of asset
Price Goal: Fair market price
Time Frame: 30-60 days
Possible Selling Process. Private treaty or auction with flexible settlement time frame
Example: Young couple with baby want to upgrade current house
Price Goal: Fair market price
Time Frame: Want to find new home first then sell.
Possible Selling Process. Exclusive private treaty.
Example: Family with school children moving to Sydney
Price Goal: Fair market price
Time Frame: Quick sale to enable family to buy soon
Possible Selling Process. Exclusive private treaty or auction
Example: Need to sell to reduce debt
Price Goal: Fair market price or as close as possible
Time Frame: The bank requires auction at 30 days
Possible Selling Process. Auction 30 day campaign (with offers possibly considered prior to auction)
Should I buy first, or sell first?
Before committing to selling, some owners may want the reassurance of knowing that they have another home to go to. When interest rates are low, it is more tempting to buy first and then sell. In 2014, with a rising market and low interest rates, quite a few people are buying their new home before they sell.
But what if my existing house doesn’t sell?
This is where a little research can help. First, let’s consider where your current house is located. Is it in a location where sales have been frequent and lots of buyers are looking to purchase? How quickly homes sell in your area is measured by the “Average Days on Market”. This data for your suburb or town can be obtained from websites such as http://www.myrp.com.au, http://www.domain.com.au and http://www.homesales.com.au. Here is the result for the suburb of Wakerley in Brisbane, obtained from Domain.
Here we see that Wakerley houses are selling in 73 days on average, compared to 79 days for Brisbane. They are also selling at a lower discount (the difference between the first listed price and final sale price), meaning there is higher demand for properties in this suburb and prices are holding up. The long term trend for capital growth of 6.4% is higher in Wakerley than for Brisbane.
Because, Wakerley is performing better than Brisbane overall, if your house in Wakerley is presented well you probably have a good chance of selling in a reasonable time frame, provided you are willing to accept fair market price. In that situation, you may have the financial capacity to buy before you sell. Talk to a mortgage broker.
On the other hand, if your house is in a town or suburb where sales are slow, then you’re probably best to sell first, then hope you’ll find a house to move to so you don’t have to rent for too long. In the worst case, you may have to rent for a few months before you find something.
Let’s consider another scenario. Say you’re downsizing after retirement, and don’t want to take any financial risks. In that situation, you would be best to sell first. That way you are in a position to hold out if necessary for a buyer who will offer the best possible price. I have seen some homes sell more than 12 months after first listing, at a price the owners couldn’t achieve early. On the other hand, if the market is falling, you might lose a significant proportion of the value of your property by waiting that year.
If you’re selling to reduce debt or due to marital separation, it would probably be better to sell first to reduce stress and avoid hassles later.
I would be inclined to take the following approach (depending somewhat on the state of the market):
- I would scout around for properties I like to see how likely I am to find somewhere to go to. I would use online listings and go to open homes.
- At the same time I would prepare my own house and have it all ready to list, photos and all, with my agent in place ready to start the campaign.
- If I feel there are properties available that might suit me, I would have my agent activate the campaign to sell my existing house and see what buyer interest there is.
- If I achieve a satisfactory price, I’d search seriously for another property and quickly put an offer in.
- If possible I would arrange it so the settlement on the new place was one or two days before the one on my existing property, so I could move straight in.
- If I didn’t sell my place, I would not have over committed.
- If the market showed signs of turning downwards, I would sell my house ASAP and rent until a house came up I liked.
When is the best time to sell?
While there are seasonal factors, the bigger influence on house prices is the stage of the “property cycle”. Although many people sell at the bottom of a market cycle, many wait until the market is rising, hoping to achieve a better price, potentially 10% – 20% better.
Remember, if you are buying again after selling it shouldn’t make any difference where the market cycle is, provided you buy and sell in the same market.
Property prices go up and down depending on buyer demand and the number of properties on offer by sellers. The price you achieve will be strongly influenced by the state of the economy, how much buyer activity there is, and the time frame you need or want to sell in.
The Property Cycle
The Property Cycle is sometimes simplified in the form of a clock, showing the varying stages of the cycle between the market peak and the bottom of the cycle (see diagram below). While the factors leading to peaks and troughs in the cycle will vary, it is fair to say they are influenced by the state of the economy, population shifts, unemployment rate, and interest rates.
The Property Cycle
If the rising market is at or near a peak it is called a “boom”, and if the boom becomes unsustainable it is called a “bubble”. And as everyone knows, a bubble eventually bursts.
If there aren’t many buyers around, but you notice lots of FOR SALE signs, the average days on market is high, and numerous properties have had their list prices reduced, this is a “Buyers Market”. In a buyers’ market, sellers may receive low offers they might consider to be offensively so. This is the time a good agent earns their commission through negotiations.
A rising market will have considerable buyer activity and insufficient properties on offer to satisfy demand. The buyer demand and shortage of available properties leads to price rises. This is a “Sellers’ Market”. Buyers are the first to become aware of this when they find properties are sold before they can make an offer. Owners will see comment about the market turnaround in the media and in real estate agent advertising, but will often not believe the market has turned until a property nearby sells at a better price than others achieved a few months earlier. When prices rise, they often do so quickly. As more properties become available and price gains continue through buyer competition, we might be seeing the start of a boom.
Eventually, at market peak, with house prices at their highest, the buyers will decide the prices are too high and will drop out of sight. Whether it is a burst bubble or a modest decline will depend on economic factors such as interest rates and consumer confidence.
If the economy has tanked, property prices may fall quickly, particularly at the top end. Some prestige properties that sold for millions at the peak might be sold for half their previous price. Hang on for the ride. Prices eventually get back to another peak, but it may take some years. Those who have bought or built homes ahead of a declining market may find their properties have a market value lower than the cost to replace them.
The Property Cycle is also often displayed in the form of a graph. In Australia, the bottom of the cycle never contracts below the trough of the previous cycle, and hence we see that the long-term trend is for house prices to keep rising.
The property cycle can be at different stages across suburbs, towns and regions. For example, in mid 2014 mining towns in western Queensland were in the middle of a property boom, while others in central Queensland were in decline after a boom a few years back. Sydney was 15% over the previous peak, while Brisbane prices were still 2.6% below the previous peak of 2010.
If you are buying and selling in the same market, it shouldn’t matter. But if you are buying in a high demand suburb and selling in a less popular one, or buying in a boom city and selling in a depressed rural town, you might be surprised at the changeover cost (I’ll discuss this term later).
One alternative to selling in a depressed market is to rent your property until the market improves. In the worst case scenario, it is better to sell before you buy so you will know how much there is left over to buy where you are moving to.
The media regularly reports on where we are in the Property Cycle. At the time of writing (mid 2014) commentators are predicting a favourable property market until 2016, based on factors such as Chinese investment and migration increases. Time will tell.
To monitor the property cycle, take note of indicators such as these:
- PROPERTY PRICES: Median house price, percentage change in median prices. Some real estate agents will publish local data on prices of sold and for sale properties.
- NUMBER OF PROPERTIES ON THE MARKET: com.au publishes two measures of supply for each suburb: “Number of properties for sale”. Some real estate agents will publish local data on properties sold or on offer – check flyers in your letterbox.
- MEASURES OF BUYER DEMAND: com.au publishes a measure of demand for each suburb: “People looking per property”. This website compares the suburb result with the state as a whole and shows whether the suburb is a “high demand market”, “average demand market” or “low demand market”. Some real estate agents will also publish local data on: “Number of sales” in their territory.
- “Auction clearance rates” are another commonly used measure to show buyer demand. This is particularly useful as an indicator of Sydney and Melbourne markets where auctions are prevalent. In Brisbane, auctions are less used, although clearance rates are still a useful measure of demand.
- “Days on market” indicates how long on average properties are taking to sell.
The interplay of the Property Cycle with seasonal factors means that it is not possible to be definitive about what time of year will be best to sell in. Apart from Christmas/New Year, which is a traditional down time, other factors will likely have more impact than seasonal ones on whether a house should be put on the market.
Leaving out the six D’s and the Property Cycle, the best time to sell will be when more buyers are about, and when there are fewer distractions to take their interest away from house hunting.
Influences: Holidays and other distractions mean buyers are away and have less time and interest.
Timing: Poor. Good time for preparing home for sale. Buyers research the market in their leisure time.
Summer (after school has returned)
Influences: Cooler climate regions is good time. In warmer regions hot weather and rains can reduce the attendance of buyers at open homes. Interstate transfers increase buyers wanting a quick purchase.
Timing: Okay, depending on weather.
Influences: Easter – a good time for serious buyers to be looking and for sellers to get homes ready for sale
Timing: Good – March through to May.
Winter Tax time may be relevant for investors. Good time for warmer regions to sell.
Timing: Okay. People prefer to remain settled in Winter. Good time to prepare your home for spring sale.
Influences: Prior to November and the start of the Christmas season – good weather but not too hot.
Timing Good – September through to November, before the silly season.
What if we just want to test the market?
When someone says: “I’m not sure if I really want to sell, I just want to test the market,” in my experience this is often code for – “I don’t want to spend money on marketing my property, because I’m not confident I’ll get the price I want.”
Unfortunately, this way of thinking can often be self-fulfilling. Let me explain Price Rule #1:
PRICE RULE #1: The price you get for your property will be directly related to the number of buyers interested in it, and competing for it.
As a general rule, if you want to get a good price for your house, you need to generate competition among interested buyers. This, of course, is the basis of the auction process. Auctions are great when there are lots of bidders, terrible when there’s one or none.
Regardless of the process used to sell, it follows that the more buyers aware of your property the more interest there is likely to be, and the higher the price that will be achieved.
“Testing the market” can involve sellers asking their agent to find a buyer from their database. While this happens quite often, it is likely that a proper marketing campaign will attract more buyers, generate more offers and achieve a higher sale price. By limiting the potential interest through testing the market, sellers might miss the buyer who would have paid the premium for it.
Instead of this approach, I recommend that you do two things that will provide a useful indication about the price you might achieve:
- Research properties that have sold in your area and those currently on the market using websites such as Domain.com.au and Realestate.com.au.
- Invite three agents to give you a market appraisal of what your home might sell for. Three agents are more likely to get you a more accurate indication of price than one. If you have chosen agents experienced in your area, the average of their estimates should be fairly close to the sale price in the current market.
But I don’t really want the neighbours to know I’m selling.
The flip side of testing the market is listing on the quiet: “I’d like to list quietly, because I don’t want my neighbours knowing I’m selling. No signage, no online, no advertising, no open homes.”
Okay, so how are potential buyers supposed to find out? This is like Coca Cola launching a new soft drink with no advertising and not distributing any bottles to stores. A small minority of sellers may have a legitimate reason for listing on the quiet, but normally it does not make sense to list on the quiet. Around 10% of homes are sold directly or indirectly through neighbours, who have friends or relatives that like the area, or their children might have school friends whose families are seeking to move there. If you don’t let neighbours know that you’re selling, you are cutting off a significant source of potential buyers, and possibly those who will pay a premium.
Real estate agents try to sell these quiet listings in four ways:
- Through their database of buyers. If they are selling regularly and keeping the database up to date, agents should be able to source some potential buyers. But this will never achieve the same level of interest as publicly marketing the sale.
- Other properties that the agent is selling will attract potential buyers who the agent may be able to direct to the quiet listing if they’re not interested in the other property.
- Buyers’ Agents will have buyers searching for particular types of properties in particular locations.
- Conjunctions are another way agents will use to sell a quiet listing. The listing agent contacts other agents that they trust in the area, inviting them to bring qualified buyers through. This amplifies the reach of the listing.
What’s it going to cost to sell and buy again?
The changeover costs associated with selling and buying again will depend on the value of the properties you are buying and selling, which State you live in, and whether you are a first home owner, owner-occupier or investor. Here is a checklist that will assist you to calculate the changeover cost:
Property Sale $…………..
Agent’s Commission $…………..
Moving Costs $…………..
Total Selling $…………..
Transfer (Stamp) Duty $…………..
Building Report $…………..
Total Buying $…………..
$Total Buying – $Total Selling = $Changeover
We’re serious about selling – now what?
Most sellers understand that to achieve a good price their property needs to be marketed with a flourish. They are serious, motivated sellers. You don’t have to be in a distressed financial situation to be motivated. Some agents use the term “motivated seller” to refer to such cases, but don’t assume that to always be the case.
Okay, so you’re serious and motivated. What do you do now?
Remember the three stages to achieving the best possible result:
- Present the property at its best – the “Preparing Stage”
- Promote the property to the right buyers to create a compelling offer – the “Marketing Stage”
- Negotiate effectively with buyers – the “Negotiating Stage”
As sellers move through those three stages there are nine decisions that they need to make. They are:
- Which agent?
- What selling process?
- What pricing strategy?
- What advertising will be most cost-effective?
- What date will the campaign start?
- What conditions and dates do we require on the contract, if any?
- Offers – for each offer, do we accept, reject or counter offer?
- Terms and conditions of buyer – do we counter or accept?
- The buyer’s best and final offer – do we sell or stay?
Why do I need an agent? After all, I could save myself the commission
Would you really save? At this point, I need to remind you that I work as a real estate agent, so I am not entirely objective here. But before I was an agent I bought and sold numerous properties and always used an agent. I would never have considered doing otherwise.
There is a good reason why real estate agents exist – they perform an important broker role between the buyer and seller in what is a high value transaction. There is a lot at stake here, and if you as the seller get it wrong with a DIY it could cost you – both in a lower sale price and potentially in legal bills if it goes bad. Just as a bad DIY renovation will detract from rather than add value, selling your house without using an agent might cost you more than the agent would have.
The market price of homes has factored in the agents’ commission. So if you sell it yourself, the buyer will be expecting their share of the savings because you’re not paying commission. How much the buyer will discount your price will depend on your negotiation skills.
Apart from that, in my view offering a property for sale by the owner sends the wrong message about how much the owners value their property. By choosing not to use professionals, owners are seen as the types that like to do things on the cheap. If that’s their attitude, buyers will assume they will nit-pick on price, and therefore be difficult to negotiate with. If they’ve done improvements to the house, have they done these on the cheap too? Is the electrical wiring safe? Has the owner removed a structural wall in their renovation? And what about the contract documentation – will that be accurate?
Whether these perceptions are fair or reasonable is not the issue. But they will probably serve to reduce the sale price of the property.
There’s another few reasons that real estate agents exist. In most cases, buyers do not want to negotiate direct with sellers. And sellers inevitably find it difficult to do all the things that need to be done to market the property professionally. Most don’t have the time to chase up buyers, and they don’t have the database of buyers that agents have maintained, sometimes for many years, that can be connected with.
Here are ten reasons for owners not to try to sell their own home.
- Sellers are not arms length and do not have a professional neutrality. Buyers will be reluctant to speak with sellers in the same way they talk to real estate agents.
- Most buyers will be reluctant to tell a seller to their face how their property compares to others in the market, especially its weaknesses.
- Sellers will struggle to keep emotion out of the discussion that leads to a negotiation on price, they will not usually have the experience to tease out the needs of the buyer.
- Buyers’ and sellers’ personalities may conflict. This is less likely with a broker.
- Sellers may not be familiar with contractual and regulatory conditions which agents are qualified to deal with.
- Buyers and sellers will be reluctant to discuss their financial position with each other.
- Sellers may not have the time to follow up buyers. Or a “follow-up” call may be interpreted as anxiety to sell in a hurry, whereas with an agent it would be considered standard practice.
- The agent’s advice may save the seller needless expense on preparing the house for sale.
- Agents provide numerous free services that owners are not able to provide.
- The agent has access to other real estate salespeople, giving the seller the advantages of his entire local sales marketing team and conjunction sales.
At the end of the day, your real estate sales agent only gets paid if and when your property sells. The agent receives a proportion of the sale, the remainder going towards the running of the agency itself.
Commission can vary between agents, and like most things, you get what you pay for. Expect agents charging lower commission to do less work marketing your property. Less marketing means less competition among buyers and a lower price could be expected in such cases.
Agents that offer cheap commissions need to find their revenues by chasing more listings, which means less time to spend on marketing their clients’ properties.
How do I choose the agent that’s right for me?
DECISION #1: WHICH AGENT?
The first decision you as a seller need to make is which agent to use. You should be able to find an agent working in your area who has a personality and approach you feel comfortable with.
Like lawyers and schoolteachers, real estate agents come in different shapes and sizes and degrees of competence, enthusiasm and professionalism. Some are loud and brash, others are quieter and methodical. Some are more physically attractive and others appear to be using a profile photo that is twenty years old in their advertising (something they wouldn’t be allowed do with your house).
The three most important qualities when considering which agent to engage are:
- Trust. Trust is the most important element in the relationship of the seller with their agent. And it is also important that buyers trust your agent – bluster and arrogance can work against you in negotiations.
- Selling Skills – your agent needs to be able to deal professionally with buyers and get the job done to your satisfaction. This includes regular communication with you.
- Negotiation skills – your agent needs to be able and willing to work on your behalf to get you the best price. Some agents are more about getting the deal done and moving onto the next one rather than with getting the best price for their sellers. If you’re considering using the same agent that sold you the property you’re in, ask yourself the question – how much more would you have paid for the property when you bought it? If they didn’t squeeze the last drop from you, that would suggest they may not work as well for you as a seller in negotiations.
Will a busy or high profile agent do a better job for you than an agent that sells fewer properties or is lower profile? Not necessarily. Buyers don’t care who they buy the property from, so the best agents are those who can market most effectively at the target buyers and then negotiate the price. Profile is irrelevant to you as a seller, but there is no doubt it helps agents get listings.
If you’re more concerned about speed than price, the agent in a hurry might suit you. If you’re more concerned about price, look for an agent who can demonstrate they have achieved a great price outcome after marketing a property for a while.
The busiest agents will have staff to assist them. You need to know if this is the case. The person being delegated to may be perfectly competent. But if you want to deal with your agent personally, you might need to consider an agent who has fewer listings, who will devote more time to yours.
Most agents dress to impress. Good presentation is important when selling your house, and personal presentation is how agents demonstrate they walk the talk. But don’t assume that good presentation will always translate into good performance. Dig deeper and find out more information about the agent’s performance.
The best way to choose an agent is to:
- Ask friends or family about their selling experience.
- Study the track record of three or four agents who have sold in the area in the last six months. Which have the best track record in terms of prices achieved?
- Check out the agent’s testimonials, and ask the agents for phone numbers of several recent seller clients. Ask these clients how the process was handled by the agent and the agency itself.
- Interview at least three agents. By inviting them in, you’ll get a chance to see how they perform, hear their suggestions on presenting your home, and obtain an indication of the likely market price for your property.
Note: Real estate agents are usually highly skilled at interviewing techniques, and you may find the agent will turn the discussion into an interview about you. That’s okay, just make sure you get your questions answered properly.
Some agents invited to a meeting will phone you up beforehand to ask additional information. Or they may drop off information for you (a “pre-listing kit”) to read prior to the meeting. These are methods that agents use to try to build their relationship with you and so that they are not turning up without some indication of what they’ll be confronted with.
Take the agent on a tour of the house first, then sit down at the dining table to keep it business like. Have your questions written out. Here are ten questions you might use to find out more about the agent.
TEN QUESTIONS TO ASK AN AGENT
- How many properties have you sold in the last six months? Tell me about one of those sales that had a great outcome. Ask about marketing, how did they handle the negotiation stage, what other factors influenced the outcome.
- How could my house be better presented to the market?
- Tell me about a difficult client. What happened? How did you respond?
- How is the market performing at the moment? How is (your suburb) performing compared with (city)?
- Who would I be dealing with on a day to day basis for my sale? You or your P.A.? Would you be attending all the open homes yourself?
- What approach do you have to open homes/inspections and follow up of buyers? What sort of reports or feedback do you give me after open homes and inspections?
- What price range would my house come into at the moment – high and low? What evidence do you have to justify this price range.
Note: Some agents won’t want to give you an exact number here, because ultimately the buyer activity will determine the price. But you should persist in getting at least an estimated range. Beware of the agent that suggests a very high selling price – they are probably just trying to “buy” your listing by overpromising. They will probably under-deliver later, forcing you to lower the price after the offers come in, destroying the credibility of the property. Make sure they show you their analysis of comparable properties as evidence.
- What marketing would you recommend? How would you justify spending this much?
- What is an example of a property that you have taken a while to sell, but got a great price in the end?
- I’d like to negotiate the commission – what discount would you offer? (There may not be any, but you will get some idea about the agent’s negotiation skills when you toss around this question).
Types of Listing Methods
“Listing” is where the owner places their property on the market in order to achieve a sale—the owner becomes a seller. Buyers are made aware of the property by advertising. Most sellers engage an agent to promote the property and negotiate the sale. Some States have a standard form for the listing authority. Real estate agents are not permitted by law to show any buyer a property unless they have a current listing authority signed by all owners.
With most of the buyers using online searches to find their properties rather than using agents as in the past, the competition among agents now is mostly about getting the listing, not about having buyers. Those with the listings get the sales.
Mostly, sellers will list with only one agent, who is given an exclusive listing to sell the property. The advantage of an exclusive listing is that you only have to deal with one contact point. Your agent will give your property more attention and focus on getting it sold, because they are guaranteed a commission if it sells, even if the owner sells their own property. This protects the agent from buyers who knock on the owner’s door after seeing the advertising, and try to negotiate a lower price by avoiding the commission.
These days with online listings being the main source of advertising, most sellers don’t want to pay several agents to advertise, and most agents won’t pay to advertise open listings. So that leaves most listings as exclusives. Sellers who do not have an exclusive listing are likely to be contacted every other day by agents wanting to list and sell their property.
If you are currently selling with an exclusive listing, you will probably find that towards the end of your exclusive you will receive letters, calls and door knocks from agents chasing your listing.
A sole agent listing means that only one agent can sell the property. In this case, the owner also retains the right to also sell direct. Most real estate agents will not list on this basis, as it opens up the possibility of a buyer knocking on the door to negotiate direct and avoid commission. It should be noted that if a buyer is introduced to a property by the agent’s advertising then the agent is still entitled to a commission.
An open listing is where more than one agent is permitted to sell the property, and the owner can also sell it. Sellers can fund the advertising with one agent and allow other agents to list, but if a buyer goes through another agent, the original agent gets no commission, reducing the incentive to work hard on your behalf. Meantime, other agents will be all contacting you with different stories, adding to the confusion.
Open listings are not used as often in residential real estate as exclusives these days, although they are still common in commercial property sales.