The property market has opened 2021 up in surprisingly strong fashion. It’s not that market pundits expected a soft start to the year, it’s just the strength in certain segments of the market has completely surprised most people. There is a case to say that certain niche markets have jumped by nearly 10% since Christmas. Whilst that seems close to unbelievable in a mere two month period, there is mounting evidence each week that removes any doubt.
In this special report, we break down the issues that property sellers should consider, prior to listing their property in 2021.
High or highest?
In rising markets, if a property seller remembers the wise yet cautionary proverb ‘the greatest losses occur at the time of greatest gains’ they will be ultimately better off.
An irony in real estate is that sellers are more likely to undersell in a strong market than they are in a soft market.
The reason for this is that in a soft market, sellers tend to fight very hard to protect whatever equity they have in their property. They hold out for every possible dollar and ensure their agent works really hard toward achieving the best possible result in the market.
By contrast, in a strong market, a seller’s minimum price expectations are often achieved quite easily, so there tends to be less focus on the maximum price buyers are prepared to pay.
Sellers in a strong market need to stay focused on each interested buyer’s maximum price and not their own minimum price.
Above all, keep your minimum price confidential, particularly from the real estate agent. The moment you disclose your bottom line to an agent, that may be the highest price you will achieve.
Niche markets, houses and apartments
A rising tide may lift all boats, but the rising real estate market in Sydney is lifting house prices a lot more than apartment prices. More broadly speaking, different segments and locations of the city are performing independently and without logic when compared to historical fundamentals. For example, house prices in a street/suburb may be up 8% to 10% whilst townhouses in the same location may be up a mere 1% or 2% by comparison. The townhouse owner has every right to be aggrieved at the lack of price growth. The market is the market though and it’s performing somewhat irrationally in 2021. Buyers will choose to spend their money, where and how they choose to spend it, logically or otherwise.
Before you prematurely celebrate the market conditions too much, ensure it applies to your segment of the market. If you go to market misaligned with the current trends, you could be left disappointed.
This point is particularly apt for those whom plan to buy before they sell. You don’t want to buy before selling, thinking you will then be selling into a boom that does not actually exist, in your existing property’s market category.
The irrational market behaviour is playing out across many asset classes. For example, a lot of gold bugs would have thought the current environment is right for the gold price to explode. Whilst the gold price did rise steadily through 2020, the parabolic move in price has occurred in Bitcoin instead of gold. Just as the rise in the price of Bitcoin and the record highs in global stock markets, much of what is happening in property markets is not necessarily based on sound fundamentals.
Off market sales
Prospective home sellers should ask themselves whether selling off market is a wise decision in 2021. Selling for a good price does not mean getting the best price. This conundrum is contextual. Therefore, we cannot give blanket advice to avoid selling ‘off market’. Prospective vendors should give serious consideration as to whether it is the best option though.
Kerry Packer famously said ‘you only get one Alan Bond in a lifetime’ when Bond bought Channel 9 from him. Packer was smart and disciplined enough to do the deal off-market and not go into the open market looking for a better buyer. You may meet your Alan Bond in a discrete ‘off market’ campaign. Good luck to you if you do.
However, you may also find the strong ‘off market’ offer is simply a current market based price. If you accept that bid, you will forever wonder if you could have achieved a higher price by going to the open market.
One of our clients recently received a knock on the door on day 2 of her sales campaign. At the door stood a buyer with a heartfelt note offering to buy the home, for a fair price. On our advice the approach/offer was politely declined. A week later, the home sold for $500,000 more than the previously offered amount.
Conversely, if you owned an apartment in a high rise apartment building, with a predictable and/or falling market value, you may be well advised to consider an ‘off market’ sale, if the price is right. Deciding whether to sell ‘off market’ or not, is all about context.
Early offers/selling prior to auction
A lot of the properties that have sold well above expectations tend to have a common element – they sell fairly early in the campaign. This phenomenon applies to properties scheduled for auction too. In late February, on a given auction day, there were 479 auction results reported, with nearly 40% of those selling prior to the big day.
There could be a range of reasons as to why an individual auction campaign closes before the big day. Broadly speaking though, it is clear agents and vendors are receiving strong offers early in the sales campaign that they know are unlikely to be beaten on auction day.
Many agents are experiencing record numbers of buyers attending open inspections on the first weekend a property hits the market. To send the best of these buyers away and ask them to ‘come back in 4 or 5 weeks to bid at the auction’ is clearly uncommercial and counter intuitive. The market is responding accordingly based on the elevated number of ‘Sold prior to auction’ results coming through each Saturday evening.
Many agents expect to sell their best listings in under 21 days. As a result, some auctioneers are reporting that many agents are not even booking an auctioneer for the campaign. The agents are waiting until the last week of the auction campaign before locking in an auctioneer.
Whilst we are nervous about selling off market in the current market, once the masses have been through the property, we encourage decisiveness if and when the standout buyer emerges. Whilst a vendor will always be nervous about underselling, it is important to note that a buyer’s emotion to a property can subside too. To borrow Kenny Rogers’ lines from his all time classic song The Gambler…
“If you’re gonna play the game, boy
You gotta learn to play it right
You’ve got to know when to hold ‘em
Know when to fold ‘em
Know when to walk away
And know when to run
As you interview agents look for one that clearly knows how to ‘play it right’.
Having the right agent to guide you through the sales campaign is absolutely crucial to knowing when to decline an offer and when to accept the right one.
Avoid spending excessive amounts on advertising. The same buyers are coming to the inspection whether you spend $5,000, $10,000 or $20,000 on the marketing campaign. So why spend more to reach the same prospects? Stock levels are very tight leaving active buyers with less choice. Traditionally, much of the overspend on real estate advertising is the agent using the vendor’s marketing campaign to build the agent’s profile in the market. Sure, pay to effectively advertise your property, don’t pay to promote and build the agent’s branding though.
When negotiating commission rates with a real estate agent, be very careful about incentive schemes in a rising market. On the surface, incentive schemes seem sensible enough. Identify fundamental market price and offer the agent an incentive above that.
Whilst property sellers think of these arrangements as an ‘incentive scheme’ privately agents call them a ‘kicker fee’ or a ‘kicker’.
It’s common for ‘kickers’ (bonus commission) to be 10% to 20% of the amount achieved above the market value (or reserve price). The owner normally pays the agent an agreed base commission rate PLUS the ‘kicker’! The bonus scheme turns into a commission scam.
There can be many variations of kicker fees, but most are unfairly slanted in favour of the real estate agent whenever the percentage rate of the commission escalates well beyond the norm.
As an example – If you have a property that you feel is worth $1 million – an agent may agree to a lower commission rate at $1 million but a higher percentage of everything ‘over $1 million’.
The agent may ask for a commission of 2.2% on $1 million. You suggest 2.2% is on the high side compared to other agent’s quotes. The agent floats the suggestion about a lower commission rate up to $1 million of say 1.5%. And 10% to 20% of everything over $1 million, payable to the agent. This seems fair on the surface, everyone wins together.
The trap for home sellers is the agent knows from the beginning of the campaign the price is highly likely to exceed market value – assuring themselves of an excessive and undeserved commission payment.
The owner takes false comfort in a bonus/kicker fee arrangement protecting their commercial interests, when it simply exposes them to a large commission.
Shorter market cycles
Since the 2008 Global Financial Crisis, the Sydney (and Melbourne) property market has operated in either boom mode or correction mode. Compared with the relative stability of regional markets and capital cities such as Brisbane, the Sydney and Melbourne markets have been somewhat volatile – marked by periods of sharp rises and sharp falls.
Overall, the median dwelling price for Sydney is only slightly higher than the previous highs achieved in 2017. Most agents will attest that there were plenty of cycles within that 4-year window.
Whilst the current market is delivering windfalls to vendors, it is advisable to remember that market conditions are always ‘subject to change’. Often without warning. In 2020 alone, there were two peaks and two troughs within the one year, making it one of the most difficult periods to trade real estate in, for agents, buyers and sellers.
Admittedly, the short-term outlook looks favourable for property. The likely removal of stamp duty in NSW in favour of an Annual Property Tax, the rollout of the COVID vaccine and the cash swirling around the economy all seem to be favouring sellers over buyers.
Let’s leave the final words to Kenny Rogers’ though….
You never count your money
When you’re sittin’ at the table
There’ll be time enough for countin’
When the dealin’s done
Article from Place Real Estate