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When home prices decline, leverage shifts to buyers

Sellers benefit even more to manage net proceeds

When prices are up, and selling conditions are good, fewer home sellers notice the ubiquitous high commissions or lost money due to mispricing. When residential real estate home prices trend down and leverage transitions to buyers, the need to understand these topics becomes even more acute as money becomes more scarce. Most of the time you have little control over when to sell, no matter what the market conditions. But sellers who focus on net proceeds can still get the most out of their situation in a down market.

It's easy for homeowners to get confused when they don't question conventional wisdom. As one example, consider this financial advice from MarketWatch on how to sell a home in a down market. In summary, the first four things the author advises home sellers to do are: 1) disregard the cost of commissions in order to get the "best, most aggressive" agent; 2) pay extra incentive commissions to get better results and; 3) take out ads to promote home listings and; 4) underprice the home, "by as much as you can reasonably bear." Sellers who follow these types of suggestions are guaranteed to needlessly miss out on money they especially can't afford to lose.

In contrast, sellers in a down market should seek to manage commissions and price to maximize their net proceeds. Sellers can get the best possible outcome if they instead: 1) seek out low commission brokers, because higher commissions don't lead to better results nor affect the price; 2) avoid any unnecessary upfront incentive commissions, such as for buyers agents or other inducements; 3) never pay to advertise a listing because the MLS is a monopoly and ads don't reach any new buyers and; 4) always price your home accurately based on data, using the price per square foot (PPSF) method or another structured approach.

Regarding pricing in a down market, still stay far away from those automated home valuation numbers which can't price accurately. If prices are dropping every month by 1%, you may want to adjust your PPSF data accordingly based on the date to better capture the trend. An accurate market price, whether the market is up or down, is generally one where multiple offers are avoided and an offer is secured before the average time on market. Just be sure to always avoid situations where you underprice your home, creating a rush of buyers along with multiple offers, as that is a surefire way to lose the most money from a bad pricing strategy.

Finally, keep in mind that a few key metrics change when home prices start to fall. The number of homes for sale typically will increase as fewer homes achieve their listing price, which creates rising inventory levels. More inventory gives buyers more options to choose from, leverage in negotiations, and of course time to consider their options and wait for more price drops. For sellers, rising inventory means more competition, and this increases the average time on market as well. In any set of market conditions, prospective sellers should know exactly what the average time on market is for their area in the MLS and if the average number of days has elapsed, it’s often time to start considering the size of the upcoming price drop.

Put together a strategy for selling in a down market

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