Is the First Offer the Best?

This post was originally motivated by this video by the Freakonomics guys (courtesy of Jack Lindberg on LinkedIn).

The basic claim on the video is that the interests of the seller and Realtor are not well-aligned.  If you’re selling, the Realtor will try to get you to take the first offer, even if it’s a little low when you may be better off waiting for a higher offer.  If an offer for $10K more were to come in a week later, you would get $10K more but, after all the splits, the Realtor would get a pittance.

The “evidence” for this is that, when Realtors sell their own homes, average market time is 10 days higher than when selling a client’s.  They also claim that when Realtors sell their own homes “they get more money than when they sell the same home for a client”.   (Don’t understand what evidence could possibly support this statement.  To get an apples-to-apples comparison, the Realtor and client would have to try to sell the same home at the same time.  Freaky.)

I can’t think of a direct way to test their theory directly.  But if it’s true, you would expect the sales / list price ratio to go up with market time, at least for a while.  That is, sales with very short market times, where the sellers presumably leapt at the first offer, would not do as well as sellers who waited for a better one (all other things being equal).

We all understand that there are many important factors that are not accounted for here.  For example, was the house priced reasonably to begin with?

Leaving those aside for now, what do the numbers tell us about the relationship between market time and sales / list ratio?  The chart below is based on around 6,000 sales in Fairfield County, CT in the past 12 months.

The scattered dots represent the sales / list ratio for the given number of days on market.  For example,  properties with a market time of 100 days, had a sales / list ratio of 94%.

The thin black line curving from the lower left to upper right is the cumulative % Sold.  So, for example, just under 60% of the sales took place within 100 days of listing.

(Note: The sales/list ratio is a 7-day moving average.)

As you can see, the sales/list ratio drops from the 99% vicinity to around 94% in the first 80 days. From there it decreases more slowly, getting to the 92% area after 300 days (when 90%+ of properties have sold).  That is, longer market time, lower sales/list ratio.  At least in the type of market we’ve been in for the past year.

You might argue that things would be different in an up market.  If you look at the chart below from better times in 2004, there’s a difference in degree, not in kind.  The curves basically shift up and to the left, meaning that sales/list stays a couple of points higher (dropping from above 101% to 97% in the first 70 days, then down to 96% after 180 days (when 90% have been sold).  And you get to 90% sold in about 170 days as opposed to 260.

In 2008 and 2009, when the market was going down quickly, the same patterns are there.

Anecdotal evidence would suggest that lots of people list their houses a little above the market.  I think most of us have been through this discussion.  We’ll go in a little high and maybe someone is out there who will fall in love with the place and pay the price.  If this someone doesn’t come along, we’ll drop the price.  After 90 days, you’ve dropped 5-6%, which is probably what you think it really should sell for, so you hold there if it’s still on the market.

There’s also what I would call the “new listing splash factor”.  That is, when a listing is new, lots of people see it at once.  After that, it’s just a trickle.  So when the property is first listed, you’re hitting the most people in the shortest amount of time.

If I were trying to explain all this to a seller, I think I would say that if you want to sell in the 60 to 90 day timeframe for 95% of asking price or better, you should price realistically to begin with.  If you want to go in a little high, fine, but be prepared to cut quickly.  If you hold out, you’re going to be on the market longer and likely have to drop the price anyway.  Even in a “good” market.

Data is from the Fairfield County Consolidated Multiple Listing Service, used with the permission of New Era Realty, Danbury, CT, a licensed broker in CT and CMLS member.

More information at www.RealtyMarketUpdate.com (or www.RltyMktUpd.com)

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