Hourglass Pricing in a Tough Property Market: A Market Perspective

Are seller pricing themselves out of the market? And if so what is the figurative magic bullet to settling the perfect for perfect price for that specific home, at that specific time?

You do not need to be an active professional estate agent to know that property prices in South Africa, are as a whole, under tremendous pressure. The aim of this post is not to be negative, but rather to be realistic.

It does not take a lot of research to determine that the residential property market is facing serious challenges. In a recent segment done by Carte Blanche (Home Sales Conundrum) highlights the reality facing sellers, in the present market. The position in my home market of Port Elizabeth, South Africa, is no different.

I must state that due to the nature and extent of the challenges we face in South Africa, most housing segments are under pressure from various factors, depending on the market segment.

We have all heard industry leaders state that a drop in the Repo rate will reawaken demand for property by making it easier to afford a bond. I take the position that due to the increasing cost of living any such gains are largely negated by the rising costs of living, which more than offset any modest drops in repo rate.

The owner of a residential property, in South Africa who is thinking of selling may have some points to consider.

The property market, even in a stable economy, is cyclic. It is also heavily impacted by the national economy.

A seller would have bought at a high, say in 2008 and not quite recovered the loss in value. The owner may have overcapitalized, or bought in a high-end suburb. I realize that some readers may question the last item.

Let me explain. Upmarket suburbs have always traditionally, held value, which is true, under normal circumstances. However when the economy is under pressure, political uncertainty abounds, and there is a dramatic increase in emigration; it is the upmarket properties sector that comes off worst. To make matters worse, the number of buyers who are willing and more importantly, able to purchase, have in my experience reduced.

It needs to be considered that sellers are human beings. It is natural that they would be proud of their home. The family home, for many also represents a sizeable capital asset for the seller.

It must also be remembered that it’s also a very emotional issue. A seller may need to settle a sizeable bond, the seller may even harbour ambitions of moving to the Western Cape (where house prices are crazy, although sanity is returning), or possibly considering financial emigration or even a physical move overseas. The weakness of the Rand further puts pressure on sellers to try to achieve the highest sale price possible.

The seller may have spent a lot on upgrades and renovations, which did not translate to a commensurate increase in the market value of the home.

It has also been noted that economists who consider residential property, have observed that residential house values have been slightly negative, in real terms.

Buyers

The buyers in the market have also evolved. They are now better informed, have more resources available to them, and given that there is so much stock on the market, they look around and in many cases have a very good idea of what their money can buy for them.

Buyers are greatly assisted by portals which state how long a property has been on the market or if multiple agencies have listed the property.

Unlike the seller, the buyer is not limited to one property, they consider multiple properties and sometimes a buyer may even consider properties in different suburbs.

Estate Agents

A discussion of pricing would not be complete without considering the effect of the estate agent. A tough market will always be fertile ground for dodgy estimations of value (often referred to as valuations).

But then why do it, when doing so would spell certain death for any possibility of a successful sale?

Overvaluing 

There are estate agencies and estate agents that overvalue properties when doing valuations, to get the listing. They use the allure of a higher valuation, to convince the seller to make use of their services. This could be a company strategy or it could also be a predatory tactic or maybe just the result of sheer incompetence or sheer desperation. Sadly, irrespective the cause, overvaluation naturally leads to overpricing which, in a tough market, poisons the well for everyone.

Buyers very quickly see that its overpriced and although the seller may have viewings, there are never be any written offers.

Ironically, the estate agent who got the mandate to sell because of the inflated valuation, suffers, as effort and resources are expended fruitlessly, while the seller becomes increasingly frustrated.

The property eventually becomes stale and interest wanes rapidly. The sellers eventually adjust their price but the drops are too little too late and the home becomes even less sought after.

Eventually, a seller may through desperation fuel by frustration, make things worse by retaining multiple estate agents to market the home, which just further reinforces the market’s perception that the seller is desperate, while now exposing the seller to multiple commission claims.

Undervaluing

Then on the other end of the spectrum of the owners, agents, and others that for various reasons underprice their property. Here the problem is more insidious. The reason being the owner sells and sometimes quickly.

The informed buyers know it’s cheap and are quick to snap it up. Unfortunately, although many of these sellers may have hoped to save money, this may be more perception than anything else. As an agent, if I represent a buyer, the first place to look for bargains remains private sales or where there are factors that indicate that the seller might be under pressure e.g. multiple agent boards, etc.

Interestingly, many buyers when making offers on homes sold by owners seem to deduct 5% from what they would have offered because there is no agent. Sadly, if the seller had had a good agent, they would have ensured that the seller is protected and that the seller’s interests are protected.

But if things are tough on both ends, what is the solution?

Hourglass Pricing – Just above the middle

In a tough market, the owner needs to realize that no matter how desperate you are you need to get the pricing as close as possible to what the market sees as its value. Using the analogy of the hourglass, if the two bulbs are the two opposite extremes, the perfect listing price is just a bit above the middle (which is the real market value).

If you take that valuation and increase it very slightly, the right buyers for that home will be attracted and because they are better informed will know that it is fair value. Its that simple – and also that complex.

Who makes that call?

  • A few days searching properties on P24 or Private Property is not enough to truly know the market. After all, nothing is as dangerous as a little knowledge.
  • You need an expert who understands trends in the economy, the country, the city, the neighborhood, and yes, even the street.
  • You need to be objective which is sadly impossible when it’s your home.
  • You need someone who can structure a unique marketing plan for your property and execute it while guiding you through the technical process of selling a home.
  • You will need a multidisciplinary team to assist in the marketing and oversight and legal advice from your independent legal advisors.
  • The list goes on.

But ultimately, you will need a professional estate agent to market your home. Getting the most out of the transaction in my view is finding someone that can determine that perfect price that puts your property (and all its complications such as servitudes, noisy neigbour, etc) into that sweet spot, just above the ideal selling price, which is the point in the middle of the hourglass.

The result is: you achieve the best selling price for your home, at that point in the market.

Clinton Begley is a fulltime professional real estate associate with Open Realty in Port Elizabeth, South Africa. He has an impressive sales record and providing frank advice, based on in-depth research. He has been an active estate agent for 17 years and in addition to writing the old board exam (CEA), he also holds the Professional Practitioner: Real Estate & Master Practitioner: Real Estate professional designations. Clinton is also an admitted attorney (1999), notary (2001), and conveyancer (2002); although he no longer practices law since 2014 and is now on the non-practicing roll. 

 

 

 

 

 

 

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