Although it seems absurd to pay a 5% commission to sell a property in the internet age, a great real estate agent with good connections may be worth it.
Let’s say the best price you thought you could have gotten for your property was $1 million. But your real estate agent was able to work her connections and get you an out of town buyer for $1.1 million.
Paying $55,000 in commissions still leaves you with $45,000 above what you thought you could get. In this case, you probably are happy with your real estate agent even if the market was mostly responsible for dictating price.
But there are situations where a real estate agent will not only charge you a 5% – 6% commission but also unsuccessfully market your property to the point where it sells for below fair market value.
During my hunt for ocean view homes in Golden Gate Heights, I stumbled across one example. It’s a case study of what not to do as a seller and as a real estate agent. It’s also a case study for buyers to take advantage.
A Real Estate Transaction Gone Bad
Let’s take a look at 25 Lomita Avenue in San Francisco, officially a two bedroom, one bathroom house with 1,529 square feet.
It has amazing views of the ocean with an oversized 5,998 square foot lot (2,500 sqft lot is standard in SF). The house also has about 400 square feet of unwarranted living space with another unwarranted full bathroom downstairs.
The negatives of the house are that the owner removed the garage to create about half of the unwarranted living space. The black garage door in the picture is actually just a wall. The home also sat on a bend which may be uncomfortable for some families due to a blind spot when cars drive by. Finally, there is some normal wear and tear.
Overall, 25 Lomita Avenue is a nice house in Golden Gate Heights. With $150,000 – $250,000 of work, it’ll be really lovely.
Now that I’ve described the house to you, what do you think was the initial list price? To improve your real estate acumen, you should always do a walkthrough without knowing the price. The closer your estimate to the asking or final selling price, the sharper you will be when it’s time to buy or sell.
I’ll give you a hint about the price. Homes in Golden Gate Heights with panoramic ocean views sell for $850 – $1,050 / sqft on average for good to completely remodeled homes.
Based on its average condition and official square footage of 1,529, this home should be listed for $1,300,000 – $1,605,000. The average would, therefore, be about $1,450,000.
But what about the unwarranted 400 sqft downstairs you ask? Let’s be generous and add 400 sqft to 1,529 sqft to equal 1,929 sqft, even though the unwarranted space is slightly below grade.
At 1,929 sqft, 25 Lomita should be listed for $1,639,000 – $2,025,000 based on $850 – $1,050 price/sqft. The average price would, therefore, be about $1,832,000.
Now let’s take it a step further and average the averages given nobody pays full price for unwarranted space that is not listed on the 3-R report. This is important because when you turn around and sell a property, you will face the same issue of not being able to count unwarranted space as official square footage.
The average of $1,450,000 and $1,832,000 equals $1,641,000. Pricing the property at $1.6XX would have been the logical move.
The real estate culture in San Francisco is such that the final price is usually higher than the list price due to tremendous demand. It is very hard to underprice a home because the market tends to bid the price up to market value.
The worst thing you can do when selling a property is to overprice the property and let it sit. When a property becomes “stalefish,” people start thinking the worst about the property and go away. You’ve got to price a property at or slightly below market and sell within 30 days.
The Initial Listing Price
The agent and the seller decided to get greedy and list the price for an unreasonable $1,975,000. See the price history of 25 Lomita below.
$1,975,000 was a huge mistake because it signaled to buyers that the seller wanted $2 million or more. $2 million or more for a house with no garage and only 1,529 of official living space is out of line for the neighborhood. Maybe in 5-10 years, but not now.
At $1,975,000 the official price/sqft online was $1,291, on par with the most expensive neighborhoods in San Francisco.
Once the sellers realized nobody would pay $1,975,000 or higher, they cut the price aggressively by $225,000 a month later to $1,750,000.
During this time period, a house a couple of doors down at 65 Lomita Avenue came onto the market. However, the 25 Lomita agent and seller already knew this house listing was coming because it had a “Coming Soon” sign staked on the property before 25 Lomita was listed. See picture.
This is where a good selling agent is really worth his or her weight in gold. 65 Lomita is a smaller lot, with lesser views, no deck, half as much unwarranted space, and only one full bathroom in the entire house. The official square footage is slightly larger at 1,590.
But what it did have is a garage, an official third bedroom, and an agent who priced the home appropriately at $1,699,000.
The pricing really was key.
While 25 Lomita was busy lowering its price over a two month period, 65 Lomita listed and sold within 30 days with a final selling price of $1,750,000! What a much better experience for the 65 Lomita seller.
25 Lomita ultimately sold for $1,700,000, or 14% below its original list price of $1,975,000 after spending 3.5 months on the market. But what’s really sad is that 25 Lomita sold for $50,000 less than 65 Lomita, even though it had a bigger lot with better views, a second bathroom, and more overall space.
I strongly believe that if 25 Lomita had been priced at $1.6XX as I calculated above, 25 Lomita would have sold for between $1.8 – $1.85 million, or $100,000 – $150,000 higher than it did.
Lessons Learned From This Debacle
1) Pricing is extremely important. Do not get too greedy with your asking price. It’s better to price slightly below market to draw people in and create a bidding war rather than price too high and have the property sit.
2) Do not blame the homeowner. I spoke to the listing agent at 25 Lomita after the first big price drop to ask what was going on. She said she wanted to list the house closer to $1.79 million but her sellers insisted at $1.975 million. She is supposed to be the real estate expert, not the sellers. She needs to take ownership of the pricing.
3) Do not bad mouth other listings. I asked the listing agent about a couple other comparable listings in GGH and she said one was, “a piece of shit.” I was completely turned off by her response because that piece of shit was a diamond in the rough in my opinion. The property she bad mouthed was already in contract unbeknownst to her! The listing agent was unprofessional and bitter, which probably showed up in conversations with other potential buyers.
4) A little sprucing up can go a long way. Most new buyers lack imagination and are extremely picky, which is why staging is big business. New buyers may also be feeling financially stretched or unsure. As a result, they want everything to be perfect. For example, even though it might only cost $3,500 to refinish the floors, new prospective buyers might assign a $20,000 value to the refinished floors that smell new because they have no idea. The same thing goes for appliances and newly painted walls.
Experienced buyers, on the other hand, want to see a “piece of shit” like the 25 Lomita listing agent said because they can see the potential. They realize that it doesn’t cost too much to paint and switch out appliances.
5) Act decisively. The listing agent took too long to lower the price for San Francisco’s standards. She waited 30 days to lower the price from $1,975,000 down to $1,750,000. Then she waited another 30 days to lower her price down to $1,725,000. Instead, she should have initially slashed her price down after the second or third week if she really was listening to feedback.
The seller might have truly been stubborn and had strong-armed the listing agent into keeping the asking price high. Just be aware of what might happen if you think you’re the expert instead of your real estate agent. Listen to your agent. That’s what she or he is there for.
If you’re the listing agent, you’re doing your seller a disservice by being a “yes sir, yes ma’am.” You will not only hurt your seller’s chance of getting the highest price possible, but you will also hurt your reputation and future business if your listing doesn’t sell at a price within the standard period of time.
25 Lomita would have sold for 6% – 8% more than it did if it was prepared and priced properly. Now imagine how pissed you’d be if you also had to pay $85,000 for commissions.
Sellers and real estate agents need to do the math and run through multiple scenarios if they want to get the best price possible. Otherwise, you might as well flush money down an unwarranted toilet.