How ‘Free Market Appraisals’ Can Cost You Dearly.
Maybe you are thinking about stepping up to a bigger home for your family, stepping down to something smaller, need to reduce debt, are going through the emotional rollercoaster of a separation, or you’re just over your current home and it’s time for a change. For this conversation, your personal reasons for considering selling don’t really matter. However lets go with ‘stepping up to a bigger home’.
You’ve been quietly looking at other properties online that have an extra living area for your teenagers, and probably even gone along to the odd open home. It seems that the kind of properties you’re after are around the $420,000 – $430,000 mark. The one you viewed over the weekend was perfect, you loved it and can see your family living there. They are asking $435,000 but it’s been on the market for a while and the agent said the sellers were keen to move on…
“We may get it for less. Hmmmm, I wonder if we can we make this work?”
Before you can go further, the first question you need to answer is… What is your property likely to sell for in todays market?
You can then figure out how much ‘equity’ you have. How much you are likely to end up with in your hand after paying all expenses – selling fees, legal fees, repaying mortgage etc. Combine that with how much you can comfortably borrow, and you can start to work out if your goal of a bigger home is realistically achievable.
While you’ve been looking, you’ve also kept an eye on what other properties similar to yours are asking on the market. You see the neighbours property across the road for sale and naturally think…
“If they are asking $310,000 then ours must be worth at least $320,000. We’re on the better side of the street and we’ve got the awesome bar-b-q area we built out back.”
At this point, based on your own research, you believe your property is worth around $320,000.
Key Understanding #1: The Endowment Effect
There is a phenomena called the ‘Endowment Effect’.… as humans, because we are emotionally attached, we naturally place an unrealistically high value on our personal possessions.
Your 8yr old daughters artwork, proudly hanging on the fridge, is priceless to you. Why? Because you are emotionally attached to it. Yet it’s worth nothing to anybody else.
Your family home is the perfect storm for the endowment effect. “My home is better than the neighbours”. Of course it is, you have memories, have laughed, cried, worked on, brought up your children in your home. It’s special to you.
The net result of the ‘endowment effect’ is that most people believe their property is worth more than it actually is. This is perfectly natural and it’s OK – just be aware of it, because it can lead you into trouble.
So you’re thinking your home is worth $320,000. Your current mortgage is down to $105,000 and you guess selling costs will be around $15,000. So thats $200,000 left in your hand. It would be stretching you, but you think you could manage with a mortgage of $220,000, meaning you could pay $420,000 for your next property.
“Honey I think we can make this work. But we better check our figures before jumping in. Lets talk to the bank tomorrow, and get some advice on how much we are likely to sell for”…
For this, you traditionally have two options…
1. Independent registered valuation.
This is paying for the unbiased opinion of a trained professional, that will put their emotions aside and logically analyse the “value” of your property.
However, a registered valuation is likely to cost you approximately $500 – $650 (In our local market at time of writing). So many of you think…
“Why spend $600 at this stage when we can can get a …”
2. Free Market Appraisal
This makes perfect sense. A real estate agent can give you the big picture. They can show you what the neighbours property actually sold for, and at the same time should know how your home compares to others currently on the market.
Also, they are working with real buyers looking in the market right now. So you assume they have their finger right on the pulse.
Plus, the big cherry on top, it’s FREE. If you decide not to go on the market, it wont cost you anything. After all, you constantly get flyers in your letter box and see agents advertising ‘Free Market Appraisals’ in the local newspaper. Why not take advantage of it? What have you got to loose?
“And Honey, we better get quotes from 2 or 3 different agents. Then we can compare their prices”…
Key Understanding #2: The Quote Trap
You have just set yourself up for one of the biggest traps in real estate. What Neil Jenman (consumer advocate and author of “Real Estate Mistakes” & “Don’t Sign Anything” – both highly recommended reading) calls the ‘Quote Trap’.
Right here is where, what’s best for you and what’s best for the agent, head in totally different directions.
You notice that once the agents arrive, to supposedly appraise your property, the conversation quickly turns to your personal plans. They start asking you personal questions that have nothing to do with the current value of your property. “Are you selling? Where are you going? How much are you hoping to get? Are you getting quotes from other agents?” etc.
“Why are they asking me all these personal questions? Shouldn’t they be taking more notice of and asking questions about my property? I just want to know what they think it’s worth”
Key understanding #3: A ‘Free Market Appraisal’ is in fact a ‘Sales Pitch’
Traditional real estate agents are “salespeople” not valuers.
Their income is commission based. Their focus is getting properties for sale because without a ‘Listing’ they can’t survive. Their real ‘sales job’ is finding and persuading home owners (like you) to put your property on the market.
(For more on this read … ‘The Sales Job in Real Estate is not what you think’).
Offering FREE Market Appraisals is simply a ploy to get in your door, to give themselves an opportunity, to sell you on listing with them.
The ‘Free Market Appraisal’ is the start of a real estate salespersons ‘Sales Funnel’. YOU (as a potential seller) are the first ‘sales target’ for real estate agents.
So when you call a typical agent and ask for a ‘Free Market Appraisal’ – you think you are getting a free and useful service that will help you budget your next move, but you are actually inviting a ‘salesperson’ into your home to give you a ‘sales pitch’.
Technically, this is called “Bait & Switch”. The bait being the “Free Market Appraisal” and switch being the real reason they are there – to win your listing.
Moving on with your story…
“Who shall we call in for an appraisal honey?… Lets get in the agent dealing with the property we are interested in buying, and call the one that put a flyer in our letter box last week. Also, Jill from playgroup has just got into real estate, she seems nice, I’d like to give her a chance too.”
Key understanding #4: Are they qualified?
What you really want and need is genuine advice about the current value of your home – so you can make sound decisions for your families future. Yet look at how you just selected which who you invited to ‘advise’ you. You seem to think that all agents are the same. That anyone will do. You give little thought as to their credentials, qualifications or experience. You don’t even ask yourself if they actually know what they they are doing. For instance, what is their ‘Market Appraisal Accuracy Rate’? What price did their last 20 clients actually achieve compared to their up front appraisal range? In other words, can you rely on their advice in the first place?
It may surprise you to learn that most salespeople have had very little (if any) formal training on valuation principles. Most of their training is “sales” based… How to overcome objections, sales scripts and closes to get your listing etc. The skill set needed to accurately value your property is totally different to the skills needed to persuade you to list with them. The first requires analytical skills, deep knowledge of what affects value, and experience interpreting the local market dynamics. The second is mostly about being liked, about getting you to feel good about them.
Key Understanding #5: Conflict of Interest
Even if the salesperson does know what they are doing and has the skills to accurately value your property. Even if they do put in the necessary research and effort to ensure their appraisal is accurate… you still cannot rely on their advice. Simply because they have an underlying conflict of interest.
Unlike a valuer, the real estate agent will only get rewarded for their work and advice … IF you choose to sell your property with them.
So while a Valuer can get on with the job of accurately valuing your property, for the salesperson it’s a different kettle of fish.
Salespeople learn quickly that you more than likely have the ‘endowment effect’ and if they tell you the truth about the likely value of your home, they greatly decrease their chances of getting your listing onto the market. They learn that people often ‘shoot the messenger’, and instead list with those who are telling them what they want to hear.
Lets say you call in three agents to give you a “quote”. Your home is really worth $300,000 but because of the endowment effect you are hoping for $320,000. Agent A does their homework well and tells you the truth. Agent B and C seem more enthusiastic, and tell you what you want to hear… “I’ve got buyers that I think will pay you $320,000”. Who do you want to believe? The higher ones of course. And, because deep down you don’t trust real estate agents, you probably think agent A (who told you the truth) was just talking low to try and get a quick easy commission.
Therefore, by asking a traditional salesperson for a free market appraisal, you are putting them in a difficult position. On one hand, if they really cared for your financial well being, they would encourage you to budget conservatively. Any budget advisor worth their salt, will advise you that most people make the mistake of overestimating their potential income and underestimating their expenses. They end up a lot worse off financially than they planed. The smart thing to do is be conservative on your projected income and overestimate your likely costs – that way you should be financially safe. So if your property is really worth $300,000, it’s actually in your best interests to budget on getting $300,000 or even slightly less.
Yet the salesperson has a dilemma – give you the right advice and risk not getting the chance to sell your property (which means they cant get a commission and cant feed their family)? Or tell you what you want to hear?… For a second put yourself in their shoes… What would you do if you were in their position? Who would take the higher priority – the wellbeing of your clients or your family?
Please be clear about this. I’m not saying that traditional agents are bad people. Most of them genuinely care about their clients. What I’m saying is, the traditional real estate commission-only ‘Model’ (way of doing business) puts them in a position where it is very difficult for them to truly advise in your best interests.
Lets get back to your situation …. You’ve had the three appraisals back and are now positive you can get $320,000. After all, two of the three agents confirmed your thinking. This will leave you $200,000 in your hand. You know you can stretch to a mortgage of $220,000 so you confidently go and put an offer on the new property for $420,000.
You go ahead and put your property on the market. If you are like most people you load your price a bit to give you room for negotiating, so you set an asking price for yours of say $330,000… How exciting, you are getting close to being in your new home. Or so you think.
The initial market reaction is disappointing. All those hot buyers the agent talked about aren’t turning up and there is little interest in your property. You notice the previously enthusiastic salesperson has changed their tune… “the market is indicating your price is too high” and the pressure starts to come on for you to reduce your price in order to sell or miss out on your dream home. Reality sets in. The best offer on the table is $305,000.
To go ahead with your purchase, you now have to borrow $15,000 more than you planned, which may put you in a strained financial position.
Or maybe you simply can’t afford to go ahead, so pull out of the contract to purchase the new home and withdraw your property from the market. In this case you have just wasted your own and other peoples time and money (this adds to… ‘Why Traditional Real Estate Commissions Need to be So High’).
On top of all that, you have also gone through emotional stress as your plans crumble around you.
This is how ‘FREE Market Appraisals’ can cost you dearly.
But it doesn’t have to be this way.
Key understanding #6: Don’t muddy the waters
There are two separate and fundamentally different issues / decisions to be made.
The first is:
“How much is my property most likely to sell for?”
Here you need reliable and unbiased advise so you can safely budget. You want those advising you to not only know what they are doing when it comes to valuing, but also be completely straight up and honest with you.
Then, and only then, can you decide if you should be trying to sell in the first place. If the answer is yes then move on to…
“What is the best way to approach the selling process, so that we maximise our profit?”
This is about ‘strategy’ (your approach to the market), ‘presentation’, ‘marketing’, ‘negotiation skills’, creating multiple offers, extracting a premium from the market if possible, and of course minimising your selling costs. This requires totally different skills, knowledge and experience to ‘Valuing’.
By getting a ‘Free Market Appraisal’ from a traditional real estate salesperson, you are mixing them together and muddying the waters.
So please, for your own sake, keep them separate.
When it comes to figuring out how much your property is worth – either get an ‘Independent Registered Valuation’ or an ‘Unbiased Market Appraisal’.
An ‘Unbiased Market Appraisal’ is where you find an experienced agent, that has an excellent ‘Appraisal Accuracy Rate’ and engage them, like you would a valuer, to give you unbiased advice. This means instead of only paying them if you choose to sell with them (like a Free Market Appraisal), offer to pay them a fair fee (for their time, experience and expertise) to give you the right advice. This way, there is no sales pitch involved. There is no longer a conflict of interest. The agent can give you the same advice they would their Grandmother, without fear of missing your listing. Should you decide, based on their advice, it is not in your best interest to sell, then the agent is still rewarded for helping you make the correct decision for you. Yours and the agents best interests are aligned. The waters are not muddied.
Then, if you decide to sell, interview several real estate agents for the job of putting your property to market and maximising your profit from the sale. You are not asking them “How much can you sell my house for?” (you already know what it’s worth). You are asking them how they will go about maximising your profit? What strategies they advise to extract a premium price from the market if available? And how they will charge you for that service… Totally different discussion.
Restate Ltd – Changing Real Estate
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