The Real Estate Litmus Test – “OLP / SP”

By
Real Estate Sales Representative with Coldwell Banker Residential Brokerage

"My Home Won't Sell Because the Economy is Bad Right Now!!!"

Anyone in the real estate market who has recently spoken with a seller has probably heard those words. Some Realtors may even agree with their seller because more then likely the agent doesn't know any better. I am not one of those Realtors. In fact, when I hear, "the sky is falling", I cannot help but laugh. 

Now before you write me off as an unsympathetic Realtor who will always praise the market, take a step back and listen to reality.

I work in the Summit, NJ market. Summit, like the rest of the country, has been going through a period of depreciation. Why this is so shocking to people still puzzles me because real estate is cyclical. It goes up, it comes down, and one day it will rise again. To expect anything different is insanity because homes are driven by the same theory of supply and demand that you would listen to in Economics 101.

So if Summit, NJ is going through the same downward trend as the rest of the country, why won't I agree that homes will not sell because of the economy? The economy is bad, is it not? Good questions I suppose, yet the answers are not as complex as you may have hoped. Look at the facts and not what the media, your co-workers, and the used car salesman are saying.

 

 

This means you need to study your local real estate market. When I pull up the Summit market and search for every sold home in 2008, I find an amazing statistic that you would not see if the economy was so bad that homes were not selling. 

This amazing statistic is simply an original list (OLP) to sale price (SP) ratio over 100 percent.

Doesn't sound too amazing? Let us take a look at how important this statistic actually is.   

Anyone who knows anything about real estate could tell you that a buyer would not pay over the asking price unless another buyer was competing for the same home. Since we also know that a buyer would never make an offer unless they perceived value, we can actually draw interesting conclusions. 

  1. Listings that sell over the asking price prove that demand is still a constant in today's market.
  2. To take advantage of this demand a home must prove valuable.
  3. Value is defined by price and condition. Mostly price!!!  

Let's call this formula of OLP/SP the litmus test for whether a market is "good". In fact, before you condemn your local market I want you to do you and your sellers a favor.

Pull up every sold home in any given town for 2008. List each of these properties in descending order by original list to sale price ratio. By the way, I use original list to sale price ratio because this clearly proves the fact that pricing it right from the start will end most lucratively. Using the list price is a flawed system.

Ok, now that you have this list of sold homes, you should separate all of those homes which sold above 100%, those homes which sold between 90-99% and every home which sold 89% and lower. This will give you three groups. Find the average for every statistic in each of these groups and compare the stats. If this doesn't restore your faith in real estate and the market, I don't know what will.

Below is a copy of what this chart would look like for the town of Summit. In today's market, 31% of Summit homes sold over their original asking price. Yes, that is a fact!

 

 

 

Summit Solds 2008 - Oct 21,2008.pdf

I've been around long enough to know that skepticism will occur. Indeed, I've heard many sellers try to claim that the reason these homes are selling quickly and for over the asking price is because they were priced at ridiculous values to begin with. "Of course they will sell fast and over the asking price, anyone can sell for a fire sale".

Well wait just a second Mr. Skeptical Seller; take a look at the average final sale's price for the each of the three groups. Do you think that it might be more then coincidence that the group of sellers who priced their homes correctly averaged over $300,000 more then every other group?

I don't know about what the media is saying or what your stock broker claims, but as a Realtor I let the market tell me what the answer is. The market doesn't have an opinion. The market doesn't think. The market just acts and with each change of the market we can interpret what needs to be done to successfully yield a seller top dollar for their home. This is what we, as Realtors, are being paid to do. 

Imagine if a doctor walked into room where the patient was claiming to have a broken arm and said, "You know what, broken arms are on the rise this year, we can skip the x-ray because I believe you that your arm is broken. Let's cast that arm and send you away to wait until it heals." You would probably think he is the most incompetent doctor of all time.

The reality of the situation is that many Realtors make much more money then doctors and yet it is common place for Realtors to cave in to sellers on price because they don't want to argue in fear of losing the listing. The market is our x-ray and misdiagnosing a seller's home can be as costly as misdiagnosing a patient's arm.

Read the market because you might be surprised how positive the trends could be. It will also make it difficult for a seller to blame the market when 1/3 of the market sold over the asking price. What this approach really does is shift blame from the market to the true problem, the price is too high.

Sincerely,

Michael Pennisi
Burgdorff ERA
Real Estate Sales Associate
Cell (908) 656-3858
 
2007 Burgdorff ERA Rising Star Award Recipient
 
For all of your real estate needs please visit:
 
www.MichaelPennisi.com

 

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Rainer
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James Miner
Law Office of James Miner LLC - Westfield, NJ

You are right, Michael.  In a challenging market like this a seller needs to get ahead of the market price-wise, not chase it down.    Jim

Oct 23, 2008 09:02 PM #1
Rainer
404,761
Brian L. Sirota, Esq.
Bristar Realty (Realtor/Attorney) - Orange, CA
For Solutions: (714) 501-7660

Michael, you wrote this in 2008.  I don't know if you're still on Activerain, but I wonder what you'd say about your own blog four years later.

May 18, 2012 08:22 PM #2
Rainer
146,868
Laura T. Perry
Re/Max Associates of Lancaster - Lancaster, PA
CRP, GMS, Award Winning Relocation Specialist

Pricing is huge ! Pls. view our RELO message -  http://actvra.in/4jHG

Jul 29, 2014 05:34 AM #3
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Michael Pennisi

Summit, NJ Broker Associate
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