A Peek Into My Sales Pricing Process Pt.2
Jason Cochard for Land Academy
Last time, I outlined part of my offer pricing methodology and some of the indicators and analysis I do in order to support my per-acre offer price. This time, I’ll discuss some equally weird analysis and methodology for sales pricing. Insofar as sales pricing needs to be supported by sound purchase prices, all sales pricing strategy will impact offer pricing strategy— they’re close to inseparable. We tried to identify overbought markets last time, now we’ll try to identify oversold markets and a reason to care.
At the offer pricing phase, in addition to what I outlined last time, I also separate on-market comps into the categories of Realtor listings and Investor listings. Realtors usually have their brokerage and realtor number listed, etc, so it’s easy to see who they are. And the investors are many times recognizable names that I already know, or at least don’t appear to be realtors. By separating the investor tier and the realtor tier, the offer price can be computed by combining a percentage of Investors and a percentage of Realtors. Someone who I recognize as an investor is probably going to be disciplined about modestly marking up and getting out while leaving some value for their buyer, so a good approximate offer price would be to simply reverse engineer the markup and arrive at their offer price for any given listing.
One advantage of separating realtors out is that you can look at the DOM for the lowest comps (ie, the investor tier), providing an insight into overall trade volume. If a known investor is the lowest, yet has 150+ days on market, maybe it’s not a good choice of county and you’re better off mailing elsewhere. So that’s a factor to look at in the “picking a county” step.
I also scrutinize the low end of the investor range, by noting that possibly the reason the parcel was acquired at such a crazy low price was that the investor solved a title issue for a seller. Maybe the offer letter was initially higher than what we’re retroactively deducing, and the investor used the title help as a bargaining chip to revise the offer downward, enabling a crazy low listing. So, simply assuming 50% of the lowest listing might not be realistic; maybe it’s closer to 50% of the average of the lowest 1/3 of listings, or 60-65% of the lowest listing, or some version of that.
For realtor listings, they’re generally incentive to maximize sale price, so, I usually like to try to get my offer somewhere where I’m offering about what other investors likely offered, while doing 2 things:
1) understanding that my offer will not be evaluated by sellers who are looking at a ton of comps — only we are doing that. Instead, it’s going to be looked at as a percentage of the “market value” of the deals normal people know about, which is going to be in the realtor tier, not the investor tier. The realtor tier is found in the MLS. So, as a sanity check, I don’t want to be content making an offer that seems great to me as an investor because I was smart enough to reverse engineer some investor’s sale price — that offer could seem sound, but might be a single digit percentage of listings in the realtor tier. It’s going to come off as offensive and might contribute to a huge death-threat-to-deal ratio on that mailer. And that’s totally fine, as long as you know what to expect.
2) I’m also trying to find an offer “ceiling” ahead of time, which is a price I won’t exceed if/when a seller gives a counteroffer. That ceiling is going to be either the offer price itself, or a level which would support a sales listing between the investor range and the realtor range and still be handsomely profitable after accounting for transaction costs. You definitely don’t want to be forced to be lost in the middle of the higher realtor pricing range without even factoring in fees and transaction costs, should you be forced to go that route.
To the extent you can assume that most investors’ listings are not on the MLS, and you can list slightly below the low end of the realtor range while accounting for limited commissions and transaction costs, the MLS can work for you and you’ll be at the low end of the deals MLS-centric buyers are aware of. In other words, even though you aren’t priced the lowest on certain land sites, you’ll be the lowest on the MLS, which is good. As I try to see this from a MLS-centric buyer’s perspective, it seems to me that acquiring at price levels that enable listing your property on the MLS while pricing it at the low end of like kind property, you are almost creating a buy trigger for those buyers just like an oversold indicator would, simply because the entire investor tier can be opaque to normal people. And of course, as it relates to counteroffer ceilings, I would never let my offer price force me to list at anything above the lowest MLS listings, because then you really area just losing money to DOM and liquidity risk.
So, I’m starting to notice that the two best places to price sales are 1) the lowest overall, 2) somewhere between the ranges of the investor tier and realtor tier — planning for a cheap, uninsured sale on the low end, and planning for some transaction costs as you approach the realtor tier. My rationale is, I’ve been contacted by realtors from my Zillow/ FSBO listings, threatening not to show their clients my property if I don’t offer a commission. So that gave me the insight that realtors are probably NOT showing their clients any of what I’m seeing in the entire investor tier of listings. If this is true, then it negatively affects DOM for the lower investor tier. Thus, it can be beneficial to work with the establishment, in some cases such as flat fee MLS, or at least plan for that scenario when pricing offers.
So if the offers are at a point where you’re able to offer a flat commission (thus gain all those motivated leads by hungry agents) while still netting a good return after fees, and be able to price the sale lower than all the realtors listings, then I think that’s a really sweet spot to be in. If I’m right, and some agents actively suppress listings that don’t have commissions, then you can let them do all your sales work for you simply by planning for that when pricing offers.
That’s the sales strategy I’m trying to develop in order to cut out much of my sales work. Of course, the cheaper you can get it, the more it will help you with pricing between the investor and realtor pricing tiers. I do see the benefit of wholesaling to other investors at bargain basement sales pricing, but I’m also seeing that it may limit me to only selling to other investors, due to psychological effects in the non-investor buyers, such as, “What’s wrong with it?” questions. It seems counter-intuitive, but it seems that one of the remedies is to raise the pricing of sales listings while working alongside the establishment to get my stuff sold to retail buyers but without all the work.