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Why time kills a good real estate deal

(Larry Downing/REUTERS)
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David Howell, executive vice president and chief information officer at McEnearney Associates, writes an occasional column on the Washington area real estate market.

We know from experience that most of the time homes that get offers quickly sell much closer to their original list price than those that take longer to sell. Why is that? It is because time kills.

With the nature of the Internet, buyers know the moment a property comes on the market. In the old days, if a potential buyer was interested, they might arrange a showing to go see the property. Today, that showing is online and immediate. Based on its price, condition and location, a home communicates value to that consumer — and if it doesn’t, they move on and look elsewhere. Bringing them back to that property means changing the value equation — which usually means changing the price.

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Think of it this way: When a home first comes on the market, everyone who is looking for a particular type of home in certain price range and location sees it right away online. If it does not sell, those potential buyers have moved on, and as time goes by, only buyers new to the market are discovering the home. By definition, that is a smaller group than all the buyers who were looking when the house first came on the market.

The charts show the web traffic for two of our listings that recently went under contract. To make sure the comparison is fair, these are homes that are in the same neighborhood inside the Beltway, listed by the same agent and at very similar list prices.

The first property was listed in September of last year. Web views are always highest when a home first comes on the market, and as expected, traffic spiked quickly in the first week and then began a steady decline. A price reduction in late October increased web traffic, but not to the levels seen when the house was first on the market. An early December price reduction had almost no impact on traffic, and it wasn’t until a substantial price drop in early January that traffic spiked again. The property finally went under contract three weeks later. Total time on the market was more than 150 days and the total price reduction was 14 percent before someone felt compelled to make an offer. Also, the offer was 3 percent less than the new list price.

The second chart shows the benefits of coming on the market at the correct initial price. Just like the first example, traffic spiked and then started to taper off. The difference is that buyers perceived value at the initial list price, and in a week, a contract was successfully negotiated. The sellers came on at a compelling price, rode the online traffic wave and got their home sold at almost full list price.

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I’m not suggesting that it works this way every time because there are always exceptions. We see this most often for very expensive homes. Because the pool of potential buyers looking to buy, for example, a $3 million home at any given time is very small, a home can be priced correctly based on comparable properties and market conditions and still not sell quickly.

But time after time, listing after listing, in good markets and bad, we see the consequences of pricing strategy. Time on the market and price are inextricably linked. Far more often than not, the wrong initial price means a longer time on the market, and time kills.