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Early this year, with the housing market in its deepest ditch in a decade, Linda and Mark Paternostro decided to sell their Glencoe home of four years and move to another town. They put the five-bedroom house on the market at $1.149 million—$101,000 less than the $1.25 million they had paid for it in 2007.
Stung by the idea of losing money, Mark had advocated starting out above the 2007 purchase price, just to see what might happen. But having watched other houses in the neighborhood linger on the market for a year or more because their asking prices reflected rosier (and long gone) economic times, Linda wouldn’t have it. “Prices had been plummeting, and I’m a financial realist,” she says. “The reality is the reality.”
A month after putting the house up for sale, the Paternostros cut the price to $1.099 million; two weeks later the place went under contract at $970,000, or 22 percent less than what they had paid for it four years earlier—and that doesn’t include roughly $1,000 spent on small repairs and cleanups to put the house on the market in sparkling condition. Despite the losses, Linda feels “exceedingly lucky. It could have been a lot worse,” she says. “It could have taken a very long time when we were ready to be somewhere else.”
It wasn’t only luck that worked for the couple. It was their hard-nosed take on the dreadful state of real estate. They started out by accepting the primary rule for sellers in today’s market—that it simply doesn’t matter what they paid for the house—and took strategic steps to get the property sold. With a downward tilt that has now persisted for almost five years and has drained a larger percentage out of home values than the Great Depression did, the rules of buying and selling have changed dramatically.
Back in October 2000, with the economy still riding the dot-com-fueled boom, Chicago published a story called “The New Rules of Real Estate.” At the time, I reported that because everything was going up so quickly, past prices weren’t much help to would-be sellers trying to determine a sale price for their home. As for homebuyers, they couldn’t spend days pondering an offer because properties were getting snatched up so fast. Several years of explosive growth followed, but by the spring of this year, Chicago-area home prices had dropped back nearly to where they were 11 years ago. Clearly, it’s time for a new set of rules.
RULE NO. 1
Yesterday is gone.
The cardinal rule for sellers in today’s real-estate market is that what you paid for your home is irrelevant when you are setting an asking price. “If you’re hoping to get what the Joneses got, I’d like to get gas at 80 cents a gallon,” says Michael Parent, managing broker of Coldwell Banker’s St. Charles office. “I can drive around all day looking for it, but it’s gone. Forget what you paid four, five, six years ago.”
Local home values have dropped more than 30 percent since their peak in September 2006, according to the Standard & Poor’s/Case-Shiller Home Price Indices, and despite the earnest optimism of many homeowners, they have not shown signs of a fast rebound. Foreclosures, job losses, steep increases in the cost of living, and, in Illinois, a crushing public debt are all diminishing economic good cheer. Over the summer, economists were forecasting that home values would finish 2011 at least 4 percent below their already depressed 2010 levels and wouldn’t be growing steadily again before 2014.
Watching your biggest investment wither is dispiriting, and as the downturn has dragged on, the number of people who retain any hope of seeing a price rebound has withered too. But many real-estate agents say they still encounter homeowners who either can’t or won’t believe that so much of the equity they used to be sitting on has evaporated. “We hate to be the ones to tell you that what you paid [for your house] has nothing to do with its value today,” says Joe Siciliano, the branch manager in Coldwell Banker’s Lake View office. “But if you need to move and you want your house to get sold, we’re going to have to tell you that.”
Even some sellers who get it don’t get it. There can be a disconnect between understanding that real estate is in the dumper and the emotional attachment to one’s own home. “Often there’s a little bit of a feeling that ‘it doesn’t apply to my home; my home is unique,’” says Janet Owen, a Prudential Rubloff agent. “Learning that, no, your house is like everyone else’s is painful.”
RULE NO. 2
Don’t play the “let’s just see what happens” game.
Some sellers who still don’t get it—or who do but have a tough time accepting the fact that they are going to lose money—figure they might as well try putting the house on the market at an inflated (i.e., nostalgic) price, just to see if they get any nibbles. Every credible real-estate agent I have spoken with over the past year has adamantly discouraged that approach. A home’s first exposure to potential buyers is its most opportune, many of them say, and today’s educated buyers recognize an unrealistic price right away.
“When sellers tell me they’re not in a hurry so they just want to try out the price, I would rather have them wait until they’re ready and price it right,” Owen says. In her stratum of the market—high-end properties in the Gold Coast and Lincoln Park—sellers sometimes suggest that maybe a New Yorker transferring here won’t blink at a high price because prevailing prices are so much higher in Manhattan. “But these buyers are savvy about the market,” she says.
That’s true in more moderate price ranges as well. The blizzard of real-estate statistics and news from the media, combined with the ease of Internet-based property research, has made many buyers discerning appraisers of home values in their targeted neighborhoods or towns. “Most people can tell a bad price—or their agent can,” Parent says. That’s not to suggest they can pinpoint the exact ultimate sale price of a home, but they know fat in an asking price when they see it.
Owners who intentionally assign a high price to their home are a key example of what Parent calls being on the market but not in it. A house that is in the market, he says, is priced to get sold, not to test someone’s optimistic pricing theory. “If you’re in the market, you’re in the game to play it, not sitting on the bench hoping somebody comes along who wants to give you extra money.” Sellers who ask too much, he adds, are “getting in the way of the people who are serious about selling their homes.”
RULE NO. 3
The right price sells fast.
Last spring, the owners of a seven-year-old Bucktown home put it on the market at $799,000, just 79 percent of the $1.007 million they had paid for it in 2006. Eight days later, it was under contract at $800,000. Those sellers were clearly in the market. There may have been some late-night teeth gnashing over the $207,000 lost in the deal, but at least they got their house sold and could move forward.
“A compelling price gets you sold, and if moving is your goal, you need to get sold,” says Mabel Guzman, president of Envision Real Estate and the Chicago Association of Realtors. How to determine a compelling price? “Know the inventory you’re up against,” she says. Do a serious, clear-eyed study of the comparable properties in your neighborhood that have sold in recent months and carefully tot up your home’s pluses and minuses compared with those. (This is also something a qualified real-estate agent can do.) Then cut 1 to 2 percent off your price. You were probably favoring your own home, knowingly or not.
“Studying the comps is an eye opener,” says Beth Burtt of Hinsdale’s Brush Hill Realtors. “If you’re being diligent about it, your price becomes pretty obvious.” As your economics professor used to say, the marketplace speaks clearly if you’re listening.
Not all homes start out at the right price for today’s market, but when they get there, you will know. The 20-room Gold Coast mansion of Jamie Dimon, the former Chicago banking executive who left to become chairman and CEO of JPMorgan Chase in New York, went on the market at $13.5 million in April 2007. It sat for three and a half years, even though its asking price drifted down to $9.5 million by mid-2010. But when Janet Owen, the last agent on the house, cut the price to $6.95 million, it moved within a few weeks, finally selling for $6.8 million. “When it got to where the market perceived it to be priced correctly,” Owen says, “it sold.”
Illustration: Daniel Stolle