The Principles of P.E.A.C.E. – Understanding the Economic Factors that Help You Get the Most for Your Property
I have spent many years teaching and training Real Estate professionals on how to utilize technology to educate themselves and their clients, market their businesses to get more listings, and maximize exposure for them to get the very most for those listings.
I am still fascinated, and I admit quite frustrated, by how few agents who refer to themselves as Real Estate professionals, understand the economics of the industry. Most Real Estate agents cannot explain the economic principles which govern our industry overall, let alone be able to explain to a prospective homeowner the specific factors affecting the Real Estate market in the areas they farm and call home.
Whether you are a Real Estate professional wanting to help your customers get the most for their home, or you are a homeowner who wants to get the most for your home, it is imperative that you understand the economic factors, the governing laws of Economics, and the methods of marketing that affect how quickly, and for what price, your property will sell.
I have broken down what I believe are the most important of these factors in this book. I refer to them as the “Principles of P.E.A.C.E.”. An acronym, P.E.A.C.E. stands for:
- EXPERT NEGOTIATION
We are going to delve into each of these principles in detail together. But before we do, please understand that while it is almost impossible to write a book like this without including my own ideas, opinions and biases, the following information is based – almost completely – on facts, data, statistics and experience from actual Real Estate transactions and situations over 15+ years.
I support my assertions with economic laws, real statistics and illustrations from actual situations so that it makes more sense. This is going to be important, especially for many reading this who have been in the Real Estate industry and have established beliefs and habits that have kept you from becoming true experts.
I am going to challenge many commonly-held beliefs which the Real Estate industry in large part utilizes in its preparation and sales processes, and has kept homeowners from putting the most amount of money in their bank accounts when selling their properties. Throughout this book, you will find highlighted sections I call ‘Myth Exploders’; pay close attention to these sections. When you discuss the sale of your property, whether with a Real Estate professional or a potential Buyer, many of them will hold these beliefs as facts. Understanding the truth will provide you a decided advantage in any negotiations that ultimately take place during the sales process.
Maybe you are a homeowner who wants to make sure you get the most for your home, or maybe just want to know what your home is actually worth. Maybe you are trying to decide whether to hire a Real Estate professional or put your home on the market yourself (We will discuss the options of how to market your home throughout this book). Either way, the information gleaned in this book will help you make the most-informed decision, and get the very most for your property.
Maybe you are reading this book as a Real Estate professional who wants to understand these factors better so that you can be the expert to your customers, get more listings, and be more successful. If either of these describes you, you are in the right place. When you can speak intelligently about Real Estate economics, and homeowners learn from you, you gain credibility and are seen as a market expert – something that I believe is underestimated in the industry as a key to being a top-producing listing agent.
SUCCESS KEY DROP-IN
Before we get into the ‘Principles of P.E.A.C.E.’ themselves, let’s go over some overall economic laws, facts and factors which affect Real Estate valuations. Understanding these basic principles will help you better understand economics and apply the more-comprehensive principles in the following chapters.
CHAPTER – THE ECONOMIC PRINCIPLES AFFECTING VALUE
The valuation of property is affected by certain economic principles that someone trying to sell HAS to know if you are going to get the most for the property. While we will touch on all of these as we go through the Principles of P.E.A.C.E., following is a basic overview of these principles so that you have an understanding of how buyers make decisions, as well as how appraisers make valuations.
The first two principles – the Principle of Supply, Demand and Desire, and the Principle of Substitution – are the most important for the majority of homeowners who are likely going to find their customer in the pool of home buyers looking at homes for the purpose of residing in the property as their primary residence.
While these principles also affect the valuation of a home for investors or potential buyers for second or third properties for their own use, there are other principles – the Principle of Anticipation, the Principle of Balance and the Principle of Progression and Regression – which are also important to this potential pool of buyers.
Principle 1: Principle of Supply, Demand and Desire
Real Estate is a commodity. The amount of inventory – that is, the number of homes available in a certain area and price point – influences the value of the property. The scarcity of a commodity influences its value by creating greater demand for the inventory that exists. (We will discuss this in much more depth when covering the P.E.A.C.E. Principles).
Another principle we will be covering in-depth is what type of factors and preparation can affect the demand for a property. Demand is also affected by desire. Desire can be affected by the inventory of similar properties, but also by the rental market, new construction, inventory in nearby or similar areas or neighborhoods, economic uncertainty, and some other factors.
What is to understand for now is that there are LAWS of Economics. There is no getting around these laws; we can do as well as we can working within the framework of these laws. But what someone wants to get for a property, or even what someone believes he ‘needs’ to make for a property, will not overcome the fact that supply, demand and desire are going to have a direct effect on for what a property will sell.
In order to effectively market and sell a property, it is vital to understand what type of market in which you are trying to sell. How much inventory is there? How are properties selling overall in your area? How about your specific property classification (DEFINE THIS)? Knowing and understanding this data will help you set the initial market position and get the most for your home. We will cover this information in more depth in the Pricing chapter.
Principle 2: Principle of Substitution
This principle states that the value of property tends to be set at the cost of an equally-desirable substitute property. It is important to know that no one should, or likely will, pay more for a property than that what it would cost to obtain a site by the purchase of equal appeal and utility.
Many homeowners are unreasonable in valuing certain aspects or features of their own properties. While some of these feelings the current owner has may ultimately be shared at some point by the new resident of the property, very few will provide any initial value which will affect the desire of potential buyers to pay more for the property.
When we get into the Pricing section of the P.E.A.C.E. Principles, being able to set aside personal feelings about a property, as well as how much you or your customer wants or needs from the sale of the property, will help you get more for the home.
An understanding and application of this principle will help you in all five aspects of the P.E.A.C.E. Principles. Applying this principle to the pricing and marketing of your property will make your property attractive to the largest number of potential buyers, generating more exposure and creating the competition necessary to maximize the ultimate sell price in the shortest amount of time.
Principle 3: Principle of Anticipation
Buyers – particularly investors, but also those who plan to reside in the home – will buy properties for future benefits. The Principle of Anticipation states that value rises using anticipated future benefits, whether they be financial or practical.
A good example of this principle is someone who pays more for a home with a fireplace or pool because of the anticipated benefits of those features. While looking at two similar properties in the desired area with the desired size and features, a buyer may be willing to pay more for a home that provides the added benefit of one of these types of features.
For many features, it is difficult to decipher how much that anticipated benefit is to an overall market. While you will find there are some specific features or amenities that buyers are willing to pay for when purchasing a home, HOW MUCH more buyers will pay is almost never even close to what the cost of adding the similar feature or amenity would be after the purchase.
Consider where I live in Southwest Florida. Two very similar properties exist in a Buyer’s price range – one has a pool that cost $60,000 to put in; this feature could bring the benefit of added enjoyment to the family. The second property has no pool. The home without the pool lists at $200,000; the one with the pool lists at $210,000. A buyer may be willing to pay an extra $10,000 for the home with the added benefit; however, almost no buyer is going to pay anywhere close to the $60,000 paid by the previous owner.
The better you are at understanding the value of various features in your area, the better you will know how to price your property for the maximum exposure (the E in P.E.A.C.E) and attraction (the A in P.E.A.C.E.).
Principle 4: Principles of Progression and Regression
The idea behind the Principles of Progression and Regression are that the price of a property increases and decreases with a change in the perceived value of the location of the property. An example of progression would be selling an older home surrounded by homes which have been renovated and thereby have increased in value. In this situation, the value of your property will be brought up because of its location.
The opposite is true of the Principle of Regression. For example, if you have the best house in a neighborhood that has been decimated by a storm, the value of your property will go down because of its proximity to the properties negatively impacted by that storm.
All of these principles affect for what your property will sell. Understanding these principles, and more importantly applying them to the pricing and marketing of your property, will help you get the very most for your property.
This overview of these principles is by no means meant to be a thorough course on Economics, or even on these specific principles. But having at least a conceptual understanding of their existence and their effect on property values is imperative to pricing, marketing, and negotiating the sale of a property.
For those of you homeowners considering having a real estate professional list and market your home, I would suggest you ask enough questions of the professionals you interview to make sure that your agent understands these principles and will apply them effectively in the marketing strategy for your property. For a list of questions to ask your Agent, click [HERE].
For Real Estate professionals who are reading this, make sure you understand these principles. Just as importantly, make sure you can explain the principles to homeowners who be looking to you to be their expert. Use Albert Einstein’s wise quote to gauge your understanding of the principles:
CHAPTER – THE PRINCIPLES OF P.E.A.C.E.
As we get into the five principles which will ultimately determine the sale value of a property, let’s first get this out of the way. This book is being read by both homeowners and Real Estate professionals – both with fairly different reasons and motivations for learning these principles. For homeowners, more and more of you are trying to sell your property without listing with a Real Estate professional, which is certainly your right.
In 2019 (the most recent statistics as of the published date of this edition of the book), 7% of homes that were sold in the United States were sold ‘For Sale By Owner’ *(according the NAR (National Association of Realtors) Buyer and Seller Survey). So homeowners CAN sell their own homes.
However, two important things to know are that:
- Homes that were sold by FSBO’s sold for an average of 32.4% less than homes sold by the Real Estate industry.
- It is estimated that almost 2/3 of the homes sold by FSBO’s were sold to a friend, family member or acquaintance, meaning much less marketing was required.
Homeowners have different reasons for wanting to list and sell their own properties including wanting to ‘save’ the 6-8% the Real Estate industry charges to help you list, sell and bring the buyer for your property. However, without having interest from at least one person to purchase your house before it goes on the market, you will almost never sell your property for enough to ‘save’ the cost of utilizing a professional Real Estate agent.
Even if you price your home at the ideal initial market position because of the pricing principles you learn in this book, the Real Estate industry simply provides more exposure, which creates more competition, which keeps the property at the high end of the value window. Buyers who negotiate with the homeowner instead of a real estate professional make lower offers, and are less inclined to give anywhere near full-value for a property.
These vital factors, along with the experience of the negotiation of details like fees, earnest money, concessions, warranties, and other costs, create a situation whereby a knowledgeable, professional Realtor will almost always procure much more than the 6-8% you are trying to save.
Having said all that, it is your right to sell your own property. You may have reasons beyond the final amount of money you put into your bank account for taking on the task of marketing and selling your home. We will get into this in more detail in the Economic Factors (Negotiation) all of the various details to understand, which will help you get the most you can for your property.
You may notice that I pointed out that listing with a Real Estate professional creates a “situation whereby a knowledgeable, professional Realtor will get much more than 6-8% you are trying to save”. Real Estate professionals reading this should understand that if you do not master the application of these principles, homeowners are better off with a different listing agent, or even on their own.
So let’s get to it. Let’s get into my favorite, and I believe the most important and most misunderstood factor in getting the most for a property – the initial market position, or in more common terminology the listing price, of the property.
P IS FOR PRICE
This graphic (posted by Jerusalem Real Estate) illustrates in a humorous manner the real situation that exists – that different people and entities are going to have different ideas of the value of a property. But it is much more simple than it appears. While a homeowner may have an opinion of what his/her home is worth, and banks will loan money based on a certain value, and municipalities are going to collect taxes based on a certain value, only one of the entities above really determines the value of the home. The Buyer.
A property is only worth what someone is willing to pay for it. So with our understanding of the principles we have discussed, and armed with the information we are about to learn to utilize, we can ascertain what a Buyer will most likely be willing to pay for any given property.
If you have a solid understanding of the previously discussed principles – specifically the Principle of Demand, Supply and Desire, and the Principle of Substitution, getting to the ideal initial marketing position (list price) of a property is much easier. If you do not understand the importance of these principles on the sale price of the property, it becomes much more difficult.
In the real estate industry, more and more professionals have moved from using the term “list price” to using the much-more appropriate term, “initial market position”. This term indicates the understanding that the ultimate sale price of a property will adjust with economic factors that have nothing to do with how the property is being represented or perceived by the market.
We are going to get into all of the Principles of P.E.A.C.E., and how mastering each one will contribute to getting the very most for a property in the least amount of time. However, establishing the initial market position affects all of the rest of the principles. Setting the initial market position – whether setting it too high or too low – affects all of the other aspects of the process. The price affects how attractive a property is (the ‘A’ in P.E.A.C.E.) which affects the exposure (the ‘E’ in P.E.A.C.E.) which affects how many people are making offers (competition – the ‘C’ in P.E.A.C.E.), and therefore our ability to use our expertise to negotiate the best price and terms to walk away with the most profit (the second ‘E’ in P.E.A.C.E.).
Applying the principles we learn, we can set a price that maximizes our ability to get full price, or even increase the sale price of the property. Start at the wrong price, and you have already hurt your ability to get the most for your property. One commonly accepted, and too often utilized method of pricing is to set a higher initial market position, with the belief that you can always bring it down.
It seems obvious that if we start negotiating from a higher initial price, we will ultimately get more for the property. After all, if we list a property at $425,000, we are more likely to get more for the property than if we start the negotiation by listing the property at $395,000. But this is NOT the case.
The problem here (which brings us to our first myth that needs to be broken) is that the negotiation DOES NOT start at the list price. It is a commonly-held belief that the negotiation begins at the list price. It does not. Where does the negotiation actually begin? Stay with me; we are about to get there.
When you set the initial market position for a property, you have certain data – statistics and other information – which indicate for what the property will likely sell. Statistics and situations change, every month, every week, and sometimes even daily. Before we get into what types of economic factors can alter the price once a property goes on the market, let’s look at the information we have to set the initial market position.
Having spent many hours teaching agents pricing principles, how to create CMA’s (Comparative Market Analyses), and how to present these to homeowners, one of the questions I got in almost every class was, “What do you do when the homeowner’s opinion of what their house is worth is different than mine?“, or maybe more often asked, “What do I do if the seller won’t be reasonable about what their house is worth?“
I believe if you truly understand the various principles and economic factors that affect pricing and sales price, and become effective at educating your customers on these factors, it becomes much less likely that you get this type of issue. However, I believe in being practical, so here is something you can say when faced with this issue (You will likely want to re-phrase the text to best suit your personality and situation):
“Mr. Homeowner, I don’t really need to know what YOU believe your property is worth or what you want to get for it. Your opinion isn’t going to have any impact on for what this home sells. Similarly, you don’t really need my OPINION either. Opinions might just cause us to set an initial market position which ultimately limits what we can get for the property.”
Instead, you will explain to your customer that you have facts – actual data – which provide an understanding of what buyers are most likely to pay for the property. Your CMA is based on real numbers which will show us three important things. The data will show us what buyers ARE WILLING to pay for the home. As well, the data will show us what the competition is – that is, what homes most similar to yours are on the market, so that we know what other homes buyers who need a house like yours will be comparing it to.
What data do I have that indicates FACTUALLY what a buyer is willing to pay? Well, sold properties of course. We know what buyers are willing to pay for your home because they HAVE in fact paid these prices for similar properties in the market. And what data do we have that indicates at what other properties buyers will be looking when considering their options? Well, current listings of course. We already know that the Principle of Substitution dictates that someone won’t pay more for a home than a property that meets the same needs in a similar location and with similar features.
But we also have FACTUAL DATA which indicates what buyers are NOT WILLING to pay for the property, or at least up until now have not been willing to pay. What data is this? Well, expired listings of course. Properties that did not sell are a clear indication that the market will not pay this price for this property at this time. Unless there is some economic influencer that would suggest property values have increased, or some unique situation which brings a buyer who wants to live in that specific house for some reason, there is no reason to believe that your home will sell in this price range. Pricing a home in this price range may help others get their homes sold, but will do nothing but serve to drive down the eventual sale price of your property.
A tool that has been utilized in the real estate industry for many years illustrates how to utilize the data – sold listings, existing listing and expired listings – to identify the ideal price range for the initial market position is called the Competitive Pricelines Tool (or CPL). Having taught agents how to create and present CMA’s to sellers, I created literally hundreds of CPL’s, and almost every one of them come out looking the same. Here is an example of what the tool looks like: