“Should I try to sell my land now?” is a question many rural property owners are currently asking themselves. Over the holidays lots of people had family meetings to discuss what they are going to do with family-owned land in the coming year. Landowners often get to the end of the proverbial diving board and stand there staring into the murky waters that make up our current land market and take a long look before committing to make the leap.

I love working with landowners, and 9 out of 10 times I am the listing agent in a transaction. A listing agent works for the landowner, and should try to be as helpful as possible in helping their client achieve his goals while selling a property. When asked by sellers about what they should do or expect if they decide to sell, I try to be as honest about the current state of affairs as possible and help them have the expectation that even when marketed properly it could take a year to sell a nice property. I invariably hear, “Well I’m not going to give my land away. I don’t have to sell it.” (That phrase must be written on a slip of paper closing attorneys or estate executives hand out to new landowners when agents are not around, because that response is universal.) My advice in that situation is almost always to wait another year or so because you may be able to realize more money from the sale of your land then. Landowners usually follow up with, “But I would like to go ahead and put it on the market.”

I am a word picture kind of guy, so let me use a metaphor to help describe the current market of rural land in Alabama, and from what I gather it is much the same in other parts of the country. The market is currently packed with available rural properties for sale. LANDFLIP.com currently has 1339 active listings of land for the state of Alabama. I have done some research and discovered that there are over 100 companies that have some emphasis on land sales in our state. If we were to assume that a whopping 10% of all available rural properties in our state are on LANDFLIP.com, then we would have about 13,000 tracts of land for sale in our state at this moment. When a seller gets ready to put their property on the market, they essentially enter a competition with a host of other owners that are selling too.

Imagine you live in a major city, and you would like to go to a store that is 15 miles away at the heart of the city, and you need to be there about 5:00pm on a weekday. You know from living there for years that the freeway will be packed with people coming and going at that time of day. You have to decide how important it is to you to make it to that store at that time. So you hop in your car, and enter the fray. This same scenario is playing out right now in the rural land market. Lots of people are selling in this market for many reasons: the land may be bank-owned, distressed, or sellers simply need the money. Whether people are headed to the city-center to visit a store, hospital, or try to get home, they are all still part of the congestion. The reasoning makes no difference.

You look across the median to the south bound traffic and you see light congestion and drivers leisurely changing lanes. That is what a seller’s market looks like. Sellers can set prices within reason and have separation from other properties. That is what a seller needs to move a property in this market too: SEPARATION.

All of the cars on the freeway are moving at the same speed so they stay bunched up. This is exactly what happens when properties are priced according to stale comparable sales. A log-jam develops and properties seldom sell at those asking prices.

So how does a seller differentiate their properties from the competition? I tell my clients two things will sell your land in this market: price and marketing.

Price- It is imperative that you price the property correctly right out of the gate. New listings get a lot of attention as soon as they come on the market, and a well-priced property can sell within days or weeks with the right exposure. If you try to list it at a price that is too high to “just see” in this market, your land will get lost in the shuffle. I am seeing properties listed at 15% to 20% of the appropriate price get no attention, 5% to 10% will get minimal activity, and a property 5% to 10% under can get you a really quick sale. That is because properties offered slightly under the market price get attention from savvy buyers who know what price they “should” be paying. That is one way to get separation.

Marketing- Your land needs exposure to every prospective buyer. A seller or their agent must have a good strategy to advertise a property broadly. If 85% of prospective buyers are beginning their search online, as the NAR reported last year, then your land must be visible to those searchers. This is one way that a great land agent will help separate your property from the mix. A great agent uses the basic online tools to market it, but is also innovative and finds ways to maximize exposure for your property.

You don’t want a middle-of-the-road land agent in this climate. Find a great agent that has the pulse of the market in your area, and let them go to work on helping you sell your land. For your land to sell right now it has to stand apart from the competition through a combination of great features, good price, and exceptional marketing exposure. Find a way to separate your land from the traffic jam and get it sold this year. If you have a property on the market currently, make the necessary changes now and hopefully they will be met with success.

Everyone is swallowing hard in this market: sellers on price, buyers on turning loose of money and not knowing where the economy is headed, and agents at laying out money to market listings that may not sell. Finding a win-win solution for each party to a transaction will help get more deals to the closing table.

At AlaLandCo, we sell land and farms throughout the state of Alabama. There are pockets scattered over the state where the market seems to be doing fairly well. There are still micro-markets where there is a demand for residential land. There is a market for timberland at timberland prices. There is a market for property that is viewed as a good investment over time.

Then there are markets that rely heavily on absentee recreational ownership. Much of the rural property in Alabama is held in this fashion. It’s ownership tends to be upper middle class couples that reside in or very near a major metropolitan area in the state or neighboring states. The people that fit into this class of ownership have experienced the squeeze that the recession has put on all of us. As a result, many have decided that they want cash out their rural property investment. I imagine this holds true for most of the states in the South, and maybe even the entire country. I know about Alabama, so I will stop inferring about the rest of the country now.

The result has been a great many properties coming to the market in the past year. Many of these properties were just purchased by their sellers in the early to mid 2000′s. Here in my home county, Clay County, this trend is very prevalent. Many of these sellers are still reasonably financially secure, but are just reacting to the trends they perceive in the market. Then there are those that walked way out on a limb when they made the original purchase and now find that limb sagging more and more. Due to all of this, there are many, many, properties currently on the market. A few years ago, I told those that were looking for land here that it only changed hands when somebody died (somewhat morbid but it was true). That is no longer the case. Most of the ownership here was once local and therefore there were forces acting in the market that were not economic. These forces kept people from selling Dad’s land or PawPaw’s and MawMaw’s land. Today’s ownership does not have these non-economic ties to the land. Therefore they are much quicker to make a selling decision.

All of this has led to a tremendous downward pressure on prices. It is not reasonable to expect the prices that sellers were asking for in 2007 (some are still on the market at those prices). I often have sellers want to list something with me at an absurdly high price in hopes that a “rich” doctor or lawyer from Atlanta will come along with more money than he has sense and pay two prices. Let’s follow that just a moment. I think most would agree that you must be reasonably intelligent to make it through med school or law school. Why do people think they will automatically go “dumb” when they see the property they have for sale? It makes no sense to me. I have sold properties to both doctors and lawyers and did not perceive any of them to be dumb or making a move that was financially ill-advised. They have achieved their status by making smart, well-informed decisions…not compulsive purchases of high value assets like land.

Yes, this is the group of people that still have disposable income to buy land and farms with today. They are also smart enough to know that with a little research they can find a property that is priced in line with current markets for the area. The doctors and lawyers do not have the market cornered on these smarts either. EVERY buyer in the market today is well aware of this fact.  If you want to sell a property it must be priced in line with the market. If you want to look at a for sale sign on your property for the next 5 years, keep looking for that dumb doctor or lawyer.

There IS activity in the market.  Properties that are priced right are selling.  For much of rural Alabama, that means pricing your rural timberland at rural timberland prices.  Not prices that over-value the recreational aspects of the property.  Not prices that are looking for a developer to buy your land and turn it into a subdivision.  Outside of a very few isolated pockets, there is not any residential development going on.  Why would a developer pay big money for your property when he already has three that are not selling?  He’s not even looking at your property.

Prices are off throughout the state anywhere from 15% to 50% from the highs in 2006-2007.  If you want to sell, you need to get serious about pricing.  It is the FIRST thing that a potential buyer considers when he or she sees and advertisement for your property.  All of the advertising in the world will not sell $0.50 pencils for $5.00.  The same will hold true for your property.  Pricing is not the only element in selling, but at least for now, it is the biggest.

That’s an accurate view of the way we think about our stuff!

When trying to price your property for sale, you have to guard against your ownership bias. The amount that you paid for the property has no bearing on the current market value. The fact that the property has been in your family since Noah walked the earth is meaningless in the market. The attribute that meant the most to you may or may not have any value to prospective buyers.

The open market is a cold and cruel thing. The market’s view of your property can be summed up by Sergeant Joe Friday’s famous phrase “Just the facts, ma’am.” Value is related to the cold, hard facts of the property: location, utility, physical attributes, income and expenses, etc.

If you have decided that you are serious about selling your property, taking a step back and looking at it from a prospective buyer’s point of view is very important. Removing your personal, emotional attachment and optimistic financial goals from the pricing decision are critical. Most often, it is wise to have the assistance of a professional. Selecting a real estate agent, broker, or appraiser who is knowledgeable and actively involved in the market for your type of property is very important. They can give you an unbiased opinion.

One of the first factors for making sure that your property gets noticed is pricing. It has been my experience that when you price your property below the clutter, you will attract attention. By “clutter,” I mean that realm of pricing that is reflective of conditions six months or more ago. In most markets today, an abundance of properties are available and often they have been on the market for a long time and become stale. All of those old listings that are priced based on the old market conditions create a cloud. It is easy for a property to get lost in the crowd when there are so many available. That is particularly true in a declining market. Pricing that seemed reasonable originally could be considered aggressive today.

If your property is in a market segment that is expected to have an increase in the availability of properties over the next six months due to foreclosures or other factors, pricing at the lower end or below currently available comparable properties will potentially increase the attention your property receives. However, reaching the balance between an aggressive asking price and avoiding the impression that the pricing is a “fire sale” number can be tricky. That is why it is essential to have the assistance of a qualified professional that can help you navigate as you fly below the “clouds.”

Recently an agent with AlaLandCo listed a nice 16 acre property for $10,000 per acre. I had been keeping in touch with a prospective buyer who was searching in this area for nearly a year. As soon as I learned of the listing, I called him to let him know this property was available. The next day he viewed the property and several others in the area. Within a few hours we had an offer of 99% of the asking price and we closed within 2 weeks! Talk about some happy sellers.

Buyers in this market are well-informed about available properties and the selling prices of what has recently closed. It is imperative for a landowner that is serious about selling to price the property accordingly. This does not necessarily mean slashing the asking price, it means listing the tract at a fair price justified by what the market will presently bear.

Three weeks ago I took a listing on a nice 111 acre farm in Fayette County, Alabama. It has a small cabin, 3 stocked lakes, 8 foodplots and shooting houses included. The tract was generating hits from buyers within two hours of being online! I scheduled showings of the property on the way to show it, and had potential buyers arrive while I was already meeting others on the tract. We expect an offer this weekend. This property offers a lot of qualities that people are looking for and it is well-priced, and the public has responded with keen interest.

A good realtor who knows his area will help a landowner set reasonable expectations, and will walk away from listings that will not sell. This means the land agent must have his finger on the pulse of real estate activity in his county. A landowner may not be able to offer a better property, but she may be able to offer what she has at a better price. Quality properties at fair prices will sell in this market. Buyers will buy if the deal is right; they’ve waited long enough. The timing is right, is your asking price?

A few FSBO sellers frame this question differently. They ask: Am I more advantaged in the current market by setting an asking price or by saying to all buyers, “Make me an offer.”?

Conventional negotiating wisdom argues that whichever side first proposes a price consigns itself to the weaker position. With property listed with a broker, sellers always set a listing (asking) price and terms. If conventional wisdom is true, this means that buyers are always advantaged by having the seller declare a proposed gross sales price.

I have seen non-real-estate negotiations where the conventional wisdom held true…and others where it didn’t.

Parties often negotiate over the value of a service or a one-time purchase of a right, like an easement. Whichever party most values what is at issue between them might be better off letting the other side to mention price first, but not always.

Two easement negotiations come to mind. In the first, I needed an underground easement to cross a neighbor’s property to hook up a development’s water and sewerage lines with the closest town lines. My alternative to a negotiated agreement with the neighbor was to connect at more distant points and install a sewage pump in the project. I valued the easement highly.

The neighbor following conventional wisdom refused to name his price. So I offered $1,000, which he doubled. I “reluctantly” agreed. My alternative would have cost $15,000 to $20,000, and not been as good. In that instance, I, the buyer, was advantaged by naming the first price, which was set very low in comparison to what it was worth.

In another example, a partner and I had just bought a timber-heavy but landlocked parcel. A logging road accessed the property and had been used before, but it was not a deeded right of way. I told my partner to visit the neighbor over whose land the road crossed and spread five new $100 bills out on the kitchen table. We wanted a one-time use of the road and were prepared to put it back to its original condition after we were done. To this seller, we were offering a $500 windfall. We were, of course, prepared to pay more. Again, we were the first to propose price in an instance where we valued the object of negotiation highly.

With the pipe easement, I deliberately offered a low-ball price, because I knew how the seller’s mind worked. With the logging road, we offered a more-than-fair price, which we felt the seller would also understand as more than fair. Different circumstances require different tactics. In both cases, the first to offer a price — in each case, the buyer — got what was wanted at an acceptable price.

With real-estate sales, I have rarely found that sellers who set an asking price are disadvantaged in bargaining over the sale of their property. If the conventional negotiating wisdom had proved itself in the field over time, why would brokers have sellers list properties with asking prices?

A small twist that is not uncommon is for a seller — either broker or FSBO — to advertise a property with the exhortation, “Call for a price.” I find this annoying and discourages my interest. I can’t remember the last time I called for a price. I assume such properties are overpriced, but I may be totally mistaken. Of course, some buyers do call for prices, otherwise why would sellers continue to use this tactic?

Large tracts of land are often put up for sale on the basis of “Make me an offer.”

Sometimes this is simply a way for a seller to get a good-faith buyer to give him an idea of current market value without going to the trouble of listing the property or getting it appraised.

The seller places the burden and expense of determining current value squarely on the buyer. From my perspective, that is exactly the right location for this burden…because it ultimately protects the buyer to do this research.

Sellers also use this approach as a way of getting a snapshot of reality in a rapidly appreciating or depreciating market where comps-based appraisals won’t be current.

The buyer’s unaccepted offer may be the floor price a seller is looking for on which he builds a higher asking price shortly thereafter.

I think legitimate able-and-willing buyers are often discouraged by a large-tract seller who won’t price what he’s selling. These buyers face time, effort and expense with no guarantee that the offer they produce is in the right ball park.

On the other hand, a buyer can take this opportunity to price the property properly– on the basis of what it’s worth to him, given the property’s liabilities and assets and in light of his own resources and plans. The offering price can then be thoroughly

supported, and the documentation shown to the seller as a way to center negotiations on the buyer’s valuation.

In a market that’s moving down fast, a seller should pay careful attention to a “low” offer from a buyer who’s done his due diligence. While the offer may be less than the seller paid at the top of the now-vanished bubble, it has credibility to the extent that the buyer has done his homework and is absolutely transparent about his research. In such circumstances, a buyer putting the first number on the table can work it to his advantage, since he’s established the pivot price for negotiations. The buyer says to this seller: “I know you paid more for this property and want more than I’m offering, but this is what your property is worth today.” The buyer has facts on his side; the seller has hopes.

A buyer in this situation should determine what the seller paid for the property, tax-assessed value and the motive for the seller’s need to sell in an unfavorable market. He can present his “low” offer as a take-it-or-leave-it proposition, based on the fact that his research has now established the true value of the property, which the seller had declined to do.

The better way to proceed may be to propose a “low” price with some flexibility in terms and package it with bargaining chips that are intended to be conceded.

The downside of “playing” with a large-tract, “Make-me-an-offer” seller is that a buyer may spend the time and money to work up a price proposal that is not in the seller’s ballpark. Still, all buyers who offer what a property is worth to them assume this risk. It’s only the buyers who anchor their offering price in terms of the seller’s listing price that free themselves of this risk…by assuming the much greater risk of overpaying.

When I’ve faced a “Make-me-an-offer” seller, I’ve looked at it as an opportunity. The seller, I feel, doesn’t know what the market price is of his property in a changing market. He’s unwilling to put an asking price on it and he’s also unwilling to say something like, “Best offer over $x.”

I’ve been willing to work up a preliminary idea of its value to me and then run the idea of price in general terms by the seller. That limits my investment in due-diligence, and I’m transparent about the level of analysis I’ve used to suggest a price. Maybe I could go up if additional evidence suggests additional value, but it might also work the other way, I say to the seller.

In a market where price is softening rapidly, sellers tend to price either too low because they are fatalists or too high because they are desperate.

I feel that it’s always up to the buyer to set the first price regardless of whether the seller has come up with an asking price. The buyer’s price must always be based on research that will convince an unbiased observer. If it doesn’t convince the biased seller to negotiate, the buyer needs to tell the seller that he is moving on to the next opportunity…and then do so.

Part of the seller’s answer will be determined by what he needs to net out of the sale after-tax. This net number factors in all deductions from sale income—transaction costs, taxes (local, state and federal) commissions, fees and expenses.

Another part of the answer is shaped by the seller’s judgment of current market conditions. Where a lot of buyers are chasing a relatively few number of properties, the market will bear a higher price. When few buyers are tire-kicking a lot of sale properties, or not tire-kicking at all, the market price can drift below the true value of the seller’s real estate.

A third factor is the intensity of the seller’s motivation. Desperate sellers may set a too-high asking price to cover their needs even though they doubt that a buyer will come close to it. This is the psychology of hope. It’s why we buy lottery tickets, despite the odds. It doesn’t work very often. Desperate sellers usually do best by setting an asking price that will attract buyer interest in a buyer’s market.

A fourth factor is holding power. The price a seller can exact from the market is directly related to his ability to hold the property as long as it takes to get that price.

Desperate sellers cannot hold for very long, so they have to price lower than they would like.

With these four factors — net requirement, current market, seller motivation and holding power — in mind, the seller works up five types of prices for his property when he puts it up for sale.

1.  Valuation price, which he determines through intuition, group-think, tax-assessed value, appraisals and opinion—alone or in combination. This is the price that he thinks his property is actually worth in the current market.

2.  Initial Asking price, which is where the seller starts the sales process.

3.  Wants-to-get price, which is where he hopes he ends up, which is usually lower than the initial asking price.

4.  Needs-to-get price, which is what the seller must net to come out acceptably. A needs-to-get price is a sober, realistic value, stripped of hope.

5.  Rock-bottom price, below which he will not sell because it nets too little to make the sale worthwhile.

Some sellers work up very precise numbers for each of these five prices, and others wing one or more of them.

With the initial asking price, the seller faces four tactical choices.

First, he could set a very high asking price and indicate a willingness to come down. The seller might include in his advertisement, “Negotiable.”  This tactic forces a seller to come off the initial price a lot as part of his negotiating strategy, but not below a dollar point that satisfies whatever needs the seller must meet. The seller’s strategy is to give a buyer large concessions on initial price as a way of faking the buyer into ending up paying more than he might otherwise.

The downside to this strategy is that some number of able-and-willing buyers won’t even look at seriously overpriced properties. This seller, however, is not looking for a knowledgeable buyer and negotiating partner; he’s looking for a chump who thinks negotiating a concession of 30 percent off an asking price that’s set 50 percent above where it should be gives him a good deal and proves how shrewd he is.

Second, he could set an asking price that’s, say, 20 percent above his need-to-get price.  Twenty percent gives this seller room to bargain with a buyer and cover the costs of the sale.

My guess is that most sellers use some variation of this method, and most buyers intuitively play along by trying to end up with a 10 to 20 percent discount off the initial asking price.

I have seen sellers hurt by this lazy-boy way of pricing property when they didn’t net out their expenses precisely or neglected the tax consequences of a sale.

The downside is that these negotiations are almost always limited to fighting over dollars, that is, where within the 0-to-20 percent overcharge everyone will land. Terms — which are the great wedge of flexibility in negotiations  — are elbowed off the table.  If a buyer is unwilling to pay the seller’s need-to-get price, then the process stops.

Third, the seller could set an asking price as a take-it-or-leave-it proposition. This type of seller must have holding power and a willingness to wait until his price is met.

A buyer should, in my opinion, pay a no-budge price only when it is at, or below, what the buyer believes is the value of the property to the buyer. I generally avoid even looking at properties whose prices are advertised as “firm,” unless I know that the firm asking price is at or below its value to me.

Finally, the seller could set an asking price that will net what he needs from a sale and be entirely transparent about how he got to that price. Let transparency be the path that your buyer walks into understanding your needs.

In a sense, this is a variation of take-it-or leave-it. But the difference is the seller shows the buyer that he’s done all the negotiating on price he can afford. This is accomplished by showing the buyer honest numbers, honestly arrived at.

This was the Saturn marketing model as opposed to the horse-trading that is the auto industry’s norm, which most buyers hate and at which we’re no good.

Most buyers cue off asking price, however a seller sets it. I don’t. I offer what I think a property is worth to me, given its assets and liabilities and my resources at the time.

In today’s market, I think sellers should consider the “transparency approach” to setting an asking price. It distinguishes the seller who does and lends virtue to the seller’s stated need.

I’ve found sellers, including myself, setting an asking price for real estate by fixing its value in one of at least several ways.

Seat of the pants. Sellers normally know more about the property they’re selling than any other party. Over time, sellers get a price-feel for how their places compare with others in terms of assets and liabilities. When it comes time to sell, many sellers integrate the information they’ve acquired over the years and intuit their way to a price.

Need. When the economy is lousy, some sellers find themselves pinched for cash and forced to sell real estate. Where the property is secured by a mortgage, the sale price is hoped to be sufficient to pay off the debt, transaction costs, taxes on gain and meet as much of the crisis need as possible. In the best circumstances, the seller will have some profit left; in the worst, sale of the real estate will leave him short of meeting his cash needs.

This seller must take the amount of his cash need and weigh that against what he thinks the market will bear for an asking price. The need-seller, in other words, like all others has to employ some method of coming to an asking price, apart from the numbers of dollars needed, which is his motivation for selling.

If I need $100,000 and I know my property won’t bring more than $40,000, it does me no good to set the asking price at $100,000. My best approach is to substantiate a price as much over $40,000 as I can, usually by disaggregating the property’s assets, valuing them individually, then adding them together.

Competitive Market Analysis (CMA). If the seller is listing the property, the listing broker can undertake a CMA to determine recent selling prices of roughly comparable properties. Brokers experienced in the local market will help a seller tweak that information in light of the comps used, the property to be sold and current market conditions. This is often a very practical approach. But it’s subject to influence when an agent or broker inflates a suggested “CMA-based” selling price in order to snag a listing.

Appraisal. Some sellers pay for an appraisal as a way of establishing the current market value of their properties. They then set an asking price, above or below appraisal value.

Appraisals are opinions of value, based on selecting the recent selling prices of three comparable properties sold within the previous six months. The appraiser adjusts the value of the seller’s property in light of each comp and arrives at a reasonable estimate of current market value.

Buyers tend to put some faith in seller-supplied appraisals, because they are supposed to be unbiased. Appraisals are readily manipulated to get to a certain number. Appraisers are free to choose the comps they want to use (and not choose others) and make further adjustments. A seller-commissioned appraisal is subject to pressure a seller may choose to apply to the appraiser to hit a high valuation.

The other problem with appraisals that I’ve found is their too-general level of analysis. Appraisals rarely dollar in or dollar-out quality-of-individual-asset considerations.

Timberland, for example, that contains $1,500 in immediate timber-sale value is usually valued at the same price as timberland that has $750 in timber value. Improvements are valued by type, age and square footage, but quality factors — materials, details, condition, convenience of layout, etc. – are not generally looked at hard.

I’ve also found that appraisals rarely dig deeply into material defects that affect the property’s usability, such as a crawlspace that’s too low to the ground, or ground that’s too steep for operating equipment, or land that’s unproductive for various reasons.

A market that’s either in rapid decline or rapid ascent requires an appraisal derived from pending sales, not ones that are as much as six months old.

I’ve seen a seller commission simultaneous appraisals from three different appraisers and then set his asking price as the average of the three. If, of course, a seller is willing to lean on one appraiser, he’s also willing to lean on three to get to the number he wants.

The average-of-the-three approach is a practical method for establishing the value of estate property where one heir wants to buy out the interests of the others—and everyone is looking for a fair-to-all way of doing so.

Tax-assessed value (TAV). In recent years, tax-assessed values lagged selling prices with most types of rural property. For that reason, buyers often used TAVs as a starting point in negotiations, forcing sellers to dismiss them as unrealistically low. With sales slowing, the situation could easily reverse, with TAVs of record showing unrealistically high values.

TAVs are based on formulas that reassessment appraisers use across the board. Very little, if any, digging into quality-of-asset considerations occurs. The TAV method provides a way of comparing the value of one parcel with its neighbors since the methodology is applied to all equally, but TAVs don’t tell a seller or buyer much about the value of any particular property once its researched assets and researched defects are netted out.

Online home-value sites. I ran through a number of these sites. None provided any valuation of my current rural residence, a house that has been standing for almost 100 years, on a street with a numbered address. I concede for the record that Blue Grass, Virginia is not in the thick of things.

I plugged in my childhood home in Pittsburgh…and got wildly varying results, a low of $84,500 to a high of $154,000. The sites could not agree on the number of bathrooms and most recent sale date. Others may have better luck with sites such as Eppraisal, Real Estate ABC, Zillow, Yahoo, Homegain, cyberHomes; PropertyShark and HouseFact.

Home-Price Indexes. These efforts — Federal Housing Finance Agency House Price Index; Purchase-Only; Radar Logic (25 metro areas using price psf); S&P Case-Shiller U.S. National Home Price Index; NAR Median Sale Price; LoanPerformance House Price Index; and Integrated Asset Services IAS360 National Index — are not very useful for rural properties for various reasons, mainly dealing with different approaches and different data bases. (Carl Bialik, “Only One Person Knows a Home’s Value: Its Buyer,” Wall Street Journal, November 21, 2008)

Each provides a trend that shows percent gain/loss plotted against time, and they don’t agree. Since January, 2000, four show about a 50 percent increase and two show a 75 percent increase. All show a decrease over the last couple of years, but the steepness of the decline differs. Taken together, they give a seller a sense of price direction.

So what’s a seller to do?

First, property does not have an objective dollar value until a buyer buys it. Every other number is speculation, to one degree or another.

Second, the various approaches described above will provide a range of value estimates, hopefully narrow enough to be useful. A seller can narrow the range by throwing out the low and the high numbers, then averaging the remainder. The seller might consider this number his estimated working value (EWV), in terms of which he sets his asking price.

Third, the settlement, or sale, price should be more related in the seller’s thinking to the EWV than to the asking price.

Fourth, sellers should understand that familiarity breeds overvaluation. The longer a seller has owned a place and the more emotionally invested he is, the more dollars he thinks its worth.

No universal formula exists for a seller to determine his property’s EWV, asking price or settlement price. EWV is the result of pulling together as much data-hardened information as possible and using experience and judgment to come up with a good-enough value estimate, given the seller’s circumstances. Asking price is a matter of tactics, and settlement price is often a matter of circumstances.

When a seller has only one buyer, his choice is to make a deal or keep the property. If holding is not an option, the seller has to make the best deal he can. In that circumstance, a seller does what he has to do. The decision is forced upon him by circumstances, so there’s not a lot of agonizing.

When a seller has flexibility and holding power, he should make a good-faith effort to figure out his EWV. It makes setting an asking price and a settlement price much easier. When a buyer is close to the seller’s EWV, it’s time to make a deal.

The stock market is down 40 percent over the year. It continues to decline. The Dow is down about 2,250 points in seven days. The economy is stronger than this paniced market, but is being tugged down by weakening sales, tight credit and a dozen other factors.

The stock market appears to have decided that the $700 billion in federal money will not put a floor under the fall if it’s used as Secretary Paulson testified he plans to use it. Op-Ed articles in the WSJ and other papers have presented alternatives that deal directly with stopping foreclosures, refinancing mortgages, capitalizing banks, etc. I’ve yet to see a proposal for ending credit-default swaps and unfathomable derivatives, which together, as much as anything else, set us up for this mess.

My own uneducated sense of this is that we will work our way into a recovery, one property at a time, with one buyer and one seller finding a price. If sellers don’t budge from inflated valuations, all the liquidity in the world won’t get buyers to buy.

Everyone is waiting for the pain to stop.  I don’t think we reverse this trend without pain being spread widely and deeply. A price set six months ago won’t work today. Each seller has to fight this fight with himself and his lender. It will be ugly and hurt a lot. A property that is overpriced by 100 percent needs to come down 50 percent.

Brokers are encouraging their clients to drop 10 or 15 percent. Recent WSJ ads are coming down by 25 to 30 percent or more. I’m interested in what brokers on both the seller and buyer sides think about this predicament, which has ensnared us all.

I spent several hours this weekend looking at rural listings around the country. Thousands are advertised, with many of each type in the same place at about the same price.

Few sellers appear to have come off their original asking prices during the last six months. In most areas, sales seem slow. Suburban sellers have cut their prices by 25 percent or more. So why aren’t rural land sellers doing the same?

First, rural sellers may not have as urgent a need to sell. Turnover in rural property is lower than in suburbs where homeowners are subject to job transfers and financial volatility. Rural sellers are often able to wait longer.

Second, sellers in a weakening market are inclined to imprison their asking prices with backward-looking expectations. Since prices and sales were strong a year or two ago, therefore, seller reasoning goes, they should be strong now (even if they’re not).

I’ve never had much luck in hoping better times into existence. My experience is that markets produce prices, not wish-fulfillment.

Third, sellers cling to forward-looking inflation dreams. Prices, they hope, will go higher. Hold tight, they tell themselves, prices go up…eventually. Which is generally true…eventually.

Fourth, sellers hold to high asking prices in a falling market to avert loss. MIT economist David Genesove and Columbia University economist Christopher Mayer found that Boston condo owners faced with a real loss (not just less profit) stuck with higher asking prices. This produced a little more in sales price, but involved the costs of holding the property longer.

Dan Ariely, author of Predictably Irrational and James B. Duke Professor of Behavioral Economics at Duke University, explains sellers pricing above market in two other ways. Once we own something, he told me, we “endow” it with more value than it’s worth. And when we “customize” real estate we think it’s better than similar properties, and should, therefore, be priced higher. These behaviors are understandable, but not rational, he said. (www.predictablyirrational.com) .

All of these factors encourage sellers to stick on unrealistic asking prices that won’t move their properties. And once anchored into that price, sellers feel they’re losing money with each reduction. In truth, they’re not losing anything. It isn’t there to be lost.

A seller usually sets an asking price by pegging it to recent sale prices of comparable properties. But a comp analysis can cement a seller’s asking price into an outdated, overpriced market. It will estimate past worth, not present value. It’s a rationale for not selling.

When a seller prices his property at $250,000 based on comps in a weakening market, a buyer won’t look at it because it’s anchored above the $150,000 he perceives to be its current worth. The buyer reasons that it’s not even worth making an offer. The buyer is wrong. Low offers educate sellers. Three no-budge offers at $150,000 are a shriek of reality, not a subtle signal.

This buyer also sees properties listed at $150,000 as overpriced. So nothing happens.

Buyers in a buyer’s market buy the properties re-priced at the new wholesale, not the old retail. When a dozen identical lots are each priced at $50,000, the first seller to drop to $40,000 will be the first to sell.

In today’s market, a must-sell-soon seller should use a comp-based appraisal value as a top line from which he drops to a get-it-sold asking price. If you need to sell today, you need to price below your comps-based “market” value.

Buyer expectations — not appraisal values — determine sale price in an overvalued market.

Prices are too high in many rural markets—especially for timberland, farmland and money-gobbling hobby farms.

Over the long term, all have appreciated steadily. That will continue because of population growth if nothing else. But this genuine, long-term rise in values was shot up with growth hormone for the last four or five years. Today’s asking prices are inflated beyond what many of these properties are worth today.

Much of this has to do with sellers pricing timberland and cropland at second-home value. Many rural sellers also seem to assume that hunters are rich idiots.

Many rural prices today are about what they were a year or two ago. They should be lower by 20 to 30 percent if a seller wants to sell. If a seller doesn’t need to sell, I’d advise pulling the property off the market for a while.

A seller has to set an asking price in a buyer’s market based, first, on what he needs to net from a sale.

Figure the amount you need to pay off your loan, closing costs and taxes (transaction taxes and income tax, both state and federal). Then figure the cash you have in the property—down payment and repaid principal, plus capital improvements. Then determine a reasonable profit on your cash. Price it there if you need to sell.

Or price it a little higher if you can seller-finance, which is a big help to a buyer and a cheaper alternative than institutional lenders.

If your calculations show that you’re going to lose money on a price-discounted sale, you have to guess whether you’re better off losing a known amount soon or holding in hope of a higher price at some unknown future point. It’s often true in down markets that the costs of holding outweigh the net gain from the hoped-for, higher future selling price.

To hold for a higher price, or to sell now at a lower price—that’s the seller’s question. Try this exercise. Assume a cut in asking price produces a sale that’s 30 percent less. Then project your costs of holding for 18 months at the current asking price and a sale for only five percent less. Which nets you the most dollars? Which produces the least amount of heartache?

Bad news rarely gets better by not reading the paper.

If it doesn’t pay to hold, then don’t. Cut the price. Get it over with. And move along.