Astonished to find out how real estate agents work! I ask several agents and brokers on how they price their listing property. The answer I got was: “We use the CMA tools.” So I asked if any used COMPs? The answer was: “What are you talking about?”, and some added: “Aren't they both the same?”
I will start with a question to agents and brokers all are licensed real estate work around and with us, then I will just tell you, Mr & Ms. Seller, what I got as an answer for just simple but still an important question.
Here is the question: “What is the difference between CMAs & COMPs?” Over 90% of those agents I asked had no clue and less than 10% of their answer wasn't even that great. Most did have a mixed concept of both issues.
Fine, please allow me to explain the difference between Competitive Market Analysis “CMA” and Comparative Market Analysis “COMPs” Both are pricing measurement tools, but, COMPs are much more sophisticated than simple CMAs, COMPs are the best Marketing forecast, done by Marketing economists such as university professors who teach Marketing Economics.
With a glance at today’s economy, using the eight-point below a marketing expert can forecast the answer by watching the trends of the first 1-6 points and then analyzing points 6 and 7:
1- The Consumer Price Index (CPI) that is the true measure that examines the weighted average of prices of a basket of consumer goods and services (A & B)
A- Consumer confidence index is it up or down
B- Business confidence index is it up or down
2- Bond yield is it up or down
3- GDP on the rise or declining
4- The Stock market is climbing or declining
5- Interest rate is up or down
6- Quantitative easing: What does that mean? It is a disaster in our monetary policy where the Government prints $$$.
7- Inflation or Deflation: What does that mean?
There is no simple answer, but let us carefully watch out the trend of the banking interest rate movement and see if there is an increase in the interest rate! And what does that mean to us as Realtors? If it seems that it is on the rise, which makes buyers less qualify for same loan amount, here the agent should inform their sellers to sell now before prices drop furthermore and vise verse - If there is a hint that interest rate going down, here the agent should ask the seller to raise their asking price, figuring out that buyers can afford bigger montage loan. Some would ask don't we have the same fiduciary to the buyer and so we have to get them the best price! The answer yes we do but nerveless we have a loyalty to the seller not to the buyers. Sellers pay our commission, let us remember that very well and all the time.
Economists know that the Market is driven by aggregate earning and that is considered to be one of the key factors that Marketing analysts use to forecast the trend of the economic performance and they start to watch carefully the impact on the price index. That alone has a significant impact on the Real GDP per capita which is the true measurement of the economic output - Economists take the earning output and divide it by the number of people in the country the result would be passed on to the FED - Now if there is a sign of inflation the FED would raise the interest rate. I do remember I got numerous emails from several agents asking me, "Does that have anything to do with Real estate Marketing?" my straight answer is: Yes it does.
There are many other factors that can be utilized by Marketing experts that are related to Macroeconomics and Microeconomics. If I write about that issue, it will begin to sound like a lecture in Marketing Economics. So let us stop here for now and we will resume our Marketing discussion when we meet.
Inform your buyers what a higher interest rate means: Mr. & Ms. Buyer will be less qualified for the same amount of loan; in plain English, buyers cannot afford the price of the property that he or she is looking at to buy, at the higher rate….
An educated buyer agent should search more (work harder) to find a similar property for his buyer, it is not a bad idea to search for motivated sellers or short sales. There is a lot to say about how to deal with less qualified buyers.
Inform your sellers that they will have a tough time to get the price they are asking. Shortage of funds among banks means less in the money supply. Loans become more difficult to obtain, for the simple reason that the interest rate is a factor when it comes to approving mortgage loans – just study the formula of monthly income compared to the mortgage payment because lenders use your debt-to-income ratio to figure out how much of a loan payment you can handle. This monthly payment means principle and interest: the higher the interest, the less loan amount may be approved by that lender for your buyer.
Price measured by the trend of the economy:
Educated agent with degrees in economy knows how to forecast future prices take that to their sellers and buyers and must explain the correlation between pricing their home and the performance of the country economy and let the sellers and the buyers know that the interest rate is one of the major factors that impact the speed of property transactions. Notify both parties, the less money available to be supplied by bankers or mortgage institutes or even private lenders make selling a property more challenging than before. There will be fewer qualified buyers around, thus showing your property will become harder than before. I believe you, Mr. & Ms. Seller, should re-think your property price before it is too late. As we know all buyers are affected by the interest rate. Let us work around that issue and be more flexible with their offers.
Now some should ask. How about dropping interest rates?….All economics signs show that dropping in the interest rate will not happen at least at the time being. But if you need to know what will happen then just contact me.