The following scenario is based on the Real Estate Intervention episode Movin’ On Up, aired November 12, 2009 (Season 2, Number 6):
Meet Michael and Karen Austin. They live in Baltimore, Maryland. The Austins purchased their home (a two-bedroom bungalow) in 2005 at the height of the real estate market. The original owners listed the home for $114,000. Due to a bidding war, the Austins paid a $7,000 premium, or they purchased the home for $121,000. Their plan was to buy, renovate, sell, and double their investment! The market was unbelievable, and others had successfully implemented this strategy in the past.
Currently, it is 2009, and two things have happened: The real estate market is depressed, and the Austins have outgrown the property due to two unplanned pregnancies. Now the Austins have two small children—Ethan and Caleb. They are desperate to move and find a larger home in an area with a better school district for the children. They listed the bungalow for $155,000 because of home improvements and the outstanding loan on the home. They currently owe $147,000 on the property. Home improvements or upgrades include an upgraded kitchen with granite countertops, custom cabinets, and stainless steel appliances. Additionally, the Austins have finished the basement and added crown molding and recessed lighting to the home. The Austins thought their home would be ideal for first-time or single homebuyers as well as senior citizens downsizing. The property includes a large back yard, perfect for entertaining or gardening. However, the home has been on the market for months, and the Austins have not received any offers.
Mike Aubrey is trying to help the homeowners sell their home in a depressed real estate market. Mike uses a three-step method. First, he tours the home to evaluate it. Second, he obtains information from recent homebuyers in the area. Third, he takes the sellers (i.e., Austins) to view other homes (i.e., comparables) selling in the area. During his tour of the Austin’s home, he noted it was small (less than 1200 square feet), painted boldly in some areas (e.g., red in the kitchen and faux painting in the bathroom), cluttered, unfinished upstairs, and overpriced. (Larger homes with three bedrooms were selling for less nearby.) Additionally, the home did not present well. The colors and decor would only appeal to a small group, and it is important to appeal to as broad a base as possible when selling real estate. Mike’s assistant, Sabrina Soto, interviewed a recent homebuyer (Judith Godsey) in the area regarding the criteria for her purchase. She was an older woman, and she said that she did not purchase a home in the Austin’s neighborhood because the homes were small and the neighborhood was too busy. The Austins viewed other homes in the area and found other sellers were offering much more for less money. Mike discussed his findings with the Austins. He indicated their home was overpriced and that they had unrealistic expectations. He told them that they needed to consider market factors, such as the weak economy and the demand for larger homes. (Sales are more robust for homes with three bedrooms.) Although Mike was unable to find direct comparables (because the Austins had priced themselves out of their market), he found a two-bedroom home without upgrades for $90,000, a three-bedroom home without upgrades (except for the windows) for $139,000, and a three-bedroom home with upgrades for $169,000. Based on an analysis of the market, Mike indicated the Austins had three options: (1) Drop the price to $139,000 to strategically position the home and sell it. (2) Rent the home. (3) Stay in the home and wait for the market to improve. (A higher price would cause them to compete with three-bedroom homes.) If they chose to stay in the market and sell, they also needed to stage or present the home more effectively.
The Austins rejected the proposed price reduction because of their outstanding loan and the effort they had put into the house to make the upgrades. Mike assured them that the sales price of the home had nothing to do with the amount they owed the bank! They were also surprised to learn that “sweat equity” did not always translate into sales dollars. The Austins were frustrated by the thought of having to bring $8,000 + closing costs to the table to sell their home. They decided to consider the alternatives.
After studying the market more (and verifying two-bedroom homes sold for $89,000 to $120,000), the Austins decided to pursue the rental option; they placed their home in a government program that offers rental assistance to low-income individuals—Section 8. The government offers additional assistance to Section 8 renters who desire home ownership. The Austins hope the tenant will purchase the home after the one-year trial period through the government’s assistance program for first-time homebuyers.
1. Discuss Aubrey’s method. Why does he use comparables? Why are buyers interviewed?
2. Discuss the 4 P’s of marketing (Price, Product, Place, Promotion) within the context of the show.