“Hi, I’d like you to list my property for sale. Will you send me some comps?”
I get this phone call from land sellers several times per week.
I think: Comps, uh, what comps?
By “comps” I presume you mean you want to know the selling prices of comparable parcels. Perhaps you’re remembering how it was the last time you sold your house. The nice Realtor showed you a list of similar houses in your neighborhood that had sold recently. You looked at the list together and discussed how your house may have fewer bedrooms than that one but a better kitchen than the other one. You priced your house after reviewing a list of sold comps, right?
So now with your land you’re thinking that you’ll do it the same way. You assume there are a fair number of parcels that have sold recently and you want to price your parcel based on what other parcels like yours are selling for. Do I have it right?
As a seller, I know you think your logic is impeccable and your request for comps is just, well, obvious.
I hope you are open to new ideas.
Because the problem with your logic is this: unlike houses, which sell easily, land is difficult to sell; there are many sold house comps and few sold land comps; because so few land parcels have sold those sales tend to be less comparable and more idiosyncratic, so less reliable as the basis for comp averages; anything that has sold has, by definition, done so in the past, not the present, in a somewhat different economy; you’re not competing with the handful of parcels that have already sold; you’re competing to sell your parcel in the present or future with the many, many parcels like yours available for sale right now; finally, you want to sell in the next half year not two years from now after hundreds of “days on market” like most sold land comps.
All of this means that basing your selling price of the smattering of parcels that have sold may not be wise in the current economy.
Here are some examples to illustrate my point (names and places have been changed):
Seller Todd’s Subdivision Lot
Todd owns one of several virtually identical lots in a central Oregon subdivision. He wants to sell his lot. All of the lots in this subdivision are similar in size and quality. Seller Todd’s goal is to sell his lot in the next 6 months.
Four parcels in this subdivision have sold in the last 2 years at $20,000, $25,000, $30,000 and $35,000. However, there are 32 parcels available for sale and on the market now that have not sold. Those 32 lots are available starting at listing prices of $19,000 and going up from there. Further, in the past year, 17 sellers of lots in this same subdivision have seen their listings expire and their lots have not sold. The prices on those expired listings started at $21,000 and went up from there.
If I e-mailed seller Todd some “sold comps” and advised him to price his parcel around $27,500, the average of the sold comps, do you think he would achieve his goal of selling his parcel in the next 6 months?
The reason is, his lot is competing with parcels on the market now priced as low as $19,000.
To understand the situation, imagine buyers driving into central Oregon from Portland. Let’s say they are hipster buyers in a retro red convertible. Based on statistics, one buyer like this shows up in this subdivision every 6 months. Our buyers heard about this nice new subdivision in the mountains where there used to be an ostrich ranch. Suppose Todd did price his lot at $27,500 and these buyers read about this great $27,500 lot in the agent’s colorful ads and decided to drive over and check it out. But when they get there and start driving up and down the streets they see 32 signs on vacant lots. There’s one lot at $23,000…and another one at $28,000…and one at $20,000. Then they spot one at $19,000! So while originally they drove out to look at the lot priced at $27,500 based on the agent’s great marketing, the buyers in the red convertible ultimately decide to submit an offer on the lot priced at $19,000.
This is the way it goes in real estate day in and day out. However buyers are not driving around in red convertibles. They’re surfing the web. Today buyers can easily access information on the Internet about all of the parcels available in this subdivision. They can search any number of websites like Zillow or Realtor.com. So it’s highly unlikely that a buyer would get a hankering for a high priced parcel over all of the other virtually identical and less expensive lots in the same subdivision. Why would someone buy Todd’s lot at $27,500 when they can buy essentially the same lot at $19,000, $20,000 or $21,000?
Before Todd can sell his parcel at $27,500, the lots priced at $19,000, $20,000, and so forth will have to sell first. Since one lot is selling about every 6 months in this subdivision, it will be a few years before his lot is likely to sell at a list price of $27,500.
OK, thinks seller Todd, then how did those other sellers get good prices like $20,000, $25,000, $30,000 and $35,000? If they sold theirs for prices like that then why can’t I? That’s what he’s thinking, I know, I can hear his thoughts through the phone lines.
Well, for one thing those sellers got those prices in the past. Some of those parcels sold 1-2 years ago in a somewhat different economy. Another reason is that sometimes transactions are not “arm’s length”. The lots may have sold to a family member at a higher price. For example maybe an adult son or daughter was trying to help their aging parents with hospital bills by buying their lot. A lot may have sold to an adjacent neighbor who wanted to expand his yard and so didn’t want any other parcel but the one she purchased. We have no way of knowing why they sold at those prices. The question Todd must ask himself is: can he get a high price like that for his lot when many other similar lots are available at lower prices? Let me put the answer simply: It’s highly unlikely.
If seller Todd really wants to sell in the next 6 months, he should glance at the sold comps and then set them aside. In deciding how to price his parcel, his primary focus should be on the prices of his competition – parcels available for sale. Todd should consider pricing his lot at $18,000, effectively undercutting the least expensive parcel on the market.
On the other hand if, after rethinking things Todd decides that he doesn’t necessarily want to sell in the next 6 months after all, or does not want to accept $18,000, that’s fine too. In this case he should consider leaving the parcel off the market and waiting for the economy to improve.
Seller Bethany’s Riverfront Land
Bethany does not have a cookie cutter parcel like Todd’s. She has a large 20-acre parcel directly on a river. Also Bethany is willing to offer seller financing as an incentive to buyers who don’t have all cash.
However, even with this special parcel, we would still have the same situation:
As seller Bethany’s broker, I could research all 10-30 acre parcels in the area or county where Bethany’s parcel is located and I would find that few have sold and many are available.
I could research all parcels on a river, stream, lake or ocean and I would find that few have sold and many are available.
I could research all parcels where the owner is offering seller financing and I would find that few have sold and many are available.
The economy has affected the salability of all parcels including large attractive parcels with financing incentives like Bethany’s. No matter what kind of parcel you are offering in the current economy, research is likely to reveal few sold comps and many equally wonderful parcels available that have not sold. Thus, pricing based exclusively on sold comps is folly in this economy even for “special” parcels.
Seller Fred’s 5 Acres With a Well
Fred wants to sell his 5 acres in an agricultural area. Fred has a capped well. So I go into the MLS and research all parcels between 3 and 7 acres in the same are over the last 2 years. In that period, 3 parcels sold. The median average selling price was $122,500. In addition, 28 parcels expired in the MLS without selling starting at $73,000 and going up from there.
Currently, 17 parcels are available starting at $48,000 and going up from there. Available parcels with wells start at $90,000 and go up from there.
Note that only 3 parcels sold in a 2-year period. That’s one parcel every 8 months. Many did not sell. Many are on the market now. However, the parcel priced at $48,000 is not his competition because it does not have a well. Fred’s competition starts at $90,000.
Fred definitely wants to sell his land in the next 6 months.
Let’s do a thought experiment: Supposed Fred priced his land at the average selling price of $122,500. Do you think it would sell in 6 months? Unlikely. The reason is, that statistically one buyer will come along in that window of time. If they are looking for a parcel with a well they the probably buy the $90,000 competing parcel and not even look at Fred’s high priced parcel priced at $122,500.
So I advise Fred to glance the average selling price and the comps and set them aside. I also advise him to pay no attention to the $48,000 parcel available for sale because it does not have a well. If he wants to sell in the next 6 months, Fred should list his land at something like $89,000, undercutting his $90,000 competition.
It may not make sense to focus solely or primarily on the selling prices of a few random parcels when there are many parcels available for sale that have not sold. Keep your eye on the competition: similar parcels available for sale. Price your land to compete!