When Selling, You Need To Understand Your Target Market

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One of the hard things to get through to sellers is to understand the characteristics of the sort of buyers they need in order to have a successful transaction. If a given set of prospective buyers can't afford the property, they might look anyway. They might even make an offer, and it's possible the offer might even be accepted. But in the current loan environment, the necessary loan won't fund, so the transaction isn't going to actually happen.

Furthermore, it's a good idea to know the income characteristics you're aiming at by the price you set. If you set a price of $400,000, what does someone who can afford a combination of cash and loan that add up to $400,000 look like, in the economic sense of the word? You'll know better than I who makes and does not make that kind of money in your area, but you should know it. I know it for San Diego. This isn't the kind of knowledge that comes from 10 minutes on the internet. I know what professions do and do not make the required money, and what professions for which it's a matter of where a particular prospect falls on that profession's pay scale, but it's taken me years to learn, just for San Diego, and every city is different.

The point is this: Once you've figured out how much various professions make and the price you think the property is worthy of, that gives us a lot of information about how to get the property sold. You have to figure out how to get the attention of buyers in that category, you have to have a plan of how to set the bait so they will go look, you have to figure out how to make the property attractive to them when they do go look, and they have to have a clear action to take in order to make an offer. In theory, this is nothing more than the standard marketer's AIDA (Attention, Interest, Desire, Action) sequence, but the practicalities take a lot of effort to learn in this specific instance.

Most areas have their own character. Some neighborhoods have a working class character, while others attract highly paid professionals. Some have an artsy orientation, others are very matter of fact. Properties have their own characteristics. The one property in the neighborhood with a panoramic view of the area is not going to appeal to the buyer who's looking for any hole in the wall, so long as it's in that neighborhood so their kid can go to Super Education High School. Put property character and neighborhood character and the price you want to obtain together, and if you're a listing agent, that had better give you an idea of exactly who you're hoping to attract to your property. Like all targeted marketing, you won't turn away someone from out of the targeted demographic, so long as they can actually get the transaction done, but you don't have to be in the business long to discover that you'll do better by appealing to the degreed professional who makes the money to qualify based on Debt to Income Ratio for an 80 to 90 percent Loan to Value Ratio loan, than you will targeting the fry cook who's saved and invested for twenty years and is all of a sudden ready to buy the property now that he has a 70 percent down payment. That fry cook may show up on their own anyway, but how many people do you know who save that much over that long a period and then want to spend it all on real estate? As opposed to the newly married professional couple who've been in their careers a few years each, have a little bit of money saved, and now they want to stretch their budget as far as they can? Most people take precisely this latter path, and that is why you should concentrate your efforts to sell to those people most likely to buy your property.

The rates are going to change a little bit every day, but in most cases, it's not going to be significant change. Things like interest only loans will stretch their qualification a little bit, but those are best approached with a trembling hand for purchases, and you're better off planning for the buyer being advised that the property may be too expensive for them in such an instance, and having a plan in place, than you are hoping that everything goes perfectly for you to sell to an unsuspecting buyer. Yes, you're selling and once you get your money, you really don't care what happens. But these days, a lot of agents and loan officers are suddenly discovering the advantages of really looking out for their client's best interest, and you don't want to assume that your prospective buyer's agent will not be one of them. Remember, you're trying to look ahead and get a consummated transaction for the best practical price - and a buyer with a loan that does not fund is not the one you want, no matter how good the initial offer.

Not all loan amounts are the same. Conforming Loans are better than Temporary Conforming which are in turn better than "Jumbo". There is no more 100% financing except for VA Loans (and they have issues of their own). Subprime was kind of in Never Never Land back then (now it's mostly dead). If you read between the lines of what their reps were saying before the industry imploded completely, they wanted A paper borrowers who didn't know they could get an A paper loan. And nobody wants to touch stated income loans right now, no matter how good the credit score or down payment. Fact. Whether you're a seller or a buyer, you can live with it and plan for it, or you can fight it and still lose.

So what I'm going to do is compute the monthly cost of housing on purchases of a given size, together with the income to qualify. I'm going to assume this is California, with California property tax rates. Furthermore, I'm just going to make a flat allowance for Homeowner's Insurance plus Association dues of $250 per month. It's not exact, but it'll put you in the right ballpark. With a specific property, you can get closer, or course.

Let's start with 90% financing, a 90% loan with PMI, because that's the only way to do it right now. This obviously requires the buyer having a 10% down payment plus a bit, and limits us to conforming (and now temporarily, jumbo conforming) loan amounts. I'm also going to do the numbers at an assumed 6% loan rate, because that is a better long term rule of thumb. Here's what it takes:

purch price $200,000.00 $220,000.00 $240,000.00 $260,000.00 $280,000.00 $300,000.00 $320,000.00 $340,000.00 $360,000.00 $380,000.00 $400,000.00 Monthly COH $1,657.52 $1,798.28 $1,939.03 $2,079.78 $2,220.53 $2,361.29 $2,502.04 $2,642.79 $2,783.54 $2,924.30 $3,065.05 mo income $3,683.39 $3,996.17 $4,308.95 $4,621.74 $4,934.52 $5,247.30 $5,560.09 $5,872.87 $6,185.65 $6,498.44 $6,811.22 annual inc $44,200.65 $47,954.05 $51,707.44 $55,460.84 $59,214.24 $62,967.64 $66,721.04 $70,474.43 $74,227.83 $77,981.23 $81,734.63

In other words, a family who wants to buy a $400,000 property with a 10% down payment needs to be making almost $82,000 per year. Them's the facts, and that's not including any existing debt service they may have. Credit cards, car payments, student loans, etcetera. If other debt service is $500 per month, you raise the income to qualify by over $1100, and the yearly income by $13,000 plus change. San Diego's Area Median Income is a little over $69,000, and a family making that much money can afford a loan of about $320,000 currently - if they don't have any other debt. If they have a huge down payment, of course, it's easier, but how many people have you encountered recently with huge down payments?

Now, let's consider people who actually have a 20% down payment. Most likely, they bought a condo a few years ago and now they've sold it, but they had enough equity in the condo to account for that 20% down on the more expensive property. Or they sold the condo and bought a starter home, and now they've sold that and are looking to move up again. This is without PMI, and having some equity means that not only are the terms of the loan more favorable, but you don't have to borrow as much to buy a property that costs the same, and so a property of the same value is much more easily affordable.

purch price $200,000.00 $220,000.00 $240,000.00 $260,000.00 $280,000.00 $300,000.00 $320,000.00 $340,000.00 $360,000.00 $380,000.00 $400,000.00 $420,000.00 $440,000.00 $460,000.00 $480,000.00 $500,000.00 $550,000.00 $600,000.00 $650,000.00 $700,000.00 $750,000.00 $800,000.00 $850,000.00 $900,000.00 $950,000.00 $1,000,000.00 MonthlyCOH $1,417.61 $1,534.38 $1,651.14 $1,767.90 $1,884.66 $2,001.42 $2,118.18 $2,234.94 $2,351.71 $2,468.47 $2,585.23 $2,701.99 $2,818.75 $2,935.51 $3,052.27 $3,169.04 $3,460.94 $3,752.84 $4,044.75 $4,336.65 $4,628.55 $4,920.46 $5,212.36 $5,504.26 $5,796.17 $6,088.07 mo income $3,150.25 $3,409.72 $3,669.19 $3,928.66 $4,188.13 $4,447.60 $4,707.07 $4,966.54 $5,226.01 $5,485.48 $5,744.95 $6,004.42 $6,263.89 $6,523.36 $6,782.83 $7,042.30 $7,690.98 $8,339.65 $8,988.32 $9,637.00 $10,285.67 $10,934.35 $11,583.02 $12,231.70 $12,880.37 $13,529.05 annual inc $37,803.04 $40,916.68 $44,030.32 $47,143.96 $50,257.60 $53,371.23 $56,484.87 $59,598.51 $62,712.15 $65,825.78 $68,939.42 $72,053.06 $75,166.70 $78,280.34 $81,393.97 $84,507.61 $92,291.71 $100,075.80 $107,859.90 $115,643.99 $123,428.08 $131,212.18 $138,996.27 $146,780.37 $154,564.46 $162,348.56

Once again, this assumes there's no other debt service involved. But if you've got a home with a $700,000 price tag, you're still looking at trying to lure in a buyer family that makes a minimum of at least $10,000 per month. These kinds of buyers are not going to go for old carpet and a carpet allowance. They want your seller to have already dealt with it. Even if it's the cheapest, most beat up property in Rancho Santa Fe, on the smallest lot, the sellers are still going to take a hit on the price that's a lot bigger than the actual cost of such things for not dealing with it themselves.

For a successful listing, you need to know your target market - know who you are trying to sell to. It's a hard lesson to get across, but it really is necessary to pick your targets in order to hit them. Some people do buy properties that are apparent mismatches between their lifestyle and the property, but not many. As listing agents, we need to understand what is and is not a match before setting off to attract a buyer, and recommending appropriate measures to the owner before it goes on the market. We need to write the listing promo appropriately to attract to needed demographic, and not only we but our clients as well are much better off by concentrating our marketing efforts where they are most likely to net a fully consummated transaction at the best possible price.

Caveat Emptor

Original article here


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This page contains a single entry by Dan Melson published on January 30, 2014 7:00 AM.

Where Would I Invest A Million Dollars? was the previous entry in this blog.

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