The delicate art of pricing

Please note that this post is an excerpt of the webinar hosted by our sister company, The Landlord Code, where our co-founders coach DIY landlords how to avoid problem tenants and maximize rental profitability. Get access to more training like this in our (free!) private Facebook group HERE.   

Today, we are discussing the delicate art of pricing. How to price your properties to get maximum rents while avoiding ROI killing vacancies. – Now you can still use the dartboard technique which is blindfolding and putting prices on a dartboard and just throwing it at it. – Wait! There’s nothing wrong with that plan? – It works once out of every 100 times but if you want to learn how to price your units properly and effectively to avoid the ROI killer, you wanna listen to this. – Now, if you’ve been following us for a while, you know that one of our mantras is the number one secret ROI killer is vacancy. Now most landlords, when it comes to pricing their property start to think, okay, highest rent equals highest return, price my property up here, that’s how I’m gonna make the most money. – And I’ll tell you that’s the biggest misconception that you can have. So, today we’re going to cover that. We’re gonna cover the misconceptions around pricing and like exposing that vacancy is the number one ROI killer. We’re also gonna talk about the bottom line reason you wanna price your property within the market. And third, The three tips that you wanna use when to price your property.

Let’s just start off with the number one secret- Before we jump into, I would love to share a quick story. Because sometimes I think it’s hard for people to conceptualize what we’re talking about. Like cause it’s so easy again to fall into the trap of the more money I ask for my rental, the more money I’m gonna make. – Absolutely. – But we had a client.This is what happened, maybe it was about three years ago or so. This was a longstanding client who was actually very dear to me. He was one of my first clients and the tenants we placed stayed a long time. They stayed like six years or something. So along the gap between when we worked together. He called us up to list his property. He’d made a few improvements. – Well, I mean, he made a lot of improvements. He upgraded the space considerably. – Yeah, it was nice, but he put a lot of money into it. So he came to us with this idea that his property was worth, I think he wanted $7,500 a month. Right? And our valuation at the time was like, uh-uh buddy. This is like, – Six – I think we thought six, top 55. Somewhere between 55 and six. The other challenge was he brought us this rental right before the holiday season. So I think it was the tail end of the fall. And that is one thing to consider when you’re putting your property on the market, if you’re going to be doing work, which we always support but if you’re going to be doing work, you need to think about that timeline about when it’s gonna be finished. And our market here in Marin County, you do not want a higher end rental heading into the holiday season. – Right. – So anyway, so he was kind of up against it to begin with. It was not the time to be doing sky-high pricing but he insisted at 75. He was a long time client, dear to my heart. So, okay buddy, we’ll try it. – We’ll go with your 75.

So we typically always tell our clients who are stuck on their pricing. “Hey, We’re gonna try it for a couple of weeks and see what happens. If we’re not getting traction, then we’re gonna make an adjustment”. And so we were counselling him to make these adjustments, probably within the first two weeks. – Yeah. Cause no one’s calling. It was just crickets. It’s way too big a gap from where the property was priced. – And the feedback was not phenomenal – Not good. Not good. And, but here’s the deal, in his mind, he’d put all this money into this rental, doing this remodel. He’d improved it. Why in the world, was it not worth this much more? He’d been getting 45. And again, our assessment was 55, maybe six. So here’s what happened, three months with us our listing agreement expired, couldn’t get it rented. And he ended up going with another agent. They listed it. This was after we got through the holidays. They listed it at 55. Got it within days. But here’s the net. – No, I’m sorry. Let me correct you there. They actually listed it for above six and ended up taking 5,500 within a couple of weeks. – Okay. But here’s, here’s the loss and here’s what we want you to take away from this. In those 90 days in the time that we had that property, had he just priced anywhere between that 55 and six he could’ve had it rented within the normal let’s call it 14 to 30 days. He didn’t. So he had that extra, two and a half months vacancy on the market. Now, those are your irrecoupable, totally lost dollars out the door. Think of them as little butterflies with little dollar signs, fluttering on away fluttering out the door, never to be seen again. – And if you’re doing the math, that’s about between 17 and 18 thousand dollars that he just lost. – Gone. Gone. – Gone, that he could have had right away. He could have had that pretty much right away if he just priced the property where it needed to be initially. – So I have a new favorite quote and this comes from the founder of orbits. Never bring an opinion to a data fight. – That’s right. – And I seriously, I wanna make T-shirts of this. I love this quote so much. When you are pricing your property it is never about what you think it’s worth. And it is never about what your neighbor says he got. It is always about the data. – Yes. and what you want, you wanna look at where the market’s at. So, the bottom was jumping– – So let’s jump into three things we’re talking about today. – So, we just talked about the misconception about valuation.

Pricing your property where you think it is versus where it needs to be and wasting time on the market by not having your property fill to gain those vacancies. That’s going to kill your ROI at the end of the year. So when you’re calculating ROI, it’s going to be that. So if you’re thinking, “Oh, if I just got X amount of dollars, everything will be fine”. Well, if it takes you 90 days to get X amount of dollars – It’s not fine! – You lost so much money! – It’s not fine! – If you like to burn money, then you can do that. If you’ve got time to kill and actually that’s a good point to bring up. We get this from people. It sounds like, “Well, look, it’s not worth it if I don’t get this amount of money or I’m not gonna rent my property for anything less than X dollars”. And let me tell you that is the wrong mindset to have. If you’re in this to make money and earn passive income because you have to roll with what the markets doing. If you’re not doing that, you’re gonna to lose. – If you’re in it, for some reason, other than long-term wealth building or building a long-term money which, I don’t think most people are, then you you can price it wherever you wanna price it.

But if you are actually in it to further your financial goals, to have an asset that appreciates and value, to have an asset that’s working for you, then it’s always about the data and it is never about your opinion. So we actually have a tool that we use for some of our clients at Foundation Homes and which we are going to be including with our course, “The Landlord Code: Million-Dollar Mindset” course, which is dropping late March. – Late March. – Oh, we are in March. So, late this month. It’s an awesome tool. It’s called our vacancy calculator. And this is where we actually show you the breakdown. You can plug in a rent. You can see what it looks like with 14 days vacancy 30 days, 60 days, 90 days. You can see how it’s gonna look when you start to drop the price, 10%, 20%. It’s one of our favorites. It’s awesome. – It shows you where you’re gonna be at the end of the year versus… And you can make a business decision, an educated decision on whether or not it makes sense for you to jump into the market high or low. We’re gonna counsel you to be within the market but you’re gonna be able to see the realities of that decision through this calculator. So, it’s going to be an amazing tool for you to use, when you join our course.

So that’s point number one. That was misconceptions about ROI and vacancy. So the number two, – Number two! – The bottom line reason why you wanna price your property within the market. – Okay. So there is a top performing agent, real estate agent, nothing to do with rentals, in America who put out a book. Her name is Tracy McLaughlin. – Shout out to T-Mac. – We call her T-Mac in our office. I don’t know if you know that Tracy but that’s our nickname for you. And she put out a book sometime last year, and I’m sorry. I meant to bring my copy of the book. It’s phenomenal. In the show notes, we’ll drop it in a copy. This is great for agents and it’s great for the consumer. For anyone just thinking about the philosophy, her book is about how much money sellers in America regularly leave on the table by not improving their properties. But a lot of what she talks about is applicable to rentals and investments. And she talks about a theory where everyone’s familiar with the concept in sales of the multiple offers in the overbay. The idea that you price your home… If this is the market value of your home and you price it just a teeny bit under it cause you’re trying to elicit multiple offers. The market is going to over-correct and you are actually gonna end up getting more money than your property was worth. But here’s the interesting thing, studies show that the market also tends to over-correct on the downswing. So if this is the actual value of your property, but you price it here. Then what happens, isn’t here. What happens is you over-correct on the under swing, and you end up down here. So this is the actual market value.

You end up by heat, down here. And that’s not even including the ROI loss that you’re gonna have because of all those loss days on market. Cause in rentals you got to factor in those cause those days are gone. – Exactly, in the rental market works a lot differently than the sales market, because generally speaking, you’re not getting multiple offers. So pricing your property correctly on the front end is gonna make all the difference. If you overprice your property on the rental market it’s getting exposed on Zillow, on Craigslist, on Redfin, all these different rental sites and people are looking. Today’s tenants or future tenants are super tech savvy, and they’re looking. So they see a house that’s been on the market for 20 days, 30 days, 45, 60 days. They’re gonna think that there’s something wrong with it. Why isn’t it renting? And the reason why is because it’s priced too high and then you’re gonna have to drop your price significantly to regain interest – Here, here. Plus the little dollars flittering away, fluttering away, the little butterflies with your dollars or cicadas. I think this is the year where in the East coast, there’s like the massive cicadas coming out this year. – Right. And I hear a lot of landlords who I talk to like I had a plan. This is my plan. I was gonna invest X amount of dollars into my property. I was gonna get X amount of dollars return and it was gonna work. Let me tell you something. Mike Tyson’s former trainer Cus D’Amato used to say this. He said, “Everybody has a plan until they get punched in the face”. Don’t get punched in the face by the rental market. Price your property correctly. – Okay. So you wanna price it. So, now we’ve already talked about point number one, is watch out for the secret ROI killer, your vacancies.

Point number two, you’ve understood how important it is to price it within where you need to be on the markets. So now, point number three, we want to tell you actually how to price your property. – There’s three tips. We got three tips. – So first thing it’s easier when you’re an agent or where you’re a property management company cause you have access to real data. We have access to MLS. And I understand this is in our state, California. I understand in states like Texas, there is a non-disclosure state. So the public doesn’t get access to the MLS the way actually the public here can, through things like Zillow and there’s kind of some backend things. But so as a DIY landlord, if you’re trying to price your property, you need to have an approach. You need to know how you do it. So here are our three tips. If you’re not an agent, if you don’t have access to the MLS, here’s our three tips for DIY landlords for how to get done –

So number one, use the free mediums that are available. So what I mean by that is that there are a ton of sites, real estate sites that are out there. We all know about Zillow. We all know about Trulia. We all know about Craigslist. So that’s a good place to start just to see what your competition is doing. Now, if your competitions priced a thousand dollars or a few hundred dollars below where you are then that’s as an indicator that maybe, you might be overpriced. Also, it’s a good idea to look at what those properties look like on the inside. If they have photos, like if they have hardwood floors or carpet or you can see what the kitchen’s look like, the bathrooms. And that’s a good way to start the comparison process through your rental property. – Yeah. So in our course, we actually have a formula and we have a tool that’s gonna help DIY owners sort of use a formula to approach. But basically, if you’re trying to do it on your own, you wanna look at, you wanna use these free resources that are available to you, make a list. Make some pros and cons of what’s better about your house or the other properties.

The second thing you’re gonna wanna do is go see some of these properties.

So go to some of the open houses that are published or call some of the landlords and be upfront that you’re landlord and you’re calling and you’re just looking for a little bit of feedback. Say, I see, you’ve got this three bed, two bath marketed up on Craigslist. You’ve got it up at $3,000. What’s your call level been like? And that’s a question that professionals know to ask that a lot of DIY guys don’t realize. Call volume tells you a lot about a property. And that’s how we know internally. We just kinda know, we’ve been doing this so long. We have a gut sense of what your call volume should be like. But if this landlord tells you I’m getting a ton of calls, a ton of showings then you can think to yourself, “Okay, he’s in the zone”. – Why isn’t it renting? – Well, depends on how long it’s been on there. But I mean, the inquiries are coming in. So, he’s priced well, either at or below where the market should be. If he tell you he’s got no calls, well either something’s very wrong with the property or the pricing is off and it’s significantly high. – Yeah. And then, you know landlords ,fellow landlords are really… Don’t be afraid. – Yeah. – There are people who wanna help out and, they’re willing to answer questions. No one’s gonna be like, “Don’t call me. Your competition!” No, they’re really gonna want… They’re gonna answer your questions. And also, there’ll be an opportunity maybe to send leads in either direction because maybe your property doesn’t work. But this guy, it might work for someone that you’re showing to and vice versa. – Yeah You never know. But people are really open and hey, you might need a new friend. – Yeah, you never know. So check out open houses. Don’t ask someone to give you a private appointment. Don’t pose as a tenant especially– – Yeah, be honest. – We are now under like COVID circumstances. You don’t wanna put anyone out, but you can offer to piggyback on an appointment, and we’ve done that when we need to check out inventory or again, just go to open houses in your area so you can really see and feel how this product compares to your product. All right? – And the last thing, this is money well spent, but don’t be afraid to pay a professional for a professional opinion. So if there is a copy management company or in your area or a real estate agent that specializes in rentals like where we were when we first started our business. Call them up, be open to paying them. They will gladly, be happy to take your money, to give you good information.

And it’s money well spent. It’s money that you would otherwise waste by having a vacancy for your property. So pay somebody to help you price your property correctly within the market. And who knows? They actually might have somebody for your property. – Yeah, you never know. I mean, we get calls all the time from DIY landlords who are just pumping us for information. We get calls from real estate agents who just want our help with pricing. For us, because we’ve been doing it so long, it’s really easy for us to price a property over the phone. We won’t go to a property and price it for you, unless you’re hiring us. We do price evals for, I think, 500 bucks right now. We’ll send our team out and we’ll give you a proper workup. But if you just call and you want three minutes of our time, we can price that thing pretty quickly. – We can give you a range through work within. And you know what, like karmically, it’s a really good thing to do, because people, they wanna help. People generally wanna help you out. – Yeah. So, the three tips if you’re DIY landlord, trying to price on your own and you don’t have access to actual comps… Oh, one thing we forgot to talk about. When you’re looking at these free mediums, the Zillow the Craig’s list and all that, or when you’re calling these landlords and asking about their properties, keep in mind, the numbers that you’re seeing, these are asking prices. – Oh, yes. These are not the prices that they have got or that they’re getting. So it’s really easy, and we get this a lot in our property management company, an owner says, “But I see X Y Z, listed on Zillow!” – Phil’s house down the street’s gonna get 60 — – He says he got da da. – And like well Phil’s house is still on the market. And it’s been on the market and it’s probably overpriced. – Right. So that’s the hardest part actually as a DIY landlord that you only see what’s out there, you don’t see what is actually closing at. – Right. So if you don’t have access to MLS, that’s why you have to do a little bit of digging. And that’s why it’s important that one, You go to the free mediums, you look at what’s out there, you do your own assessment based on the photos. Two. You start calling people. You call the landlords, you go to the open houses, you try to do your own diligence. And then three, you talk to a professional and consider shelling out a couple of hundred bucks to get an actual, legit comp-based opinion because it’s worth the money. – And here’s the bonus tip. It’s a business. Leave your emotion at the door. It’s a business. So you wanna make sure that, any pricing that you’re thinking about has zero to do with how you feel about the poverty and everything to do about what the market’s gonna bear for your property. – Yeah. You gotta think of it like an art teacher versus a mathematics teacher. When the art teacher is grading your project, it’s subjective. Who’s to say that this artwork is an A or a B or to interpret what it is? – Right. There’s a drawing that our daughter did on an airplane that was supposed to be a castle that looked a lot like something a little bit more X-rated. Who’s to say what that thing actually was or wasn’t? – It was a castle for sure. It’s a castle. I wasn’t gonna guess. Versus the mathematics teacher. It’s pretty easy to know whether you got the correct or incorrect answer. It’s database. Never bring an opinion to a data fight.