Harmful Effects from Changing the Listing Price?
With the housing market showing signs of a recovery, sellers may think they can list their homes at a higher price and adjust if necessary. That may not be a good strategy. This is a post we ran last year by Ken H. Johnson, Ph.D. — Florida International University (FIU) and Editor of the Journal of Housing Research. To view other research from FIU, visit http://realestate.fiu.edu/. – The KCM Crew
The Research
The ResearchAre there any negative effects from changing the listing price of a property? This question haunts Brokers/Agents as well as sellers of property every day. At present, there does not seem to be a consensus answer to this question within the professional real estate community. Fortunately, this question was scientifically investigated by John R. Knight. Unfortunately, few know the results of Professor Knight’s research.
In Knight, the impact of changing a property’s listing price is investigated. Additionally, the types of property that are most likely to experience a price change are also estimated. The findings from this research indicate that, on average, properties which experience a listing price change take longer to sell and suffer a price discount greater than similar properties. Furthermore, bigger price changes are found to experience even longer marketing times and greater price discounts. Finally, as for which properties are most likely to experience a price change, Knight finds that the greater the initial markup; the higher the likelihood that any given property will experience a listing price change.
Implications for Practice
Sellers as well as Brokers/Agents should therefore be aware of the critical necessity of getting the price correct from the start. Sellers wanting to over list will ultimately take longer to sell and will sell their property for less, on average, according to Knight. Brokers/Agents’ desire to take a listing and get the price right later will ultimately lead to their working harder according to Knight, and they are not doing their sellers any favors. Thus, an initial and detailed analysis of the proper price is much more critical than many originally thought.
Interestingly, I have found in my own research that the direction (up or down) of the listing price change does not matter. A listing price increase and decrease both lead to similar results found in Knight’s work – longer marketing times and lower prices. Therefore, get the price right from the beginning. It is best for all.
Endnotes
[1] Knight, John, R. (2002). Listing Price, Time on Market, and Ultimate Selling Price: Causes and Effects of Listing Price Changes. Real Estate Economics. 30:2, 213-237.
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This post was SO good! I’ve been telling my sellers this for years now. Listing your price/home high and then dropping the price if (when) it doesn’t sell may have worked in the past, but not in our current market! I’m happy to see that others see as well that this is so damaging to someone’s chances of selling their home. Great post guys, keep it up, we need this kind of truth out there!
List at average sold price for similar homes.
Couldn’t agree more. Properly educating a seller regarding market values and listing a house at the right price is one of the most important services a Realtor can provide. Though it can be challenging.
The right price is crucial in this market. Price it right and sell it fast, for 95 to 100% of list, or you will have to drop the price anyway, and usually much lower than it would have sold for if it had been priced right from the outset. Great post!
Hi Linda – Is Strategic Marketing a program – if so where does one view it?
thanks,
Karen Everhart
karene@lnf.com
The large bank servicers are all offering Short Sale Seller Incentive Programs (cash at closing to the seller) for loans owned (Held for Investment) or loans where the investor allows the bank to negotiate a short sale from start to finish. The amount of the incentives ranges from a few thousand to thirty thousand dollars. Some banks/servicers allow HAFA or other incentives in addition to the amounts offered by the servicer. States with the longest Judicial Foreclosure timelines, including New York (+1000 days) and Florida vie with hardest hit states for the highest incentives.
Clearly Banks and investors are paying for Short Sales now, rather than risk the wait. Imagine being a borrower who has not made a payment since 2005 who is now eligible for a $30K cash incentive at closing in a state where deficiency must be waived. I sometimes wonder if those borrowers have saved ten cents from the thousands of dollars they did not pay. Do they feel like lottery winners? Now let us see if the incentives make a
difference by getting more borrowers in default to move on with their life and paying for housing once again. I read somewhere that the borrowers who are spending what was their house payment for consumer goods have provided a boost to the economy. What will happen to consumption when all defaulted borrowers rejoin the ranks of renters?
In my earlier comment I did not complete my thoughts on Changing List Price on a property. I believe the price should be set at Fair Market for a successful Short Sale. The “Proactive” short sales with high seller incentives offered by large banks and some private investors all have a requirement that the listing price be set by the servicer/investor. There are two reasons for this. The “Reactive” short sales where an agent lowballs a listing price to get showings and offers to submit for short sale approval often feature multiple counter offers, long timelines and a low closing ratios.
Investors want current “Fair Market Value” for every property to mitigate loss and servicers who work for them run the risk of the investor alleging “improper servicing” if the offer accepted is below fair market. Investors try to make servicers buy back loans at origination value everyday for a variety of reasons. In Nevada, a buyback under these circumstances would cost the servicer more than 70% of the full origination value. That is far larger loss than the difference between a low bid and “Fair Market” as determined by the servicer. Agents are far better off to complete a CMA with recent closed comps and submit with every offer when they disagree with a valuation. Someone out there explain to me why a buyer looking at a $2M property will not go out of pocket $500 and get their own appraisal for the agent to submit with a CMA and Photos of “property conditions”?