Get the Price Right… the First Time
Pricing a property is one of the biggest challenges real estate professionals face. Sellers often want to price their home higher than recommended, and many agents go along with the idea to keep their clients happy. But if you really want to do right by your clients and sell their homes quickly, you need to price every listing correctly … right from the start. We’ve laid out some pricing best practices to help you (and your seller).
There is no “later.”
Sellers and agents often think, “If the home doesn’t sell for this price, I can always lower it later.” However, research proves that homes that experience a listing price reduction sit on the market longer, ultimately selling for less than similar homes.
Ken H. Johnson, Ph.D. at Florida International University and Editor of the Journal of Housing Research, referring to previous research by John Knight, revealed:
“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.”
Additionally, the “I’ll lower the price later” approach can paint a negative image in buyers’ minds. Each time a price reduction occurs, buyers can naturally think, “Something must be wrong with that house.” Then when a buyer does make an offer, they low-ball the number because they see the seller as “highly motivated.” Pricing it right from the start eliminates these challenges.
Don’t build “negotiation room” into the price.
Many sellers say that they want to price their home high in order to have “negotiation room.” But, what this actually does is lower the number of potential buyers that see the house. And we know that limiting demand like this will negatively impact the sales price of the house (we expand on this topic more later).
Not sure about this? Think of it this way: when a buyer is looking for a home online (as they are doing more and more often), they put in their desired price range. If your seller is looking to sell their house for $400,000, but lists it at $425,000 to build in “negotiation room,” any potential buyers that search in the $350k-$400k range won’t even know your listing is available, let alone come see it!
A better strategy would be to price it properly from the beginning and bring in multiple offers. This forces these buyers to compete against each other for the “right” to purchase your seller’s house.
Look at it this way: if you only receive one offer, your seller is set up in an adversarial position against the prospective buyer. If, however, you have multiple offers, you have two or more buyers fighting to please your seller. Which will result in a better selling situation for your client?
Look at supply and demand.
In real estate, supply and demand is calculated by dividing the number of homes for sale (supply) by the number of homes sold (demand). We generally refer to this as “months supply of inventory” or “months supply” for short.
While there is no steadfast rule that will apply to pricing in every category of housing, here is a great guideline:
- 1-6 months’ supply creates a sellers’ market where there are not enough homes to satisfy buyer demand. Appreciation is guaranteed.
- 6-7 months’ supply creates a balanced market. Historically home values appreciate at a rate a little greater than inflation.
- 7+ months’ supply creates a buyers’ market where the number of homes for sale exceeds the demand. Depreciation follows.
When you discuss home values with either a seller or buyer, you should be prepared to discuss both the supply and demand for homes in their category. You should also be prepared to discuss any projected change in those numbers (new housing development leading to increased supply, new industry coming to town leading to increased demand, external forces such as government regulations or mortgaging requirements, etc.).
Set the “price floor” and the “price ceiling” using your CMA.
For each potential listing, do a comparative market analysis by type (4 bedroom colonial, 3 bedroom ranch, 2 bedroom condo or apartment, etc.).
- Set the price floor – the lowest the house should sell for. Find 3 comparable homes that have sold recently. Since these homes have sold already, you can project that the average price among them is the bottom number you should expect.
- Set the price ceiling – the price at which you are confident the house won’t sell for. Find 3 comparable homes that have been on the market a while or removed after a long wait. The fact that they haven’t sold is an indication that they aren’t priced properly (or they would have sold). Taking the average of these homes should provide a top barrier for your pricing conversation with the seller.
- Know the current competition. Now find 3 comps that are currently on the market. You’re looking for differences that will help determine value in the buyers’ eyes. Things such as condition, extra amenities (pool, etc.), updated kitchens and baths, and your seller’s timing needs (do they need to move for a job transfer?) will help you determine the last piece of the pricing puzzle.
The Price is Right
Just like anything else in real estate, great pricing comes down to educating your clients and building trust with them. Listen to their concerns and then help them understand the facts about pricing. Give them the best advice, trust their intelligence, and tell them what they need to hear rather than what they want to hear. This will put you and your clients in the best possible position.