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Setting The Right Price

Home Investor Selling Rule #2

"Overpricing your home can be worse than under-pricing it."

Your first instinct might be to put your home on the market for the highest price that someone has told you your property might be worth. In fact, many people do just this in the hope that somebody will "bite" and pay top-dollar for their home.

Unfortunately, this is rarely a good idea if you actually intend to sell your home. (There are two exceptions to this which will be covered later). The reasons for this will become clear in this section and I'll give you some guidelines that will help you figure out the best price at which to market your property to reach your goals.

The first thing you need to understand about property prices is your home is going to be placed on the market with competing properties (homes similar to your own in a similar price range). When you consider the price of your home, you must determine where you would like to position your home when compared to your competition; do you want to be the most expensive property, the best value or somewhere in the middle?

When buyers are looking for homes they will compare your home to your competitors and they will determine your home's value by comparison to others on the market. It will quickly become evident to buyers that your home is either expensive, good value or priced at a fair market price.

If your home is expensive by comparison to other similar homes in the area, you will attract fewer potential buyers to view your home. The result is you are less likely to receive offers you consider acceptable since most buyers will opt to place offers for other homes that represent better value (the exception to this is where your home has some unique features, such as waterfront, that are not available in other homes currently on the market. In this case, your home can command a premium in the market and still be considered good value).

A fair-priced home will attract willing and able buyers that are going to be willing to make an offer on the home based upon the features they desire compared to other homes in the area.

If your home is underpriced, it will attract significantly more buyers to view the property and this will lead to a number of competing offers being made on the property. This can result in a feeding frenzy of offers being made, none of which have to be accepted, allowing you the luxury of determining what "offer" might be acceptable. This might actually be an offer above the asking price. There is nothing to stop you from making a counter offer to a buyer that is above your asking price.

In the overpriced home, the seller is faced with a long, drawn-out sales campaign, frequently resulting in the need to lower the price several times in order to attract buyers.

Exceptions to the rule

The two exceptions to the rule against overpricing your home are:

1. Unique or difficult to value properties such as special waterfront homes in an area where few similar properties have sold in the past twelve months. In this case, setting a price that is on the high side allows you and your agent to quickly gauge the interest at that price point and adjust it as necessary.
2. If you do not want to sell immediately and you don't mind having buyers brought through your home for months on end; then you may be justified in setting a high price, provided that you recognize the risks and drawbacks of this approach (see below) and that you accept your home might never sell at this price point.

Fresh Homes Sell Better Than Stale Homes

The "freshness" of your home in the market will make a big difference to how much you can get for it.

Consider this: the majority of buyers to look at your home will pass through it in the first six to eight weeks, while it is fresh on the market. This is your best chance to sell your home for top-dollar. During this time, your home is fresh in the mind of Real Estate Agents in your area, and they are introducing their buyers to your home in the hope it will be attractive to them.

If your home is overpriced, buyers will quickly tell their brokers and brokers will guide their clients toward homes they are more likely to buy within their price range. The result is, brokers will avoid wasting time on your home if they believe there is no chance of securing an offer at the price you are asking. (A good broker will always show properties based upon their actual market value if they believe there may be some flexibility on the price).

Since the majority of homes in the US are still sold to buyers working with brokers and their agents, including homes initially listed as for-sale-by-owner, it stands to reason that an offer on your home will probably be secured through a Real Estate broker.

If a home does not sell in the first 90 days it is on the market, it begins to become stale in the mind of many brokers. It now begins to take on the air of a property that is difficult to sell. Brokers become more reluctant to "sell" the property to their customers, preferring instead to offer other, more attractively priced homes. (Bear in mind, a broker wants a quick sale, any sale will do, and it doesn't have to be your home).

How to determine if your price is too high

When you first put your home on the market (hopefully using a Home Investor Specialist to assist you in marketing your home), you may decide to list it for top-dollar by comparison to other homes on the market.

Your Home-Investor Specialist will typically host a "broker's open house" when other real-estate professionals in your market area will be invited to view the house so that they can decide if it is suitable for any of their customers.

At this time, your Home Investor Specialist may discuss your property with several of the agents from other brokerages to get feedback on the pricing. They do this because the more feedback they can get, the better able they are to judge the price point in the market.

The Broker's Open house is typically followed quickly by a buyer's open house which is open to the public. Your Home Investor Specialist will also use this event to gauge the reactions of buyers viewing your property for the first time.

This combined feedback is typically enough to determine how close to fair market price the property is positioned.

If you initially position the property at the high-end, and you are determined to sell, a series of graduated price reductions within the first six weeks can be used to more carefully position the property against the competition. (However, it is much better to get the price point right at the outset).

Example of the impact of pricing too high

Lets say your Home Investor Specialist has reviewed your home against similar homes that have sold in the area in the past six months and found that your home is valued at $500,000. Lets suppose a review of similar properties in the area reveals ten homes currently on the market of a similar size, in the same type of neighborhood, with a similar number of bedrooms. The highest price home is $540,000 and the lowest priced home is $490,000 with the remaining eight being spread evenly between.

One of the first things your Home Investor Specialist will do will be to analyze how long each property has been advertised on the market. The chances are the higher-end homes have been listed for longer than the lower-priced homes.

Sometimes a detailed review of homes that have sold may reveal many homes were initially advertised at a high price (e.g. $540,000) but they actually sold for closer to their market value of $500,000 or less.

A buyer is going to be comparing your home to each of the other ten homes. If all the homes were identical, it stands to reason the buyers will place offers for the best-value homes and not for the least-value homes. Fortunately, not all homes are identical and buyers are all looking for slightly different features in their ideal home. This means you can use some judgment to determine what size of "dollar premium" your home's unique features are worth.

Lets look at what happens at three price points with three exaggerated scenarios:

Scenario One: Offered at $539,900

Your home must be the finest example with many unique features that buyers are willing to pay a premium for in order to command this price beyond the estimated value. (Bear in mind, the estimated value of $500,000 will already have taken into account most of these features).

Even if your house is in pristine condition, if it is valued at $500,000, at $539,900 it is overpriced and is high even against the competing homes on the market.

This home will sit on the market and receive very little attention from buyers and brokers because they are busy looking at making offers on the homes that are closer to fair-market value.

It is likely you will become concerned after four or five months of inactivity and either lower your price or find a new broker (who will tell you that you need to lower your price).

Even after lowering the price to $520,000, the home attracts little attention because it is still overpriced.

Another month goes by and the price is lowered to $510,000. Now the home is becoming more attractive, but most buyers have already seen the home and rejected it. It has been on the market for six months and not sold. Now buyers and brokers perceive there is something wrong with the home and that it is difficult to sell so brokers avoid showing it to their customers.

Now desperate for a buyer and to generate interest in the home, the price is lowered to $495,000; $5,000 below its value. Now your home begins to look attractive to a new crop of buyers and it generates interest. However the buyers notice the home is "difficult to sell" because it has been on the market so long and you have lowered the price so much. Sensing desperation, a buyer offers you $480,000 and you counter with an offer of $490,000. They counter with $485,000 and you decide to accept the offer rather than lose the buyer.

Result: Sale price $485,000, Time on the market = nine months.

Scenario Two: Offered at $510,000

At this price-point, the home is perceived to be fair value or a little above but close enough so as to be negotiable. The home attracts buyers looking for homes in the price range of $500,000 to $550,000 but might exclude buyers searching for homes from $450,000 to $500,000.

The home generates reasonable activity with showings from Agents and within three or four months, and offer for $500,000 is received.

A counter offer of $510,000 is made and the buyers come back with a final offer of $502,000 which is accepted.

Result: Sale price $502,000, Time on the market = five months.

Scenario Three: Offered at $490,000

Now your home is a bargain! Buyers searching for homes in the $450k to $500k range will find the home attractive compared to others on the market but you may miss out on buyers looking in the $500k+ price range.

However, brokers will bring these buyers to see your home because they sense it will not last long at this price point. This helps to create a sense of urgency.

Three offers are received at the very first open house, one for $480,000 and two for the asking price.

You have the option of counter offering the two higher offers with offers to sell at $510,000 or leaving them to think it over, advising them you want to wait to see if any higher offers come in. Meanwhile there are plenty of new buyers coming through willing to make offers. Your Agent advises them that although the price listed is $490K, you have already received two offers for that price and are waiting to see what other offers might be made. This tempts a new buyer to offer $500,000.

Now you have three buyers emotionally committed to owning your home and you can now counter to all three a price you are willing to accept from the first buyer willing to make an acceptable offer, e.g $515,000.

You receive two offers at the asking price of $515,000 and one is a cash offer which you accept.

Result: Sale price $515,000, Time on the market = twenty one days.

Conclusion: Advertising a home at too high a price without lowering the price quickly will nearly always be worse than advertising the home at a discount price and negotiating the price up.

Other factors that can impact the price you can get for your home or investment property