The following article is an excerpt from the chapter: Pricing Your Home to Sell for the Highest Value from Mollie’s book: The End of 6%.
Let’s look at the Three Big Questions we get from consumers regarding pricing their home:
- “What Price Can I Get? ”
- “How Long Will It Take? ”
- “Who Determines Price Anyway? ”
In Other Words… “I NEED THE STRAIGHT SCOOP ON PRICING! ”
Let me start by clarifying an important concept with pricing:
There is a big difference between a listing price which the seller determines and a selling price which is controlled by the market. Or to put it another way…the seller sets the price… ultimately the buyer determines the value.
In addition, there are certain things that DO and DO NOT affect value:
Things That DON’T Effect Value
- Your Original Cost: One of the things that buyers consistently ask when they are interested in a home is “What did the seller pay when they bought the house? ” as though that would be a factor in what they should offer. The answer is…It doesn’t matter! You may have paid top dollar to buy your home few years back in a seller’s market when prices were sky-high. You may have scored a great deal because you bought in a buyer’s market. But what you paid when you bought has absolutely no bearing on what you can ask today.
- The Cost to Re-Build Today: Building costs will go up and they will go down but they have nothing to do with market value.
- Money Spent on Certain not-the-best-for-resale Improvements: There is a mantra that I constantly repeat to would-be sellers, “What you put into your home is not necessarily what you will get out of it. ” Remodeling a bath will return will return 102% of your investment but building a home office will only get you 72% back.* It doesn’t mean that you shouldn’t make your home what you want – there is something to be said for personal enjoyment. But don’t expect an automatic dollar-for-dollar return. It doesn’t work that way.
NAR® 2005 COST vs. VALUE REPORT
- Personal Attachment: That huge built-in that takes up half of your living room may hold many memories for you because of what it showcased through the years, but has no bearing on its value to a potential buyer.
Things That DO Effect Value
- Market Value: Market value is the price that will bring a sale between a willing buyer and a willing seller. It is based on the history of similar properties recently sold in the area.
- Regression is the decrease in value of a more expensive home when surrounded by smaller homes. For example: a homeowner may have added a second story to his ranch-style home years ago to accommodate his large family. However, if all of the other homes on his street have remained one-story ranches, his two-story would regress in value as compared to the smaller homes.
- Progression is the increase in value of a less expensive home when surrounded by larger homes. Example: if a neighborhood of small homes all expanded over the years except for one, that smaller home would progress in value as compared to the larger ones.
- Substitution: Substitution refers to the actual value of an amenity. Value is determined not by the cost invested in a property, but by the value derived from it. For example, let’s say you have two identical homes and both need a well. “House A” puts in a well for $9,000. “House B” hits rock and the cost for their well is $17,000. The market value of both homes would still be the same. The home with the more expensive well is worth no more because the value is in the water, not the cost of obtaining it.
- Investment in Good Resale Improvements: The best return on investment in 2005 was a mid-range bath remodel (102%) followed by a minor kitchen remodel (98%).*
NAR® 2005 COST vs. VALUE REPORT
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The Top 10 Most Frequently Heard Pricing Comments from Sellers
(Which, truth be told, have no actual bearing on correctly pricing a home. Sorry.)
- “Our home is so much nicer than those other houses.”
- “Well, my cousin, who is an agent, said it was worth a lot more.”
- “People always offer less than asking price.”
- “We can always come down on our price.”
- “We simply have to get that much out of our home.”
- “My neighbor was able to get his price.”
- “We are going to try it at our price for a month or so.”
- “But look at all of the nice upgrades we put in. ”
- “The buyers can always make an offer.”
- “We paid more than when we bought it.”
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The Importance of Pricing it Right…
A well-priced listing is the most important factor in marketing your property for the greatest value. Nothing, I repeat nothing, can touch this. Naturally, listing a property too low will preclude the opportunity for getting top dollar. On the other hand, setting the price too high discourages showings and tends to eliminate the most likely buyers from viewing your property.
From the Beginning!
Pricing your home correctly in the beginning will net you more. Let me share with you some interesting statistics:
One of the top 10 pricing comments cited above is “Let’s try it at our price for a month or so.” The problem with this logic is that the longer a home is on the market, the less it will ultimately get. If your home is listed too high in that crucial first couple of weeks, you lose your best opportunity to sell for close to market value.
A few years back, my teammate, Dina Raneri, went on a listing appointment. After carefully reviewing the sales comparables, she recommended to the sellers a list price of $250,000 which was what the market indicated the sale price would be and would enable them to sell their home within a 30 day market time. Dina explained that if the home is priced to the market from the beginning, it will usually sell for very close to list and perhaps even more, since there was a shortage of homes at $250,000 or less.
The sellers, however, insisted on listing at $280,000. They then began a process of what we call “chasing the market” i.e. dropping the price month in and out to try to get an offer. Unfortunately, by the time an overpriced home is finally reduced to the market value it originally was, it is too “aged” for buyers to offer full price.
Have you ever asked how long a home has been on the market? What conclusions do you draw?
As you can see above, Dina’s sellers paid dearly for overpricing their home: instead of selling for $250,000 or more in a month of market time, they ended up with six months on the market and selling their home for only $230,000!
At some percentage over market, no reasonable amount of time will produce a sale.
The majority of prospect activity on a new listing occurs in the first two weeks it is on the market. This happens because buyer agents maintain an inventory of active prospects that have been cultivated over time. When a home is newly listed, agents arrange for these buyers to see it. But, once this active group has seen the property, showing activity decreases to only those buyers new to the market. For this reason it is very important that sellers have their home in the best condition and at the best price at first exposure to the market.
OVERPRICING IS A VERY HUMAN THING TO DO!
It is natural to try to get as much as possible for your property. It is natural to think your home will be the exception to the rule. We all hope that we will find the one buyer who will fall desperately in love with our house, and pay our price. It is also natural to reason that you can always drop your price later. But while these thoughts are human nature – they simply ignore the realities of the market.
Overpricing…
…reduces agent activity
…reduces advertising response
…loses interested buyers
…attracts the wrong prospects
…eliminates offers
…helps sell the competition
…extends market time
…causes appraisal problems
If you have hired a professional to assist you in selling your home, one of the first and most important things they will do is to prepare an analysis of the market and use their knowledge and expertise to arrive at a range that your home will likely sell for. Hopefully, you have hired this agent because they were a referral from a friend or family member and you trust what they say. If this is the case, do yourself a favor and listen to them.
Believe me; putting a price on a home is one of the hardest jobs of a listing agent, not because the price range is hard to come by: the “actives,” “under agreements,” and “solds” — that are crucial to evaluating and understanding the market — are right at our fingertips. Rather, telling a homeowner, who may have put years of love into her home, that it may not sell for what she thinks it’s “worth” is the hard part.
A real estate professional who has a reputation for quality work will be firm and tell you what the market is showing, even if it’s not what you want to hear. And by doing so, they take the risk of losing the listing, even though they are being true and ethical. Because, unfortunately, many sellers continue the erroneous practice of choosing an agent based on who gives them the best price.
But the facts are, the MARKET determines the price for which your home will sell, not the agent or the agent’s company. The agent’s marketing can certainly influence in a seller’s favor, but it can NEVER control when your home will sell and for how much.
Please note, though, that this is not to say that marketing is not important because a listing agent’s job is to bring your home to the attention of the greatest number of qualified buyers. But their experience, expertise, and guidance are what will make the difference in your profitability when you walk away from the closing table.
Unfortunately, as it continuously happens, agents who are desperate for business will tell consumers whatever price range is necessary to obtain the listing. In the business we call this: “buying a listing.” This practice is unethical, and negatively affects reputable agents, real estate as a whole, and worse, the consumer. These unscrupulous agents are a waste of your time because invariably, once they get your signature on a contract and their sign in your yard, they will begin “talking you down.” And by then, you’ve lost your opportunity to capitalize on the market and get top dollar.
There is a reason I continually stress to buyers, as well as sellers, to be diligent and take care to spend time with and interview an agent before they put their largest financial investment into that person’s hands. Because at the end of the day, the home searching or marketing an agent does (or does not do) might be important, but the counsel they provide throughout the transaction is critical. But that counsel is only helpful if you listen to it.
There are three questions that every educated consumer should ask themselves about a potential agent:
- “Do I feel confident that this agent is knowledgeable?”
- “Do I feel a level of trust in what they say?” and most importantly,
- “Do I feel confident that are working in my best interest?”
If the answer to these questions is yes, then listen to what they say – their counsel based on their expertise and experience is their greatest value.
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