Pricing a Property:
There are many different strategies for pricing a property to sell. Some work better than others.
List the property for a price that is as close to market value as possible. Market value can be determined by analyzing sold comparables. Monitor the buzz on the property. Any property will experience buzz when it first hits the market. Agents will call, other people will call on the for-sale sign, many agents will visit the property on the broker’s tour (open house for Realtors), and many more will come to the open houses. A property that is priced well will see this buzz continue until offers start coming in and possibly beyond. While the buzz exists, it may not be necessary to reduce the price (as price reductions are buzz-boosters). It may sometimes take 14 days for an offer to come in. A property that is priced too high will see this buzz wear off within 7 days or even less. When the buzz wears off quickly or the property has been on the market for over 30 days without any buzz (if weeks are going by without a phone call), then it is definitely time to reduce the price as the property has become what is known as a stale property.
The most effective way to reduce the price is to monitor the buzz and reevaluate the pricing of the property every 7-14 days. Continue to drop the price every 7-14 days until a decent amount of buzz is associated with the property again. An offer will usually come as long as the buzz continues. Also see: Is my Realtor Trying to Undercut the Value of my House (to sell it quicker)?
When finally an offer comes in that is acceptable, you have hit market price. Some sellers may state that, “these things take time.” This is not the case: refer to the below paragraph on “Following the Market Down.”
Most listings sell with great agents using the normal strategy.
Aggressively Low Strategy:
This strategy is employed in hopes of receiving multiple offers. Simply, work with your agent to determine what the market value is. Then, list the property for a price well enough below market value to create such a large amount of buzz for the property in hopes that multiple will offers come in.
What happens when multiple offers come in?
When multiple offers come in on a listing, there is clearly a desire for the property at this price. This does not mean that the price should be raised (some sellers will become exited as a result of this normal “buzz” and will risk the loss of all of the offers and potential offers by scaring people away. At this point, a wise agent will advise a seller to respond to each of these offers asking the offerors (buyers) to respond with their “Highest and Best” offer. This, in essence, creates a bidding war for the property. By listing a property under the aggressive strategy, a seller stands to sell a property quickly and near market value (as bids will push it up to market value.
Here in lies the beauty of real estate: the market generally won’t allow a property to sell for too little. Even foreclosures and shortsales (banks will hire brokers to conduct broker price opinions to ensure that the bank is selling the property for a value that is close to market value and can be substantiated by comparables).
What happens if only one offer comes in at the low price?
If a property has been listed at an aggressively low price and only one offer comes in, this one offer is an indicator that the property is listed just right where the market merits its value. In a depreciating market, take the offer and run before prices fall even more.
What happens if no offers come in?
If no offers come in after 14 days, the seller should be considering a price decrease.
This strategy revolves around pricing a property to satisfy a seller’s ego. There’s simply no soft and friendly way to say this. Highballers are agents who will give into a seller’s ego and price a property above market value just to have a listing. These properties tend to sit on the market indefinitely or will sell once the seller finally realizes that the price they want to sell the property for has nothing to do with how much the property is worth. Some sellers will argue that because they bought the house for $800,000 and because they have it listed for $600,000, it must be a deal. Well, not if the real estate cycle and comparables sales comparatively state that the market value for that particular property is $500,000.
What Does Not Create Value:
- How much a seller bought a property for.
- How much the seller has already reduced the value.
- How much the seller wants to net (net proceeds) from the property.
- (In a depreciating market) How much the seller has spent on upgrades on the property.
- Why the seller is selling (death, divorce, court order, all of these things do not create value).
- How much time the seller has spent working on the property.
- Raising the price and calling it an opportunity lost for potential buyers.
It is very common in real estate to find that sellers initially want to price their property at a price they think their property is worth, only to realize that the property is not selling and then they drop the price. Here’s the problem: in a depreciating market, the market typically declines faster than a seller reduces the price of their home.
Take a close look at the following chart.
As you can see, when the market declines faster than the seller reduces the price, the seller ends up losing more money by “following the market down.”
Here is an actual example from the MLS of a seller who has been following the market down for almost 3 years:
As you can see, in February 2009, the sellers listed the property for just under $1.4 million. 2.5 years later, they have dropped the value of their property $731,000 (over half) and still have not sold the property even at a price of $669,000. See, in Southern California, real estate prices fell 10% from June 2010 to June 2011. Knowing this, had the sellers of this property listed their home for $799,000, or even $849,000 in February 2009, the property may have sold for that price. However, the sellers chose to follow the market down rather than to shoot ahead of the running deer. The above image also exemplifies why it is imperative to reanalyze property pricing every 10-14 days as opposed to every few months.
Shooting Ahead of the Running Deer. Correct Way to Respond to the Market:
The correct way to respond to the market is to shoot ahead of the running deer. What this means is that a seller should price a property – in a depreciating market – just lower than where the current market price is. This way, the property should sell before prices fall even lower. A “shoot ahead of the running deer” strategy could very well have helped the sellers in the above listing — but they still haven’t gotten it.
Here is an example of a seller and an agent that got it, they shot ahead of the running deer by reacting appropriately, within short periods of time, to a falling market:
Every few weeks, these sellers dropped the price by responding to the market appropriately. Finally, they hit the market price and opened escrow.
As always, educate yourself on the Real Estate Cycle!