Many sellers want to price their home higher as to try to get the most money out of their home. How does this affect the bottom line? Do you really get more by pricing it higher? How does pricing your home affect the buyers? Stick around to find out.
There are usually three main reasons that sellers want to price their home higher. They want to leave room for negotiating, they want to net a higher dollar, or they think their home is better than other houses. We’ll cover each of these and dispel the myth that pricing a home higher yields a higher net bottom line.
First off, we’ve heard it many times: “I want to leave room for negotiating.” They often will want to price it 10% higher to leave room to come down in price. This is a wrong strategy as the wrong buyers will be looking at this house. The right buyers for this example house won’t schedule a showing for it since it’ll be out of their price range. It may not even show up in their search criteria. They’ll never see it.
As an example, let’s say our market analysis says the house should sell at about $400,000. Seller decides to price it at $440,000. What happens is that buyers looking at that house will mention things like: it doesn’t have the features of that other house, or the kitchen isn’t as nice as that other house, or it doesn’t have the extra bedroom like that other house, or it doesn’t have the finished basement like that other house. No matter what it is, the buyer is saying it isn’t worth the extra premium above “that other house.” They’ll go and make an offer on “that other house.”
In our example house, if it was worth $400,000 on day 1, on day 30 it might be worth $390,000. On day 60 it might be worth $375,000. This is because as the home ages on the market, people start wondering “what’s wrong with that house? It’s been on the market 47 days and it hasn’t sold.” So starting at a higher dollar amount usually doesn't net a higher final sale price.
The third thing that happens is that most sellers are emotionally attached to their home. They remember when they redid the bathroom and how much money they spent on that remodel. They remember redoing the roof, or changing the furnace, or repainting the bedrooms. They remember their family growing up in the house, they remember photographs in front of the fireplace, or the yard games played in the back yard. All of these things make their home “special.”
But looking at it from the buyer’s perspective, these “special” memories don’t have any value. Buyers are not looking at how the kids were playing in the family room. They are looking at how they, the buyers, will use the spaces, and if their lifestyle fits in that house.
So pricing strategy fits in 4 categories, Above market value, at market value, below market value, and on the bracket line.
Above market value pricing usually leads to a LOWER final sale price as described previously. This is only because it’ll take longer to sell and that will yield a lower market value, and a lower final sale price. Longer may mean 30 days, 90 days, a year, or more.
At market value, we would expect the house to sell in a couple of days, to a couple of weeks. It depends on if it’s a buyer’s market or seller’s market, and what the overall demand is doing today. We would expect 1 or 2 offers at or very near list price.
Below market value, we would expect to have multiple offers within a few days, and have the house sold within that few day period. With the list price below market value, one would expect many offers above list price, sometimes well above list price.
Pricing at the bracket line is a special strategy, for the right conditions. If a house is estimated to sell at $400,000, we should price it exactly at $400,000. This is because some buyers are looking at $350k-400k, and some buyer are looking at $400k to 450k. Pricing it at exactly $400,000 will expose this house to both groups of people. The lower priced buyers will say “wow this house has x and y and z features, but it’s at the top of our budget. Let’s look at it.” And it’ll be the best house they’ve seen. The higher priced buyers will say “it doesn’t have as many features as other houses, but it’s the least expensive house in our price range. Let’s go see it.”
REAL LIFE Example #1:
Recently we had a home in Richfield coming up for sale. We looked at the neighborhood and gave an opinion that the house would sell between $235k and $240k. We listed the house at $239,900 and had 18 showings on the first day with multiple offers within the first 2 days. One offer was $232,800 (240,000 - 3% closing costs), the second offer was $235,807 ($243,100 - 3% closing costs), offer 3 was $220,190 ($227,000 - 3% closing costs), and offer 4 was $239,900. We did take the highest offer, but they fell through. So we accepted the $239,900 offer. After negotiating an inspection issue, we ended up at a final sales price of $238,285.
REAL LIFE Example #2:
Years ago, we had a listing that my market analysis showed a sale price of about $50,000. It was a small home that needed A LOT OF WORK to get it back into shape. Leaky pipes, walls with holes, junk everywhere. The seller wanted to list the home at $69,900. So we listed the home at 69,900. The seller didn't want to lower the price, so it took 9 months, and we finally got a buyer that was willing to put a "low-ball offer" on the house. Their offer? $51,000. We sold it after sitting on the market for 9 months. It could have been sold in 2 weeks had we listed it in the correct value range.
REAL LIFE Example #3:
We had a seller that wanted to list a house for $225,000 when my market analysis showed it to be worth $200,000. The house was getting ready to be marketed late in our season, in October. We told them that we should price the home at $200,000 and get it sold quickly so that we won't sit on the market over the winter. In October, the market starts slowing down dramatically, all the way through December and in to January and February. If we had started it higher at $225,000, we would have been lowering to $215,000 and $205,000 and $195,000, etc. We would have been following the market down and never "catch-up" to the market. It would probably have sat until February where it would have sold for $190k or less.
But pricing it at $200,000 from day 1, brought 8 showings in the first day, and 1 offer on the second day. We contacted the other showing agents and none of them were going to write an offer. A couple of the agents mentioned that if they wrote, it would have been for $180,000. The offer we received? $200,000. If there were multiple offers, we may have ended up slightly higher. But this example shows that houses really sell at market value.
Conclusion
Pricing does not affect the final sale price, unless of course you have it way out of the ballpark too high, or too low. But anywhere in the ballpark, the house is going to sell for the same amount, market value. The only affect pricing had was to lengthen the days it took to sell, with higher prices taking longer to sell, and possibly ending up with a lower final sales price.
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