Overpricing Your Home is a Costly Mistake
If you want to sell your home then you have a lot of decisions to make. One of the most important of all those decisions is the list price. Figuring out the best price for any home is much more art than science but it requires a very scientific approach and evaluation of things that are hard to quantify. It becomes even more difficult when you’ve become emotionally attached to your home.
Putting the right price tag on your home right out of the gate gives you the best opportunity to maximize your investment. A new listing creates a certain excitement. Agents have a limited number of tools available to them to get that buzz going around your home and price is an important factor that can either feed the buzz or squash it.
It doesn’t matter how many glossy flyers she puts out or how many places your home is listed on the Internet; if your home is overpriced it is not going to sell.
Buyers may not realize it but they are getting an immersion course in micro economics when they go house hunting. They pore through the Internet listings and tour home after home. They are quickly equipped with the most up-to-date local market data. They are comparing your home to the dozens they’ve already seen.
Many times I’ve seen this lesson in action. I just listed a home for a client. My initial analysis said the home would sell for around the $550,000 mark. My clients keyed in on the two top sales prices in the neighborhood that sold at or around $590,000. They were convinced they could get $585,000 for their home. The client is the boss so that’s where we listed the home.
There were a couple factors in their favor. Their home model was fairly rare and not many were available and over all housing inventory in their subdivision was low, but time was working against them. My clients were pressed to sell and we really only had a couple months to get the home sold. Their home also needed carpet, paint and cosmetic repairs. I advised my clients that it was okay to test the market but if the buyers weren’t showing interest and the feedback wasn’t positive then we’d need to adjust quickly.
After several weeks on the market and a lot of negative feedback on the home’s shortcomings and high price I urged my clients to lower the price. They lowered the price but only by $10,000. After the small price change, showings remained light and feedback negative. After several more weeks I urged my clients to again reduce their price. They wanted to do a small price change but I told them that the home was not going to get the desired level of interest unless we got down to at least $555,000.
They finally agreed and we moved the price down to $555,000 but now the buyers smelled desperation. We had an offer come in at $40,000 under the new low list price. Another buyer had looked at the home four times and said he’d probably submit an offer but there was no urgency and that offer never came.
Lack of urgency is a common problem for homes that have been on the market for too long. Buyers may really like a home but if it’s been on the market too long they wonder what others have seen that they’re missing. And they almost always feel like there is no rush to make an offer. The home has been on the market for months so it’s not going anywhere.
We negotiated back and forth with the offer we had in hand and got them to come up $20,000 but for that price they wanted a pre-occupancy agreement (they wanted to move into the home before they actually owned it) and a significant amount of the seller’s furniture, which is a nightmare to negotiate and would have left my clients with very little furniture.
Those buyers ended up withdrawing their offer. Luckily, we had another offer come in that we accepted, but it was still significantly below list price. A day later, the first buyers came back and said they wanted to resubmit an offer. I think they were clearly playing games. They believed we were desperate. They gambled that if they withdrew their offer we’d come crawling back to them and they’d have all the leverage.
Had we listed the home at the right price early on I believe that my clients would have gotten $20,000 more than they did and they would have saved a month or more in holding costs.
Overpricing a home is not just the fault of the homeowner. Realtors often lead their clients down the path of false hope. It’s a fairly common practice for an agent to make lofty promises to a prospective client during the listing presentation. The agent may know or should know that a home will sell for say $500,000 based on the market data. But he’ll promise to sell the home for $525,000 just to get the listing. Sure, the home probably won’t sell but they’ve got the listing and now they get to put a sign up in your yard and take calls from prospective buyer clients. Eventually, the agent will advise his seller client to lower the price to something more realistic and the agent will still get the selling commission.
One of my neighbors recently asked me to evaluate his home because he was getting ready to sell. After looking at the comparable sales and the active listings I told him he could get about $430,000 for his home. Another agent came in and told him he could sell the home with no problem for $450,000. He hired the other agent. The agent came over with a cheap camera took some poor quality pictures, threw the home up on the multiple-listing service and planted a sign in the yard. About six months later, my neighbor came over to me and asked why his home wasn’t selling.
I took another look at the market and noticed that things had changed for the worse. I told him that homes similar to his have recently sold at around $430,000 but we’re in a small subdivision and there are now two comparable active listings that are priced around $415,000. I told him he needed to get his price down to compete with those low-priced listings or be prepared to wait until they sell and hope no more low-priced listings hit the market. I also told him his home’s pictures looked terrible and that his agent needed to spend a couple hundred dollars and get a professional photographer in there. But that’s a separate issue.
He talked to his agent. They lowered the price to $419,000 and they ended up selling the home for $415,000 nine months after he originally listed the property. I’m confident that the pricing on this home cost the buyer at least $15,000 but it only cost the agent a small difference in his commission and some time, but he got months of free advertising out of the deal.
The difference in an agent’s commission between a sales price of $430,000 and $415,000 is only about $450. This ended up being a huge win for the agent given the fact that he probably would not have captured the listing if he’d been honest about the sales price.
Selling a home is like being a match maker. The final sales price for your home often depends on the buyers who are out at the time you list your home. If the right buyer is not looking when you list your home then you may not get the top price. Some sellers get lucky and that perfect buyer, or, better yet, two perfect buyers are out at the exact right time and the home sells quickly at the top of the market. These outliers can be misleading to other prospective sellers.
Conversely, if that perfect buyer comes through your home when it’s overpriced then you may miss out on that match and you’ll be left repeating the search once you’ve repriced your home. At that point, your listing will have lost its luster and buyers will not have any urgency to get your home under contract. In their mind, the home has been on the market for months; it’s not going anywhere anytime soon.
Sometimes the sales data is not clear and you may choose to test the market. I’m all for that. But you have to be able to take in the feedback, continue to evaluate the market and quickly adjust your price if needed. Letting your home languish on the market is almost always a costly mistake.
I’m not telling you that if your home doesn’t sell in two weeks that you need to dump the price. I have one of my renovated homes that’s been on the market for more than 50 days and we’re holding on the price. What I am saying is listen to the market, don’t take it personal and, as always, interview multiple agents before you hire.
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