Pricing in a Rapidly Rising Market
Originally appeared in Hills Publications, March 17, 2000 and ANG Newspapers, March 18, 2000
Long-time real estate professionals have reluctantly acquiesced to what we know is an alternate reality. Home prices that only a few months ago seemed so high as to be preposterous, are now accepted with Prozac-like calm. Ironically, today, some even appear to be pretty good deals. All of a sudden, prices are increasing on Internet time.
Although this is wonderful if you are a seller, your approach to pricing still needs to be suitable for current conditions. Taking pricing lightly, or basing it on the wrong assumptions, could easily be a $50,000 mistake.
Using comps differently
In previous cycles, including everything from a depressed, buyer’s market to a relatively peppy, seller’s market, pricing has been based on closed sales. After all, part of real estate dogma is that the selling (not the asking) price is key. Nevertheless, adopting this premise blindly would not be wise at present.
As an example, a listing late last year was put on for substantially more than the previously highest price paid in this sought-after neighborhood. The house itself abounds with charm and character and is totally remodeled with quality.
Despite its appeal, agents and buyers made it clear they thought the price was high. This was notwithstanding the fact that other homes, similar in size and location, but not charm or condition, had sold for prices well above this home’s list.
After 10 days of intense marketing and no offers, it was withdrawn from the market. Seven weeks later, in mid-January, it came back on with an $84,000 price reduction. At this point, buyers lined up in droves and bid the price up $100,000 more than the original asking price, and almost $200,000 higher than the adjusted asking price.
Why was the home not purchased when it was originally offered? Looking back, it was clearly a reasonable value at the time.
Perception is sometimes more important than reality. Out of context, the price seemed high. Those buyers who liked the house may not have offered because they did not know how to put the price in perspective with the overall market.
Today’s pricing strategy
The assumption that buyers should be willing to pay a price consistent with recent closed comparable sales is not valid at the moment. Buyers often act more out of emotion than logic or common sense. Prices are so elevated right now that listing near recent record-breaking sales is more than most buyers can handle.
They see numerous instances of multiple offers ratcheting prices $100,000 or more over the initial listing figure. If the asking price is already at or near their maximum, buyers will not consider making an offer. Ultimately, pricing too high means fewer offers. As more offers in competition generally push the final price higher, overpricing costs the seller money.
A clue to agent thinking is how we talk with each other. In the past, when I asked other Realtors’ pricing opinions, I would always ask what they thought the selling price should be. I would infer a listing price from that.
For the last 18 months or so, I ask for listing price opinions and assume the selling price will be much greater. If agents look at it this way, this is a clue for you as a seller.
Although overpricing may harm you, underpricing may also be a problem. If recent comparables show $500,000 as an approximate value for your house, listing under $400,000 could be considered too low. This is significant because many buyers base their offer on the amount over the asking price.
Choosing the exact number for a list price is not simple. It is a function of a number of factors such as location, size, style, quality of construction, condition, and outdoor living. Most importantly, accurate pricing is a reflection of good judgment based on experience.
Final Thoughts
I empathize with buyers in today’s sharply escalating marketplace, and try to see things from their point of view. Sellers need to do the same.
Having a successful sale may look easy, but it requires considerable planning and correct decision-making. As a seller, taking these good times for granted by attempting to price your home without expert advice is a risky proposition.
The pricing recipe contains a large dollop of art and a small sprinkle of science. During this time of rapid change and uncertainty, professional assistance is crucial. Working with a highly experienced, local Realtor could mean more additional funds in your pocket than the entire real estate fee. Choose carefully.
Related Articles:
Multiple Offers, Part 1
Multiple Offers, Part 2
Real Estate and Stocks
Bending The Principle of Progression