2 Must Do Real Estate Seller Pricing Strategies Explained
Smart Home Seller’s Planning Guide – Vol. 2
Automated valuation Models (AVMs)
Sellers like to perform their own research. The question is, why would a bank hire a certified appraiser if they could walk over to their computer and get your home’s value by typing in your address? On occasion AVMs can give you a ballpark range, however, don’t put too much stock in what you are seeing. Unfortunately, the algorithms do not take into consideration many of the 99 unseen factors such as noise from the train tracks the next street over, the neighbor with 15 cats across the street, the proximity of main power lines, or your magazine worthy bathroom remodels which all affect value. Always keep in mind a suggested list price is an estimated value of your home. Valuation is a dance between art, psychology, science, and arithmetic to determine what someone will pay for a place to live.
Price
The list price of your home has absolutely NOTHING to do with how much you love it, no matter how many brilliant children you have been fortunate enough to raise in those precious spaces, or how much money you have put into the upgrades (Coming soon! Link to over improvement blog article). You do NOT want a broker who instantly rolls over when you say you want to increase their suggested sale price by $15,000 without a very illuminating conversation over all of the aspects that will negatively affect your bottom line.
If they allow you to start high and lower your price, FIRE THEM! What do you think they are going to do for you at the negotiation table? Hmmm? Research proves this to be a poor sales strategy for marketing a home. Your broker’s job should be aimed at targeting two goals simultaneously. Their first job is to maximize the sale price, and the second is to minimize the time on the market. The two are homogeneously connected!
References:
Han Bin Kang & Mona J. Gardner, 1989. “Selling Price and Marketing Time in the Residential Real Estate Market,” Journal of Real Estate Research, American Real Estate Society, vol. 4(1), pages 21-35. https://www.researchgate.net/publication/5142336_Selling_Price_and_Marketing_Time_in_Residential_Real_Estate_Market Miller, Norm & Sklarz, Michael. (1987). Pricing Strategies and Residential Property Selling Prices. Journal of Real Estate Research. 2. 31-40. https://www.researchgate.net/publication/5142089_Pricing_Strategies_and_Residential_Property_Selling_Prices
Understanding Pricing Strategy
Scenario #1
Let me explain this theory using two examples: Scenario #1 You put your house on the market at a top selling price for a similar home in your neighborhood, let’s say $489,999. That house has an updated kitchen, but has less square footage than your home.
Here is the problem. You set the price above the market value hoping you may only nee to drop your price a couple thousand dollars to be in contract, and if you get lucky, A FULL PRICE, dare I say it, possibly THE COVETED OFFER OVER ASKING PRICE! I hear harps.
Let me guess, you are envisioning every buyer looking for a home (and even some who weren’t even thinking about it yet) to JUMP out of their seat and call their broker to put in an offer site UNSEEN! Right?
OH, but wait, when YOU were shopping for THIS SAME HOME, you were picking it apart board by board to look for every scuff and blemish for the seller to fix, right? Okay, I know! You would NEVER! Remember, most WILL! Expect it, and you won’t be surprised.
Every seller (and their broker) THAT EVER LIVED hopes to cause the perfect storm of frenzied buyers to descend on their home bringing wine and roses along with a blank check, agreeing to an as-is purchase, and every seller term imaginable (including the ones you hadn’t even thought to ask for YET), AND serendipitously they ask for the EXACT closing date you had in mind. THEN, you woke up! lol
The reality of scenario #1 is that it is a complete fantasy! Unless of course you work with your broker to build a good strategy. Don’t get me wrong, your broker should and will always want you to net the most from your sale, because it likely translates to a bigger paycheck. The true story, the bottom line lies with the appraisal.
WHAT PREVENTS A SELLER FROM RECEIVING AN OFFER OVER THE PROPERTY’S VALUE? If your buyer is obtaining financing to fund the purchase on your home, the home MUST appraise for the value of the sale price or above. I promise you! the bank or mortgagee is NEVER going to get the short end of the stick on ANY deal, if they can prevent it!
Tools
Your broker’s job is to provide you with a Comparative Market Analysis (A.K.A., CMA, or “comps”) which, if they are really knowledgeable about the processes of appraisal, should be nearly spot on with the appraised value.
On the day of the appraisal, you NEED a very bold, perceptive and experienced broker to meet the certified appraiser with a meticulously detailed list of features and characteristics to point out and ensure all aspects of value are included in his or her report.
SCENARIO #2
Okay, you heed the warnings of your broker and you place your home on the market at a price in which the appraisal is sure to align. You price the home at $478,500 which is EXACTLY what you secretly had it appraised for when you didn’t trust your broker to provide the whole story when he or she completed the CMA and suggested a sale price of $469,999. What’s wrong with that you ask?
Allow me to elaborate. There is another factor that is greatly ignored by sellers, usually because of their aspirations far exceeding their knowledge and their sky high expectations of receiving an offer above asking price inhibiting their better judgement.
It’s a little funny, some individuals get a little experience selling their photography equipment on the latest for sale app, or make a killing at their local swap meet, flea market, or garage sale on junk lying around their home and they think selling a home is going to go the same way. If you are a seller, you really need to switch gears and think like a buyer.
What concerns buyers? Well, when you made your purchase(s), what were your concerns? Am I getting the best deal, or am I paying more than home’s true value? Let’s evaluate that for a minute. Price is arrived at by two factors, Time (this particular moment) and value (as in comparative value). Can I get the same thing, or something similar for a cheaper price, basic economics theory, right?
A home is the largest purchase most buyers will EVER make in their lifetime. Buyers of real estate are NOT going to overpay unless they have ALL CASH, AND they like your home better than anything they hope to find! What did you do to your list of potential buyers by asking for top dollar right off the bat? Oh, geez!
Now, let’s go back to pricing. What will attract the largest audience searching for a home to purchase? Which will peak buyer interest most, a home priced at the TOP of its market value, or a home priced a tad below its perceived value? THAT is how you create a frenzy, and get the most from a sale! There are a few other dynamics involved, but if I gave away all of my secrets then you wouldn’t need to call and put me to work getting you TOP dollar for your home.
What Sellers Need to Know
When buyers are pre-approved for a home loan, they are given a maximum loan amount. If you price your home at $478,500 which buyers have you excluded? Anyone qualified up to $470,000 won’t even have your home on their radar. What happens when you price your home at $478,500? You shrink your frenzied buyer pool! Less interest, less offers, less offers, less interest, and positively NO FRENZY! No amount of open houses with fresh baked cookies and refreshments served in the perfectly staged home can change the facts when your home hasn’t sold in the first two weeks in a hot real estate market!
What is the difference between $470,000 and $469,999? If you are a buyer in a bidding war, you will want to make your offer seem stronger than the competition. If I was the buyer’s broker in this case, and they really wanted the house, I would suggest $482,500, if they will die without this dream home, $485,500 knowing fully the appraisal contingency will ensure my buyers won’t pay more than the house is valued. What happened to the initial list price that would eventually bring less competitive offers and include a seemingly endless list of seller concessions, down to the pennies? Likely, it would be somewhere around $470,000.
There are other mitigating factors to consider in finding the right price to list your home. I am happy to provide all of the information with a detailed explanation for your suggested list price. If your broker cannot support their suggested list price with credible reasoning, I suggest finding a new broker. I am available to answer any of your questions, or discuss any of your concerns.
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