Tuesday, July 20, 2010

Priced to show, or priced to sell?

A somewhat flip question that agents sometimes ask their clients these days is: do you want to price your house to show it or sell it? While it may be harsh, the question is often valid. Even as we enter a 4th year of a buyer's market, many sellers still have an inflated sense of what their home is worth.

Last month I discussed how many buyers are looking to make lowball offers when that may not be justified or in their best interests. On the opposite end of the spectrum, sellers paint themselves into a corner by thinking they can price high and then wait for "someone to make an offer and negotiate." Sorry, won't happen. Too many homes to choose from. Instead, buyers will simply pass yours by for one that seems more fairly priced. Price opens the door, value gets the offer.

While no seller seems to be happy today, I've seen too many times sellers cost themselves money by starting out too high, then lowering their price again and again, sometimes chasing a declining market while they continue to carry a mortgage they can't afford.

So what factors influence price?
  • Condition. How up-to-date is the home? Has their been significant "deferred maintenance?" How well the property will show to prospective buyers will greatly influence whether you get above or below the area average.
  • Location. Yes, that old chestnut plays a huge factor. It is indeed true that people will pay more for the same house depending on access to jobs, schools, and other nearby amenities.
  • Market trends and competition. This element probably plays a larger role today than it has in years past, particularly in areas where there may be a lot of foreclosures. Further, if an area has been experiencing declining values, then you don't want to get caught in the trap of trying to catch up to falling prices the longer your home sits on the market.
What doesn't?
  • What you paid. Just like any asset, the market value can fluctuate up and down over time.
  • Cost of maintenance or improvements. Yes, certain improvements do add value to a home, but you should not immediately expect to get out what you put in (unless it's a rehab).
  • What you need. This is the one that trips up a lot of people - they "need" to get x dollars out of the house. But buyers don't care, they view your house just like every other one on the block and will seek the best value available. This is a cold reality to many homeowners who believe others should love their house as they do.
For the typical home, a real estate agent generally evaluates the local market, comparable properties, and the condition of the home to establish an expected price range where the homeowner will receive an acceptable offer within a reasonable time frame. What constitutes a reasonable time period may be a discussion for another day, but in an area that has an average number of sales, then 30 to 60 days is likely a good target.

While the above fits the large majority of homes, there are some houses that are truly unique and determining the value can be extremely difficult - as well as their expected time on market. Excluding multi-million dollar estates, other methods that may help determine value include the cost to build or, if rental property, from the net income produced. In a few situations, it becomes a bit of a guess and you wait to see the reaction from potential buyers and adjust accordingly. Although that is an infrequent occurrence, it nonetheless can and does happen.

All that said, it is still the homeowner that sets the list price when it goes on the market. The agent is your adviser offering their assessment. If the two parties are far apart on where it should be priced, then they probably should stop and consider if it will be a good working relationship.

Real estate agents will sometimes debate whether to take a listing that the homeowner wants to price too high. Many (myself included) won't take a listing where we believe the homeowner has an unreasonable expectation of what they can get - a situation which can eventually lead to hard feelings between the agent and client. Others will give it a shot and hope for the best. As it's often said though: hope is not a strategy.

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