Why it’s so Hard to Price a Property
By Diane Saatchi
Pricing real estate relies on past, current and future data points and the wishes of two parties with diametrically opposed goals. What could be hard about that?
Sellers wish, brokers guess, but the market determines the price.
As I wrote in a previous blog about understanding what your property is worth [How to Understand What Your Property is Worth], a property’s value is an imperfect number. No matter how much a seller “needs” or “wants” or thinks they should realize, the end result is as much as the market will bear, or in other words, what a buyer will pay.
The broker or brokers are called in to guide both parties to a correct, or fair trade, price. They begin this process by looking at recent sales of similar properties.
Recent sales are those that closed up to six months ago on deals that were struck three or more months before the closing. That’s historical data, so depending upon the direction of the market since the deals were struck, those prices may no longer be accurate.
"Similar" is in the eye of the beholder. Most owners think their home is superior to those objectively considered to be similar. Many homeowners will look at the current, active competition and declare their home to be worth at least that much, or more. However, current listings are generally most useful because they highlight what has not sold — probably because of overly ambitious pricing. How long unsold properties have been on the market is especially revealing and helpful information.
In an ideal world, time would hold still, markets would not change and all homes and properties would be the same. Absent this ideal, brokers add and subtract hypothetical values to account for such variables as time, age, condition, size, location, amenities and style. At best, the recommended price is a rough but educated guess.
There is one more important “moving part” to this pricing challenge, and that’s what competing brokers bring to the table. It’s always a good idea to get a listing price opinion from more than one broker, because they may have different ideas. Sellers generally want to list with a broker who will embrace the engagement with unbridled enthusiasm, and that can be conveyed through a high price, compelling data to support it, and a great sales pitch.
Sometimes, actually often, this works out. But other times, a seller and broker’s enthusiasm will lead them to price too high, or the market will change and the home languishes on the market. This is common enought that some brokers deliberately skip competing for new listings. Instead, they wait for the first, or even the second listing term to expire before they approach sellers. By the second or third time, sellers are likely to have lowered the price and re-set their expectations.
There may be truth to the saying: It’s best to be the first child, the second spouse and third listing agent.
There are different pricing strategies for different market conditions.
There are generally two pricing strategies, best suited for different market conditions: pricing higher than a target price, and pricing lower. In a robust, rising seller’s market, we might price high. Mostly, this is done because many buyers refuse to pay an asking price, expecting that they should be able to negotiate down.
In a flat or declining market, long on inventory and short on interest, a below-market asking price can create the desired demand. If the initial offering seems like a deal, people should flock to it — and often, bid up the price. The trick to this strategy, however, is making sure the listing is widely exposed. As I said above, the market determines the price, so the property needs a chance to be in the market.
Then, of course, there is a third strategy: listing a property for exactly what it’s worth. This can be hard to determine for the reasons mentioned above, but a good indication a property is correctly priced for the market is a quick sale.
How do you know when the is right price?
Here’s where experienced and trustworthy listing brokers are needed. Once an offer is accepted, that doesn’t take a home off the market. Until there is a fully executed contract of sale, the property will be treated as 100% available. The listing agent will continue to run ads, hold open houses and will keep showing. If the accepted offer was too low, someone else will bid above that accepted price. How best to handle those competitive bids is a topic for another blog.
By now, it should be pretty clear that there’s no fooling the market. Ultimately, if the pricing strategy is sound and the property is exposed to as many buyers as possible, the market will determine the right price.
© 2018 Diane Saatchi