Pricing is a topic we’re passionate about and as a result, we write about it often.
If you’d like to see an article about why some homes don’t sell, you can click on the link to open it up.
It’s an interesting topic, particularly when there are lessons to be learned about what NOT to do.
The most common reason that sellers have trouble selling is that they have over priced the property, thinking people will pay anything – but they won’t.
A good purchasing agent looks at comparables, assesses the inherent appeal of a home’s location and helps their client decide on how much a home is worth. Overpriced homes get shown but the offers don’t come in like they would if the home was priced properly.
Even a bad purchasing agent who has at least shown the client a number of properties gets a sense of whether the asking price is reasonable or not.
It takes a bad agent and an inexperienced buyer to overpay for a home. It happens, but thankfully not that often, or our prices would be even higher than they are now.
Let’s take a look at the three levels of pricing and what happens.
Priced below market value
When a property is listed for sale for a price that is below market value, the common strategy is to hold back offers for a week or so and review any offers at the same time.
The hope is either create a multiple offer situation on the offer date, or to encourage a pre-emptive or bully offer from someone who doesn’t want to compete and is willing to pay lots to avoid that situation.
If a property is priced below market value, this is what happens:
- Lots and lots of showings
- Potentially a bully offer before the offer date for a “crazy” amount over the list price to encourage the seller to forego the rest of the showings and waiting for more offers.
- If not a bully offer, then a number of offers on offer date at substantially over the asking price.
This results in a sale price that is well over the asking price, fueling the impression that the market is “crazy” as that house that wanted $800K just sold for over a million. In reality, the house was never worth $800K and the $1M sale price is more or less what was expected.
Priced at market value
It is actually quite common to see properties listed for sale at a price that is at or only a bit below the market value and still hold back offers. This is done for two reasons:
- The Seller wants to see if there is someone with more money than sense who comes in and doesn’t realize the list price is actually pretty close to the market value.
- The listing agent doesn’t have a good grasp on the market and doesn’t understand that just holding back offers doesn’t mean you necessarily get a price substantially over the asking price.
In either of the above scenarios, a challenge is how the market interprets the list price. It can cause some buyers to assume that the sale price is going to be substantially over the asking price, as it would be if it was priced below market value. They can decide not to bother seeing the property as it is going to sell for “too much for what it is” and they look elsewhere.
A good listing agent can mitigate this challenge by keeping in contact with the agents who show the property and by tweaking the wording on the listing if the number of showings is less than expected.
When a property is listed at market value, this is what happens:
- A good amount of showings, as with limited supply, buyers will check out properties even if they are worried it might sell for “more than it’s worth”.
- Unlikely to receive a bully offer at much over the asking price as the market is unsure if the list price is actually low or just at market value.
- Multiple offers on the offer date, but not likely for substantially over the asking price. Some buyers may take the lack of bully offers as a sign it isn’t worth much and even bid under the asking price.
A good listing agent can take the offers and negotiate a higher price than asking but it won’t be the same dramatic story as under pricing a property, where it sells for 120% or 130% over the list price.
Priced over market value
This level of pricing tends to come about when either the seller or their agent (or both) are using wishful thinking rather than market data to decide on a price.
Pricing just a bit over market value used to be the dominant method of pricing properties. The seller would decide on the price they want, list it for that much and take offers anytime and likely sell it for a bit less after some negotiating.
When a property is listed over market value, this is what happens:
- Not many showings take place. The market looks at the listing and despite any attributes it may have that are appealing, the price discourages a lot of buyers.
- If the property is holding back offers to a certain date, a bully offer is very unlikely. When a buyer thinks a property is over priced, they are not keen on paying even more to avoid competing with other buyers. Most buyers take a “wait and see” perspective rather than jump in and make an offer.
- On the offer date, there may be no offers, or only one that is substantially below the offer price. Buyers who think it is too expensive are waiting to see if it will sell or not, in the hopes that if it does not, the list price is lowered.
We find that properties that have been listed with different agents in a short time frame are often initially listed at over market value. The first agent in essence convinced the seller to list with them because they promised an overly high sale price. When it didn’t happen, the seller fired the agent and tried again with another agent.
If the listing agent manages to keep the client, we see some sellers stubbornly maintain the over market price, convinced that they are right that someone will pay it. Those are the listings that sit and sit on the market as buyers look and shake their heads before moving on to other options.
If you are considering selling, make sure you work with an agent who understands pricing strategy. It’s not the only thing that matters when selling a home, as you need to market it effectively and negotiate it aggressively, but it’s hugely important to the success of your sale.