Price a Home at Market or Price High and Negotiate?

The right strategy maximizes profit and minimizes risk and cost

The post below was originally written in 2011 which was a different market then the 2015 market.  I wondered if the results would be the same if I updated the numbers.  So I did.

In the first chart I used all sales between $100,000 and $1,000,000 that were not short sales or foreclosures in Vienna and Reston that settled between  May 1 and June 30 this year. which was 412 units.  I can not recall which areas I used in 2011 other than the reference to western Fairfax County.  Due to MLS constraints, I need to have a search that would return less than 500 homes.  I probably had a wider search in 2011 when there were fewer homes on the market.

For the 2nd chart, I used homes sold between $500,000 to $575,000 in Reston, Centreville, Vienna, Oakton, Fairfax, Burke and Clifton between May 1 and July 30.

In both years the longer a home is on the market, the greater the discount to list price.  Buyers get nervous as days on market increases. It is best to get it right in the beginning.

Here is the 2011 post with a few updates:

——–

At my listing appointments, I encounter sellers who take two different approaches to setting prices.

One says, “Let’s price at market, create activity and get the job done.” The other says, “Let’s start high.  Everyone wants to negotiate and we can always come down.  Maybe someone will pay our price.  No way to know unless we try.”

Both want the best price. Who is right?

Well, I recently tried to answer that question by looking at 2 groupings of recent sales.  (I am not a statistician. Those of you who are may have a better model)

First I took a look all detached homes sold in the 1st quarter of 2011 in the northern and western part of Fairfax County – 462 homes.  Here are the results.

2011 in black, 2015 in Red

Days on Market

Avg Original List

Avg List at Time of Sale

Avg Net Sale Price

% Net SP to Orig LP

% Net SP to List at Sale

<30

578,374

572,529

578,175

566,839

567,180

563,600

98.06

98.44

98.09

99.42

31-90

591,498

577,306

574,290

561,293

551,746

552,808

93.28

95.76

96.07

98.49

>90

655,515

580,038

616,532

557,412

589,078

544,253

89.86

93.83

95.55

97.64

This table showed me that the longer the home stayed on the market, the lower the percentage of sales price to either the original list price or the list price at time of sale.  This supports my observations of buyer and seller behavior.   Buyers who encounter a home that has been on the market longer than the average marketing time are often nervous about making an offer and when they do, the push harder on a price reduction.

Their thinking goes along the lines, “Well, if no one else bought the home, there must be something here that I am missing.   The home seems fine and fits my situation but I had better get a good deal because if they can’t sell it now,  I may have the same problem in a few years.”  The reality often is that there is nothing wrong with the home.   The “problem” quite simply was that the starting price was too high.

Conversely, my observation has been that when a home is new on the market and priced properly, buyers are less likely to push hard on price as they are fearful that the seller will either wait for something closer to asking or that while negotiating back and forth, someone else may come in with a better offer.

Anyway, looking at the above chart, I thought there might be some bias in that sample because higher priced homes can take longer to sell.  I next looked at all detached homes in Northern Virginia that sold in 2010 between $550,000 and $575,000 – 438 homes.  My thought was that, regardless of where the initial price was set,  the market eventually decided these homes were worth between $550,000 and $575,000.  Who got more?  Those who priced to value or those who initially tried for more?

2011 in black 2015 in red

Days on Market

Avg Original List

Avg List at Time of Sale

Avg Net Sale Price

% Net SP to Orig LP

% Net SP to List at Sale

<30

569,816

536,418

567,575

534,857

559,327

530,889

98.30

98.66

31-90

601,497

561,879

580,036

547,862

557,539

539,680

92.99

96.23

>90

612,751

567,979

578,304

551,895

556,482

539,757

91.18

96.30

The interesting takeaway here is that those who started at the highest list price eventually got the lowest sale price.  Plus it took more than 3 months of keeping the house “ready” to eventually get a less desirable result than if they had priced at market and sold in 30 days.

When a home goes on the market, the greatest amount of traffic is during the first two weeks.  Why?  Well, for any given price point, they are always buyers in the marketplace that are looking for that type of home but have not found it.  So within the first few weeks, all of those folks visit the home.  After that, the only traffic will be the few people who are first entering the market or folks who are readjusting their search.

If a home sits, eventually the price gets reduced.  That creates a small flurry activity as it may now be attractive to a new group of buyers but it is very hard for an agent to motivate a buyer who saw it at the higher price to revisit the home.  In the buyer’s mind, it has already been rejected.

My strong advice, particularly in this market with limited inventory, is to price at market and create excitement.  That can even result in multiple offers as buyers will fight over a good home and push the price a little.  Early in the marketing cycle, the seller has a little more clout but as time goes on, the pendulum shifts to the buyer side and if too long, the buyer is often expecting a below market deal.

Your thoughts?

Photo Credit: sheelamohan

2 thoughts on “Price a Home at Market or Price High and Negotiate?

  1. Having sold only two homes, I don’t have your experience nor I am in your industry. So, my experience may be unique. Both homes sold for asking price or more. Both were listed slightly above market and sold within 60 and 30 days respectively. Both listing agents pegged market price much lower than neighboring homes which was my reason for setting a higher price.

    Had these sales had a hard deadline, I would have priced them at or slightly below market to shorten the market time.

    1. Gary,

      Thanks for the comment. The key phrase in your note was “slightly above.” Pricing a home is both a bit of science and a bit of a gut feel. One has to take in the market direction and the strength of that direction when the home goes on the market. I can look a comparables and tell a seller that based on those numbers, the home should sell for $x. But if the market is in a strong upswing or inventory is extremely limited, we will push that number and, conversely, if we are in a tough market, we will need to stick with that number or pull back a bit. Comparables are looking in the rear view mirror. Anticipating the road ahead is just as important as knowing where we came from.

      Going out a few thousand above the suggested price typically doesn’t hurt. If the value works out to, say, $465,000, it is likely a $470,000 or $475,000 price will not turn away a buyer. But a $500,000 price will and that was the main point of the post. Some sellers feel that if the home goes out at $500,000 and buyers think it is worth $465,000, they can always make an offer. The problem is that when a $465,000 home is priced at $500,000, it is competing against other $500,000 homes and the buyers in that price range will see more value elsewhere. They won’t make the offer. At the same time, the $465,000 buyer will not look because the home is out of their price range.

      I would guess that when your home sold above asking it was due to multiple offers. Attracting multiple offers works well for a seller. Many times a buyer will want to fight for the right home and just the fact someone else also sees the value will make them want to push a little harder. I have seen some agents price slightly below market just to generate that excitement. To me that is a dangerous game. First, on the surface, it feels manipulative and, more importantly if it doesn’t work, the seller may have only one offer at the lower price.

      Bottom line, the numbers I posted give support to something I felt intuitively but each home is unique and the challenge is to find the right balance between the value of recent, comparables, the uniqueness of the subject property, the number of competing homes for sale, the current direction of the market and the seller’s timetable.

      Again, thanks for the comment.

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