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:

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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 1^st quarter of 2011 in the northern and western part of Fairfax County – 462 homes.  Here are the results.

2011 in black, 2015 in Red

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

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