I’ll lead with this: nothing is more of a bummer to sellers than to watch your house sit on the market, not getting any offers. It might be because the housing market is in a slow season. It might be because the interest rates spiked. It might be that buyers aren’t seeing the house in the same condition that the owner imagines it to be. It might simply be because the house is overpriced. Pricing correctly, not too high and not too low, is of the utmost importance when selling a house.
Believe it or not, but pricing too low is a problem. This isn’t as bad as pricing it too high, but we’ll start here anyway. Psychology plays a big role when buyers are evaluating houses. If they’re in a market where they’re conditioned to believe (right or wrong) that houses all sell for $50k over list, they’re going to see a house listed for $700k and think they need to offer $750k. Under-pricing your home in this kind of market isn’t that dangerous since the irrationality of the market will lift it up to value, or over. We are not in this market though:
The graph above shows the difference between list and sale prices over the past year and change. Any buyer and their agent who have been shopping over the past year should be observing– either anecdotally or by actually crunching the data– that houses are generally selling for what they’re listed at, or close to it. In August, the median list and sale prices were in fact identical. Astute buyers don’t currently have the mindset that they’ll have to pay way over list, so pricing your home too low might only attract offers close to your price, even if you listed it under its true market value.
Let’s look at the other side (pricing too high) which carries considerable risk. The first impression that buyers will have of the house will be the moment that an email alert hits their inbox, which will be mere moments after the listing goes live. There will be a big pretty picture and some general details for them, including the price. Buyers who have been at it for a while (in other words, the ones more ready to buy) will suss out a price that doesn’t match the house pretty quickly. They also might miss it entirely, if it was priced higher than their filters. Conversely, those people who have their price filters set higher and did get the alert might dismiss it since it doesn’t compare well to the ones they’re seeing for the same price. It’s a mismatch– the house is being marketed to the wrong audience if the price doesn’t come at least close to the perceived value.
The consequences here can be measured in dollars. I looked at the last 2,000 sales in our area and compared sale prices to original prices. About 3/4 of the homes did no worse than 5% under their original price– they were priced relatively correctly. The other 1/4 of the houses sold for more than 5% off of their original price. Here’s our fun fact of the day:
So on a price per square foot basis, the houses that were initially more overpriced sold for about 6.5% less than the ones that were priced closer to market value. That’s about $40k on a median-priced home.
The overpriced homes also sat on market longer– much longer. The correctly priced homes had an average market time of 25 days, while the others were on market for an average of 100 days. Consider not just the stress and headache of having a house on market that much longer, but whatever holding costs are attached to it or the new house the seller is moving into.
I’m a believer that if the strategy is to price the home on the higher side, that it’s important to not go more than one price bracket (figure it as 3-5%) away from what is believed to be the true market value. You can drop the price once without any major repercussions– there’s one Get Out of Jail Free card at your disposal. If you have to keep dropping the price (chasing the drop, as we say), you’re putting yourself in a position in which buyers sense desperation, and you’re more likely to now just attract lowball offers and the wrong kind of buyers, and you’re going to be on market longer. It is always better to be coming from a position of strength rather than weakness.
The moral of the story is to not ignore the data that’s telling you what your home is actually worth. A thoughtful and well-constructed Competitive Market Analysis– what us Realtors call a CMA– is crucial. This report will have the appropriate comparable homes and smart adjustments made to provide you with a price range that fits in line with the current market. It’s not built by algorithm (I’m looking at you, Zestimates), but by a professional who knows your market and has visited your home. If you want to ignore their data and advice and “test the market” at the number you believe your house is worth, that’s your prerogative but know that there is real risk involved. There’s nothing wrong with getting it right the first time.
