The Science of Setting a Price

By Beacon Staff

For all the time and effort that goes into buying and selling a home, the economics of the process is relatively simple. Anything is only worth what a buyer is willing to pay and a seller willing to accept. This is the same whether it’s a pack of baseball cards or a $1 million house. Although the economics may be simple, arriving at that magic price is difficult. Just think of the cost, time and energy that companies put into pricing a product so it succeeds in the marketplace. It’s no different in real estate. If your house isn’t selling, buyers think the value of your house is less than the price you want.

If you’ve taken the time to educate yourself on the local market, are diligent in hiring a professional agent, and are willing to listen to her, you can get a lot closer to the magic number. But you are setting yourself up for disaster if you don’t do your homework and go with what you “feel” your house is worth. Worse yet, is interviewing agents and choosing one solely because she says she can get you more than what the other agents think the house will sell for.

What you want to make from selling your home means absolutely nothing to buyers or the marketplace. So setting a price based on what you want so you can retire, move up, start a business, etc. will almost certainly fail. Owners may think their house is the best on the block, or at least better than those that have recently sold or are on the market. Unfortunately, your opinion doesn’t carry much weight with buyers. The numbers tell the story.

If it’s been shown that your house will likely sell for around $250,000, best practice is not to insist on listing it for $275,000 because “you never know, someone could come along who just has to have it. Besides, if we don’t get any bites we can always lower the price later.” The problem is it won’t take long for buyers to realize your price is unrealistic. The listing languishes, so you drop the price, but not enough, so it sits even longer and pretty soon you have a listing that’s been on the market so long buyers decide there is something wrong and steer clear.

The solution is to get the price right. This is done by using what is called a Comparative Market Analysis (CMA). If you’ve hired the right agent, this is the first folder out of their briefcase when you meet to list your home. A CMA breaks down the sales price of homes that are similar to yours in location, size, age and condition. Your agent will also consider the listing prices of homes on the market, but these are used more to identify the competition.

Not every reason your home isn’t selling will be the price, although they will be related to it. If buyers perceive imperfections in your listing, they will expect to see that reflected in the price, so if they’re not buying, your price is not discounted enough for buyers to believe the value to them at least equals that of your price. This is why it is imperative that sellers do everything they can to eliminate any issues buyers may have with their house before listing. Obviously, you can’t do anything about location, such as being near railroad tracks, or that you have just one bathroom. But you and your agent should have factored these considerations into the listing price.

Here are some of the most common reasons buyers are turned off by a particular house, so make sure these are addressed before lopping thousands of dollars off the asking price.

Your house should be a showstopper. This is the second biggest reason a home isn’t selling. Buyers often talk of “connecting” to a house. This is not likely to happen if your house is not company-coming-over clean and ready to show like a model. This goes for the outside as well. If it is not reasonable to put in this effort, then adjusting your price to compensate makes sense. Buyers will only consider a house if it’s a good deal, not because it “speaks to them.”

Most crucially, people cannot buy what they cannot see. If you make it difficult for people to see your property, then chances of a sale at the price you want drops considerably. Selling can be a nuisance, but it’s a necessary one. Once a home is listed, it should always be in “show” condition and be “open” for business.

Submitted by the NMAR PR Committee

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