Here’s a fact about the final purchase price of any home.
Home pricing is all about finding the sweet spot.
Simple. Right?
Yet sellers will want to sell for the largest amount possible and buyers want to pay the least amount possible.
This is where both buyers and sellers sometimes make their biggest mistake. Trying to get the most no matter what, you run the risk of getting less. Don’t make yourself out to be a greedy asshole.
For those of you buying, a too-low offer could cause you to lose a great house and it could damage your reputation as a buyer.
For you sellers out there, if you price your home too high, you’re probably going to end up getting a lower offer than if you had just priced it correctly to begin with.
What should you really do? Be reasonable. Let’s get into it.
Why do some sellers price their homes high?
- Agents “buy the listing”. Sometimes, a way-too-high price is the fault of the real estate agent. Some of them (not all) will use a tactic where they give the owner a really high estimate of what they can sell their home for, even higher than they know to be true. Or maybe they’re just lazy, I don’t know. This tactic is known as “buying the listing”. No, the agents don’t really buy the listing- but they convince the owner they can get a higher amount, which is obviously attractive. After the agent lands the listing, they list it at that crazy-high price for the first few weeks. When it inevitably fails to attract an offer, the agent blames changing market conditions and lowers the price to a more realistic number. Unfortunately, by that point, many of the target buyers have already crossed the home off their list. Often the process ends in more price reductions and the final purchase price is less than if they would have started with a more competitive price to begin with.
Now- I haven’t seen data on this, but I suspect that psychology might play a role here too. Aside from the house becoming “stigmatized” by sitting on the market for a while, I suspect some people cross it off their list because they think the agent/sellers are being greedy. I know I’ve done this before- so I bet others have too.
- Agents recommend leaving “room to negotiate”. This one is pretty self-explanatory and it’s also probably the most common tactic out there. This strategy is based on the assumption that buyers are unlikely to put in a full price offer because buyers believe they’re supposed to haggle (and everybody wants a deal). In anticipation of this, they list the home for a little bit more so the buyer can walk away feeling like they got that deal they were looking for. The reason I don’t like this strategy is because it takes up valuable time. Many buyers won’t put in an offer under the asking price during the first week (or month) the home is listed. If it’s a new listing, many buyer agents will even tell their buyers that it isn’t appropriate to negotiate (ridiculous, I know). What sometimes follows is the seller’s home sits on the market longer than necessary. This is a better strategy than the one above, but I still don’t love it. For me, this strategy makes the process more annoying and stressful than it needs to be.
- Sellers are unrealistic about their homes. The (sometimes) false belief that their home is nicer than everybody else’s causes them to ignore the agent’s pricing advice and list it at the number they (the seller) thinks is the best price. I have a really hard time relating to this bias. If anything, I’m over realistic about my home and I can always tell when a comp is better than mine. If your neighbor sold their home last month for 350k and it has a new roof and a new kitchen, first- you need to know that. And second, if your home is similar but it doesn’t have a new roof or a new kitchen— then what in tarnation do you think buyers will think if you list your home for 400k? Are you crazy? C’mon, pay attention. Be realistic. Buyers aren’t idiots. They’re gonna see your neighbor’s house as a comp, and then you’re gonna look greedy or uninformed. Don’t do that.
- Sellers are afraid of “leaving money on the table”. They also believe, “Well, I can always lower the price later”. But here’s the thing, folks. Any money “left on the table” isn’t going to be enough to sweat about. Market demand naturally minimizes the risk of losing much. Here’s the way I look at it- I’m going to price my house up to 5k less than my best sold comps. Am I okay losing 5k to have my home under contract the first week (or days) of listing it? Yep! No doubt. And here’s the reality. Because my home looks like it’s priced low, I’m going to get the most amount of action, and maybe, if I’m lucky, a small frenzy. Buyers will want to secure the house that’s priced as the best deal they’ve seen and they’re going to do it quickly and with fewer contingencies. In the worst case, I leave 5k on the table. In the best case, I get multiple offers over the asking price and I end up landing an even better sale than if it had been priced to negotiate. The best part is- sellers who use this method save themselves tons of time, worry, and annoying requests of nit-picky buyers.
Okay, oops. I just revealed my personal home pricing strategy that has worked every single time. Don’t worry, I’ll discuss that strategy more at the end; but first, I’d like to discuss buyers.
Why do some buyers “lowball”?
- All buyers and sellers have a different definition of a “lowball” offer. One seller may think that anything below asking is a lowball offer. Strange, but true. At the other end of the spectrum, there are some people out there who think there’s no such thing as a “lowball” offer and any number is fair game (because c’mon, it’s a game). I think both of these are extreme definitions and if you use one of them, you’re setting yourself up for serious disappointment and frustration.
- Buyers are also afraid of leaving money on the table. Just like sellers, they think, “What’s the harm, I can offer more if they don’t accept the first offer”. This notion may be true, but if you’re way too low, you’re going to piss off the sellers and their agent. If you’re putting an offer in and its lower than the comps, you should be able to do one of two things (and preferably both). First, you should be able to give a clear explanation as to why that’s an acceptable offer. If you’re informed and you have numbers backing up your offer, then you’re more likely to succeed. And second, the offer should be incredibly enticing in other ways. For example, you may offer cash with a short closing date, you may offer to let them leave their unwanted crap behind (and you’ll take care of it), or perhaps you write your offer with no contingencies. My point is, if your offer is for significantly less than the sold comps, give them another reason to want to take it. Make everything easy.
- All buyers want a deal. There isn’t anything wrong with wanting a good deal. Especially if you’re an investor. We all want a good deal! But try to be reasonable. There is somebody on the other side of this transaction and it’s probably a human being just like you. If you’re a buyer looking for a good deal, prepare to buy a serious fixer, a tax sale, a foreclosure, an estate property, an old rental, or entice the seller by making everything seamless, easy, and fast.
What I’ve attempted to demonstrate here, is everybody is on one side of the transaction’s natural push-pull conflict. You see? This makes it a near-inevitability that the final purchase price of a home will wind up being some variation of the middle ground- the sweet spot. Just accept it.
If you approach all buying and selling with this mindset, and you’ll experience fewer frustrations and you’re less likely to be perceived as an “asshole” throughout the process.
Here’s an example of why you should just buy/sell on the inside of the sweet spot.
Imagine this- you’re listing your home. All the sold comps sold for 270-285k. All the active market comps are currently listed at 285-300k. The market is stable/even.
Pricing Scenario 1: As a seller, you could list at 300k (what most people do). You keep your home as clean as you can and occasionally drive around for an hour to accommodate many showings. After 40 days of this, you are relieved to receive an offer. As expected, they negotiate and after some back-and-forth you accept an offer for 285k. Then after the inspection, they ask you to do 10 really annoying “repairs” which cost you about 5k (of which only a few are reasonable). See how this is annoying and stressful? See how it is time-consuming? By the end of it, your original 300k asking price has been reduced to an actual 280k.
Pricing Scenario 2: Instead, I’d rather just list the home at 280k. Sound like I’m leaving money on the table? Well, not really. First, it’s listed at the same price as the sold comps. Second, the first impression to buyers is that my house is priced low (because visually they’re seeing my listing next to the ones priced 285-300k). Immediately, the first days or week, I’m able to attract at least one, if not multiple offers. Most likely, those offers will be for full price (or higher) and with the least number of contingencies. After the inspection (if there is one), they’ll also be less likely to ask me for annoying repairs because they’ll imagine that other buyers are circling. This prevents them from making any unreasonable requests. In the end, the final purchase price will be very similar to the first scenario. Yet I’ve saved so much time and stress. To me, that’s totally worth it.
The idea that buying and selling should be some kind of buyer-vs-seller war is such a shitty way of going about it. I think realtors should act as mediators to a transaction as opposed to “the person who will get you the best deal or the largest sale”. That hard-ass-salesperson mentality doesn’t do much good in the end. It creates just another industry pain point for the consumer and creates unnecessary agent-to-agent drama. Yuck.
Keep in mind, I’m in the Midwest where prices are a lot lower with a lot less wiggle room. I can see how buying and selling million dollar homes might have an entirely different set of rules.
What do you think; how have you priced your home?
I’d love for you to share,
HouseRat Zero