Every home seller wants two things:
- To get under contract (soon), and …
- achieve the maximum contract price.
It is easy to understand why these are the seller’s desires. Also, it is easy to understand why sellers often believe that the best contract price will be achieved by listing for sale with the highest asking price.
Sadly, the reality is that both objectives can be compromised, or not achieved at all, if the asking price is too high and not supported by the prevailing market.
There are many reasons why sellers tend to overvalue their homes. Some are;
- Misread the market – Sometimes a segment of the housing market may be “hot”, meaning that houses sell within a few days, with multiple offers. However, buyers always will be reluctant to make offers on homes that they believe are overpriced. Buyers buy for the long term, whereas sellers focus on the near term.
- Pride of ownership – Most homeowners have some emotional attachment to their home, and have a general tendency to believe that buyers will see and share that emotional value. The reality is that buyers see the home in a more detached perspective and do not accept the emotional value added by the seller.
- Adding costs of improvements – Sellers often argue that they upgraded the kitchen or finished the basement, or made any number of other improvements over time, and the costs of these improvements should be added on a dollar-for-dollar basis. The reality is, although upgrades do improve a home’s marketability, the market – and buyers – only place a significantly discounted value on these improvements.
- Create a bargaining price – Sellers sometimes believe that they will get the contract price they want if they overprice so as to allow a range of negotiation with the buyer. This is a serious error in tactic, as data has shown that most buyers will make a full offer on a house that is properly priced before they will make an offer lower than asking price on a house that is overpriced.
- Cost driven pricing – This is similar to #3 above, with the difference being that the seller’s logic is that since he paid $X for the house when he bought it, he then has to sell it for $Y, for any number of reasons. The reality is the market doesn’t care what the seller paid for the house. The only pertinent consideration for the buyer is at what price can he buy the house now?
The real risks with overpricing a home is that neither of the seller’s two objectives mentioned in the first paragraph may be achieved – the house may not sell at all, or may only sell at a reduced price. These actual results can occur because of the following;
- Loss of excitement – the most interest (and excitement) that the house will receive by potential buyers will be in the first few days after it is listed. If buyers believe the house is overpriced, they often will lose interest and not even pursue it. The seller thus risks losing a segment of the possible buyers because he effectively killed their interest with his over price.
- Loss of the most qualified buyers – Some of the buyers disinterested in the case above, could be the most qualified buyers. Sellers often lose sight of the fact that what they really want is a buyer under contract who will close the transaction!
- Other properly priced homes will appear more favorable – Buyers will gravitate to those homes that they believe are favorably priced, and often will not even seek showings on homes, which they perceive to be overpriced. Their thinking is such homes are not worth their time, or they are priced above their price range, and thus are not obtainable.
- An overpriced home may become “stale” – As in #1 above, the longer a home stays on the market without selling, despite subsequent price cuts to more properly align the price with the market, the home will become stale, meaning that the available potential buyers will have lost interest. The buyer’s general feeling often is, something must be wrong with the house.
- The seller’s negotiating position is weakened – If #4 happens, the seller has less argument for negotiating a strong price and may become relegated to accept any offer, or risk not selling.
- Contract failure – Remember, the main objective is to complete the contract, close the transaction. If the over pricing leads to a weakened buyer in contract, the risk is greater that the buyer will not perform, for any number of reasons. The worst situation that can happen for the seller is to have the house “fall out of contract” and have to begin the whole process again now with a “stale” house to sell.
- The house may not appraise – Most buyers will require a mortgage. Also most buyers will buy to their financial limit. If the house doesn’t appraise to at least the contract price, then the buyer will be required to bring more cash to closing. Most often buyers will opt out of the contract if the house doesn’t appraise.
The best assurance for the seller to meet his goals is to price properly when coming to market. The best assurance that this can happen is for the seller to retain a skilled, experienced and professional real estate agent who knows the market and can guide the seller through the whole process to help him best realize his overall goals.