11 Traps To Avoid When Pricing Your Home
Pricing your home can be difficult. It’s normal for sellers to want more than market value, and when the data doesn’t match the desire, they rightly raise questions. Here are the most common.
1. Pricing your home based on an online estimate
There are no online estimate pricing tools out there that have the capability to accurately determine the value of your home. An agent or appraiser needs to physically look at your home and follow up with a thorough analysis using recent, local, comparable property data to give you an accurate price.
Many people like to look at Zillow’s Zestimate. When the CEO of Zillow sold his home, the Zestimate was $1,700,000 and he sold it for $1,100,000. The Zestimate for the CEO of Zillow was off by 35%! Does that tell you anything?
2. Pricing your home based on a previous appraisal
Many times, appraisals completed for refinance or home equity lines are higher than what you can actually sell your home for. An appraisal completed more than a year ago has nothing to do with what market value is today.
When you receive an acceptable offer on your home, the buyer’s bank will have an appraiser appraise your home at that time to make sure it’s worth at least what the buyer is buying it for. If the appraisal comes in for less than the sale price, the lender may not give the buyer a loan for your home.
3. Pricing your home based on what you paid for it
Unfortunately, there is no relationship between cost and market value. It is possible that your home hasn't appreciated since the purchase or, worse yet, has declined in value. Appreciation over the long term is common but not guaranteed. When the value of your home is less than your original purchase price, you're left with a tough choice of whether to sell at a loss or stay in the home. You must decide if the benefits of moving exceed the amount of loss.
Consider this example: What if you acquired your home through an inheritance, in which case your cost was zero. How much would you try to sell it for today? You would likely attempt to get market value even though you paid nothing for it. Regardless of their cost, homes sell for market value.
Another investment that is similar to real estate is stocks. Appreciation over the long term is common but not guaranteed. What you paid for a stock has nothing to do with its future value.
4. Adding the price spent on all improvements to the asking price
Aren't there some improvements that add value to our home? Certainly there are. Capital improvements such as additional bathrooms, fireplaces, and major additions add more value, while cosmetic changes, repairs and decorating add less. In simple terms, a capital improvement adds structure or systems that weren't there before.
Replacing a roof or air-conditioning system may feel like a capital improvement because of the high cost, however, they are considered maintenance. A repair restores value that was lost through use. Repairs to major systems extend the useful life of the home and may cause a buyer to select your home over another.
Now, here's a simple question to help you determine the value of an improvement. Thinking back to when you were making these improvements, if you knew then that you were moving today, would you still have made the improvements? The answer for many people is, no. Why not? Because we wouldn't get our money back. The bottom line is, the main reason for making home improvements is for your enjoyment, not for resale.
Buyers are reluctant to pay more for a feature or amenity if it’s not something they would have added if it were not already there.
5. Building in too much bargaining room
True, any buyer can make an offer at any time, but a buyer can only make an offer if they see your home. Here is an example that has nothing to do with real estate but will get the point across: Let's say that you're looking for a pair of jeans. Your size is 34, and you're looking for a specific style. You go into the store, and what do you do? You go directly to where all the size-34 jeans are located. You look through, and you say, "Oh, the pair of jeans that I want is not here." Suppose that pair of jeans is actually in the store, but somebody put it with the 38s. When you're looking to buy a size 34 jean, you're not going to look where the 38s are. You're going to go where the 34s are.
Back to real estate: Let's say you have a buyer looking to spend up to $200,000. They will probably search up to $205,000 or $210,000, maybe even $215,000 tops. If you build in too much bargaining room and price your home at $220,000, many of your most qualified buyers will not even see your home because you priced it higher than they are looking.
Buyers can only make an offer if they see your home. By overpricing, your home becomes invisible to your most qualified buyers.
More on building in bargaining room
A lot of sellers want to build in bargaining room, and while I agree that you should build in some bargaining room, I don't think you should build in much.
Let’s say that there are two homes that we think are worth $200,000. My recommendation would be to list it at no more than $204,900. Let's say that another seller has a home that's worth $200,000, and they say, "I want to list it at $214,900, or $219,900 to build in bargaining room." Which home do you think looks better online? If they're both going to sell for $200,000, do you think that the one priced at $204,900 looks better than the one priced at $214,900 or $219,900? I will almost guarantee you that the one that's priced at the $204,900 will get more showings, and it will sell quicker than the one priced at $214,900 to $219,900.
Suppose you do price your home at $214,900 or $219,900, and you get lucky and somebody offers you $214,000 for it. If that person is getting a loan, their bank is going to require an appraisal. If the home only appraises at $200,000, the bank will not loan the buyer $214,000 for it. In that situation, you would need to renegotiate the contract at a lower price or the deal could fall apart.
Your price is like a magnet. The closer your price is to market value, the more buyers you will attract.
6. Competing against the wrong homes
When you pick your price, you pick your competition, so when you select an asking price, you are selecting the homes that you will be competing against. If you choose to list your home at $219,900, you are now competing against all other homes priced at $219,900, whereas, if you price at $204,900, you are competing against all other $204,900 homes.
Your home may compare very favorably at $204,900, but it may compare very unfavorably at $219,900. If you were to overprice in that situation, and price your home at $219,900, then you would essentially be helping sell the other homes that are $204,900 because you're making them look more attractive. You are essentially helping the competition sell their homes! This is called a “pinball listing” because buyers will bounce off of overpriced homes and into homes that are priced properly.
7. Trying a higher price for the first couple weeks
This seems harmless enough, but you are wasting your best marketing period. Buyers are scouring the internet day after day looking for the NEW LISTINGS so if your home shows well and is priced right, buyers will likely show quite a bit of interest in your home early on, but showings typically taper off once your home has been on the market for a couple of weeks. Don’t make the mistake of overpricing your home during the period of its best activity, only to lower the price once the buyers are gone. Overpricing your home at the start would be as foolish as a retailer marking their prices down a week after Black Friday. You can only create that demand one time.
8. Taking the approach that “We can always come down”
Your home has its highest perceived value the day it is listed just as an IPhone has its highest perceived value the first day it’s available.
If you overprice early on, you will likely need to reduce the price—sometimes multiple times—to try to re-create buyer urgency. You would think that once the price is finally lowered to market value that it would sell, but by that time, your home has been on the market for several months and homes that are on the market for a long time are hard to sell at any price. You will almost always net more money by pricing your home right at the start.
One question that every buyer asks when looking at homes is, "How long has this home been on the market?" A buyer may walk into a home and say, "Oh, wow, this is exactly what we're looking for. This might be the one," then they go home that night and find out that home has been on the market for 214 days. What happens in that situation is that a buyer starts talking themselves out of liking that home, because they say, "Well, that home's been on the market for 214 days. I wonder what we're not seeing that everybody else that's passed on this home has seen." If that home had only been on the market for two days at that price, then it would've created urgency, and the buyer likely would have purchased it. Again, when a home has been on the market a long time, it's hard to sell at any price, even if it's well below market value.
9. Listing with the agent that recommends the highest listing price
Most sellers think their home is worth more than it is, and most real estate agents will list at the price the homeowner wants without giving any guidance, or they will tell the seller a price that the seller wants to hear just to get the listing. This is a sure recipe for disaster! An agent who gains your listing at a high price now, will simply push for price reductions later.
I believe it’s better to lose a listing by telling the truth than to gain it by overpricing. You want your real estate professional to give you honest advice. It's the only way you can make proper decisions and plans.
10. Pricing your home based on your financial situation
Your financial situation has nothing to do with the value of your home. Would you pay more for a property if you knew the seller needed the money? I think we both know the answer. The benefits of moving must outweigh the desire for price.
11. Pricing your home based on the assessed value
Assessed value is what the tax man thinks your home is worth and is what your taxes are based off of. Years ago, most of the time, the assessed value was lower than what you could sell your home for. Now, we're often seeing it's higher than what you could sell your home for. In general, don't listen to the assessed value prices or what your insurance agent says its worth because, again, they haven't been in your home. You must have a physical inspection of your home to come up with an accurate price.
Your home will sell for more money, and in less time, if it is priced right at the start.