Even experienced home buyers can take a home’s list price far too seriously. That’s a problem. List price is simply proof that we live in a free country, and that any seller is welcome to exercise his or her First Amendment right to free speech. It’s not science.
This chart shows that any correlation between list price and sales price is probably accidental. Only 8 percent of the 466 Palo Alto homes on the MLS in 2016 sold at exactly the list price.
Now, of course, the “above list” and “below list” columns include homes that sold for only a few thousand above or below list, and sales that near list price seem to give it credence as an indication, or at least a strong hint, of market value. So let’s try not be so literal, and say that a sales price within $30k of the list price indicates an adequate correlation between the two. That adjustment nets us 104 homes, or 22 percent, still leaving four of five Palo Alto homes with a sales price that didn’t come within a country mile of list.
Then consider the handful of Palo Alto homes that sold last year for $600k or $700k above or below list. “Okay,” you say, “a few anomalies at each end of the range don’t necessarily invalidate the legitimacy of list price”. But far more routine–and far more challenging to the idea that list price should be taken seriously–were overbids of several hundred thousands of dollars and, especially at the top end, sales prices several hundred thousands of dollars below list.
Pro tip: it’s a truism among agents that a home listed at its likely sales price won’t sell, while buyers anxiously ask their agent “what’s wrong with that house?”. Agent should respond, “nothing that a price reduction won’t fix”, because lowering the list price to under market value often gets seller the multiple offers he or she craves and, sometimes, a sales price above the previous list.
And you thought selling real estate was easy.
So what is list price, really? Where does it come from?
Ideally–at least for the seller–list price is the number on the Internet that gets enough buyers through the front door to produce multiple offers. It should also, ideally–at least for the reputation of the listing agent among his or her peers–not be so far below market value that it generates a ridiculous number of offers (I was once one of 68 offers on a house in Cupertino) and sell 33 percent above list, because this kind of nonsense makes lots of work for lots of agents and buyers that goes exactly nowhere. Although I’ll qualify this: in a sharply rising market, a list price carefully finessed two months before the house was put on the market to excite buyers while not alienating agents can end up looking like a transparent attempt to set a personal record for number of offers received.
So how can buyers take list price too seriously? First of all, they can show up to the open house of a grossly-underpriced listing thinking that they’ll be able to buy it for anything close to list. I’m thinking here of the $2M Palo Alto house recently listed at $999k, which temporarily overwhelmed the networks of the mobile carriers, but the “discount” can be far less than 50 percent and still be patently absurd, at least to knowledgeable, serious buyers. A more common way to get hung up by list is the lament “we offered $300k over list and still didn’t get the house”–not because the real estate market is unfair, but because the house was listed at $400k less than its market value. Also common is “we got a good deal because we got the house for less than list”–only because some agent or seller set the list price higher than market value.
Still think there has to be some relationship between list and market value? After all, the number on the price tag of 99.99 percent of what you buy is the number it takes to walk out the door with it, or have it shipped to you. Then consider an agent I’ll call X, who would invite the office to help price new listings, requesting advice not only on likely selling price but also on an attractive list price. X would take our suggested list price, slash it by 10 or 20 percent, watch buyers break down the door, and wind up with twenty or thirty offers…week after week.
Then there are agents who:
- genuinely don’t know what the home is worth, or
- genuinely don’t care what the home is worth, as long as they get the listing and maybe a price reduction later on, or
- work with sellers who genuinely don’t know what the home is worth, except that it’s worth a lot more than anyone else thinks
By now I hope you’ll agree that any agent or seller can run any list price up the flagpole. That’s not the scientific method. It also ain’t Nordstrom, with the price plainly marked, take it or leave it. Which may explain why, in our example, there’s a four in five chance that list price is irrelevant.
copyright © John Fyten 2017