The practical file
Sellers, get your list price right.
Here's the first rule of pricing: you can't under-price your home. Here's the second rule: it's way too easy to overprice your home, and way too fatal.
A recent conversation with a client on how best to price his house brought back memories of similar conversations with virtually every seller I've worked with.
As buyers around here know, homes for sale are often priced at slightly below market value. For example, if Agent thinks Seller's home is worth about $1.3M, Agent may recommend that Seller price her home at, say, $1.275M, or $1.249M, or even less in times of extreme uncertainty.
If Seller's home is worth $1.3M, you ask, why not just price the home at $1.3M and sit back and watch it sell for $1.3M? Because a $1.3M home, listed at $1.3M, won't sell for $1.3M in this area. In fact, it won't sell period. Strange but true, but a home that buyers would willingly offer $1.3M for, if listed at less than $1.3M, will languish on the market unsold if listed at $1.3M. It's like buyers need a boost of value-priced adrenaline to get them off the fence and in the mood.
And that's quite likely. Because the truth is that buyers won't get off their couch and into an open house unless they see V-A-L-U-E written all over a house. Once through the door, they'll fall hopelessly in love, or so Seller hopes. And they will, if Seller has done her homework.
It's also apparent that after ten-plus years of exposure to the under-pricing strategy, local buyers have come to see list price as merely a suggested starting point. If Seller prices her home at $1.3M, she sends a strong signal to buyers that she probably expects offers to start at $1.3M or more—even if Seller doesn't intend to send that signal. So if Seller lists her $1.3M home at $1.3M, no buyer shows up. Her home lingers on the market, with buyers circling but never approaching. A few months of this and Seller's home is now thoroughly stale and starts attracting half-hearted and/or low-ball offers that Seller couldn't possibly accept, and it goes downhill from there.
But if Seller prices her $1.3M home at $1.275M, she's speaking Buyer's language. "Aha", says Buyer, "I am hip. Seller really wants $1.275M plus X. It's up to me figure out what X is".
At this point, those of you who see the world from a rationalistic, left-brained, life-is-a-flow-chart point of view are wondering, "Okay, so how do I under-price my home to attract buyer interest yet avoid the risk of leaving money on the table? How can I be sure that buyers will understand that the home I'm listing at $1.275M is really worth $1.3M? In other words, how will buyers know what to offer for my home? How will they know what X is?"
We can answer this question by dispelling the most common misconception about multiple offers, a misconception that keeps us from understanding how this pricing strategy works.
Everyone assumes that multiple offers happen only in a hot market. But that's not true. If it were, bank-owned properties in real estate deep freezes like East Palo Alto and Hayward wouldn't be getting multiple offers these days, and they are. East Palo Alto and Hayward tell us that multiple offers are a sign, not of a hot market, but that even declining markets have buyers willing to compete for homes priced as values. It tells us—and this is key—that the market—in other words, buyers—recognizes when a property is priced under market and, furthermore, is willing to bid its sales price up to market value.
Of course, multiple offers are also one of the more notorious signatures of a hot market. In any market, list prices are based on yesterday's sales prices. Since prices are rising, often dramatically, in a hot market, list prices reflective of yesterday's market values will be lower than today's market value. Multiple offers and general mayhem ensue. But there's a difference between the multiple offers seen in a hot market and those in risky, uncertain markets like East Palo Alto and Hayward, markets that over the past year have lost as much as half their value. In a risky market, under-priced homes still attract overbids, but they're likely to be conservative overbids because 1) buyers strongly suspect that the worst isn't over and build this into their offers, 2) many are investors, with little if any emotional tie to the homes they bid on, and 3) these cities are perceived by the market as being less desirable (a perception reflected in their lower prices) so the I-gotta-live-here feeling that leads to high overbids isn't as strong.
Midrange neighborhoods, on the other hand, where prices have declined a relatively modest 10 percent since mid-2007, fall between the gotta-have-it mega-bids characteristic of a sought-after top-end city like Palo Alto, and the cautious overbids seen these days in cities like East Palo Alto. But that's just a generalization. Overbids happen on a case-by-case basis, because list pricing varies on a case-by-case basis.
Still not convinced your home should be priced for multiple offers even in a so-so market? Then understand that the weaker the market, the more buyers need to see value to notice your house. You're fighting not just normal buyer inertia but scary headlines to get buyers through your door. You'll succeed if you and your agent do your jobs. Once buyers see your home, they'll get excited. Once buyers know they have competition, not all but enough will be willing to pay fair market value.
What's wrong with trying it both ways: bringing your home on the market at a high price to "test the market", then reducing it if no one bites? Reducing your list price doesn't get you back that all-important momentum you need to sell for top dollar, because by then your house is "stale" and buyers are wondering what's wrong with it, if they're even aware it's still on the market.
That's why coming on the market at an attractive list price, right off the bat, is so important.
So the answer to the question, "How will buyers know what to offer for my home?" is simple: "How does any buyer know what to offer for any home? How does any buyer know what a home's market value is? Not by list price, or even the most overpriced home would sell. Buyers know a home's market value because buyers set its market value. Not sellers, not agents. Buyers are "price makers", sellers and agents "price takers". Buyers will bid up your home's sale price to today's market value, whatever that is, regardless of how under-priced—but not regardless of how over-priced—it is. So forget 'how will buyers know?' Buyers don't need to be told how this works, because a market doesn't need an instruction manual or 'guidance' from sellers to know how to act like a market. This stuff comes naturally. In fact, that's the only reason it works."
So just keep repeating, "Buyers will know, because buyers are the market". In fact, buyers—serious buyers, that is, not open house tire-kickers and other wishful thinkers—know what today's market value is better than anyone else. Because, again, buyers are the market. If buyers feel pessimistic today, home prices will decline today. If buyers see a light at the end of the tunnel today, home prices will be stable today. If buyers are giddy with optimism today, home prices will rise today.
I want to emphasize that there's nothing contrived about slightly under-pricing a home in hopes of getting multiple offers. It's organic, since it relies on the proven fact that buyers (for anything) will compete when they see value. This strategy is nothing more or less than an informal auction.
So why would someone who six weeks ago or ten years ago was a buyer with an intuitive understanding of how this auction strategy works, and complaining bitterly about how it favors sellers, suddenly, once he or she becomes a seller, start questioning the intuitiveness and effectiveness of this strategy? Because few of us understand how markets work, and why should we? The vast majority of us know only the sanitized marketplace of modern retailing. Rarely do we venture into real markets, elemental throw-back markets lacking the comforts, conveniences and polite conventions of the Nordstrom experience. Real unadorned markets are rare these days and they're scary places. We dread buying a car. We think twice before venturing into the labor market, unless we have to. The thought of buying a home paralyzes many and, make no mistake, home-buying is a rite of passage. Because real retro markets are a real mystery to 21st-century man.
Okay, so how does Buyer find out what X, that missing piece of the price puzzle, is? Left to himself, Buyer is apt to say, "Forget about X above list. How much below list will Seller take?" To prevent this, it's up to Seller or, more accurately, Seller's agent to make sure that Buyer has competition for the home. How? By presenting it attractively and pricing it effectively.
Then how is Buyer put on notice that he has competition? Buyer walks through the door of the open house and the first thing he asks Seller's agent (after "how long has this house been on the market?") is, "How much interest is there?" Agent replies, "I have six disclosure packages out and two confirmed offers for next Wednesday night, with one or two other buyers hovering." Buyer knows from this exchange that he needs to bring his best game if he and his agent plan to show up Wednesday night.
Or more likely, Buyer's agent calls Seller's agent after the open house, asks the same question and gets the same answer. And if Buyer's agent is smart, she'll continue to stay in touch with Seller's agent, monitoring interest up to the moment she meets with Buyer to write his offer, and after. When they meet, Buyer's agent will, or should, show Buyer recent comparable sales which, if Seller's agent was correct in her assessment of the value of her client's home, show it worth about $1.3M. At this point, Buyer has several decision paths to choose from.
Buyer can say, "No way I'm paying $1.3M. I'm not that jazzed by the house. Besides, I don't want to overpay. So I'm comfortable offering $1.275M". Or he can say, "Yeah, from what I've seen, the home really is worth $1.3M, and that's what I'll offer". Or he can say, "You know, I really want this home. I've been looking at homes for months now, and I like this one better than any of the others I've seen. So if someone else is probably going to offer $1.3M based on the comps, I'll offer $1.325M. I plan on raising my family in this home, and an extra $25k amortized over the next five, seven or thirty years isn't enough to make me run the risk of losing it".
Or Buyer can say, "Forget it. I don't want to compete. I'll wait for the next house."
Or some variation on the above, which is why the process is impossible to flowchart. Buyers are human beings, not robots or algorithms, and they make decisions based as much on emotion as on cold hard facts. And if any buyer is ever accused to being "emotionally invested" in a home, I hope he or she says, "Hell yes, I'm emotionally invested. This isn't a DVD player I'm buying. This is my home, my castle and refuge, for the next five to seven years on average, and I'm not going to buy a home I can't fall in love with. You keep renting until you get it."
As with any proven strategy, under-pricing delivers generally reliable but not entirely predictable results. Under-price a home for quick sale, as I did seven years ago last month, and 9/11 comes along and derails your best-laid plans by instantly making the home overpriced and unsalable. And in a soft market it is possible to get multiple offers that all come in around list price or even below. But all that tells you is that your home is worth less, in a declining and retrenching market, than the comps you used from two or three months ago to set your list price.
And even if this happens, Seller is still better off than if she'd overpriced her home, deliberately or otherwise, to give the market some sort of "guidance". Because she did give it guidance, alright: I'm one of those sellers who thinks her home is worth more than it's worth, and I'll be a real pain to work with, even if you lure me into contract. So Seller ends up chasing buyers down the price range, and buyers move faster than she does.
I'll end by relating two stories that illustrate the perils of overpricing.
A year or so ago clients of mine bought a home in sought-after Palo Alto, a city known for high overbids. After they closed, they asked me to sell their townhome, located in a certain San Mateo County city not known for high overbids. After much analysis (the townhouse market in that city is microscopic and therefore hard to analyze) I told them their townhouse would sell for $825,000 to $850,000 and quickly but if, and only if, they brought it on the market at $795,000. If they came on at the top end of the range, $850,000, because they thought a list price of $795,000 would leave money on the table, I warned them that they'd end up getting less than $825,000. Not only that, but their home would take longer to sell, a real concern since they were making two house payments. They balked, told me I didn't know how homes were sold in that certain San Mateo County city, and found themselves a local agent who dutifully brought their townhouse on at $850,000. It sat for 42 days, 42 long days in which they paid for two homes, then sold for...$822,500.
I nailed it. Slow sale, just as I predicted, and a sales price under $825,000, just as I predicted. But the other agent got the commission. "I told you so" doesn't pay the bills.
Second story.
Seller puts her home on the market at $1.85M. Buyer's agent tells Buyer that the home is worth about $1.68M. Buyer loves the home but not enough to pay a $170k premium. Sure enough, a few weeks later Seller lowers her price to $1.75M. Buyer decides that now is a good time to make an offer but not at the $1.68M he'd kicked around originally, but at a rock-bottom $1.6M. The reason? Seller's home has been on the market several weeks with no bites, and this sign of weakness has emboldened Buyer. Buyer's offer of $1.6M insults Seller and she refuses to respond to this "ridiculous" offer...more time passes, never a good thing for Seller. Buyer's agent calls Seller's agent to encourage her to encourage Seller to respond to Buyer's "ridiculous" offer. Seller does so, countering at $1.7M and grumbling that this is as low as she'll go. But by now Seller's home has been on the market for several more weeks, emboldening Buyer even more. Besides, Buyer is beginning to take this personally. Buyer counters at $1.660M, grumbling that this is as high as he'll go. Seller is insulted and refuses to respond...more time passes and, as we know by now, this is never a good thing for Seller. Seller's agent calls Buyer's agent and says that now Seller will be happy to see that $1.660M offer. Buyer's agent relays this to Buyer, knowing in his heart that even more time has passed and that Buyer will be even more emboldened. And, sure enough, now Buyer is no longer willing to pay $1.660M.
And so forth, and so on.
It's like that Groucho Marx joke: "I'd never join a club that would allow a person like me to become a member." Except that in real estate, it goes like this: "If Seller finally accepted my offer, I must have offered too much."
Sellers, don't ever let yourself be the butt of this joke. Get your list price right, right from the start.