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September 21, 2011

The risk in asking too much for your house

If you're trying to sell your house and you figure your asking price doesn't matter all that much, consider this anecdote from Wonk reader elweedz.

A home originally listed at $525,000 sold almost a year later for $350,000, less than what he might have been willing to pay for it. "Since I thought the home was so overpriced ... I never bothered to go see it," he commented. So the owners lost out on a showing and a possible offer that could have been better than what they got.

"Realtors (and I know you are out there reading this blog) should print this and show it to their customers," he added.

Sometimes, too-high asking prices keep owners from getting any offers at all. But elweedz's experience shows how some homes end up selling for less than the owners could have received had they started off with a lower asking price to begin with.

I know it can seem counterintuitive, especially to a seller who is trying to account for the possibility of lower offers from buyers by making the asking price 10 percent higher than he would actually take. But in a market where sale prices are dropping and lots of listings are jostling for attention, pricing too high really hurts sellers.

Plenty of buyers will snort at the asking price and click on the next listing, rather than coming out to look and making a much lower offer the owner might have been willing to take. And some folks who would have been ideal prospective buyers won't even see the online listing information because it's in the wrong price category.

Here's a question I'd like to have buyers, sellers, real estate agents and general housing-market observers alike tackle: Have you ever seen a situation where a house is languishing on the market but the asking price is not the primary problem? In other words, lowering the price wouldn't make a difference?

Posted by Jamie Smith Hopkins at 6:00 AM | | Comments (9)
Categories: For sale
        

Comments

no name on this, but in my experience it was the Realtor who chose the too-high price. This was a few years ago. I went with his price--about $15k more than I thought it would do--because he was the "expert" and it seemed like good news.

He also had a unit of his own for sale in the same building priced $10k less than he priced mine. I got the idea that pricing my unit--which was gorgeous--close to his less pristine unit would tend to drive the price down.

Prices, of course, were falling anyway--and had been for months before we came to market.

Six months later we sold mine for about $2k less than I would have priced it in the first place. His lower-priced unit was still not sold.

I bear the Realtor no ill will. I think he priced both units honestly, and he worked hard to sell mine. But it just goes to show--the experts aren't always right.

This is a great point, one that I stress to my clients. Buyers will weed out the properties online, via price and the photos, before getting into their car. There is a huge problem when a seller decides to overprice.
Addressing your other question- there are (at least) 4 factors that influence the property. Price, location, condition, and financing. Sellers can influence 3 of these factors- although not many can offer financing, and they cant move the house. So, a house sitting on the market likely either needs repairs/improvements, or the price adjusted. Ultimately, almost every property has a price at which it will sell. I say almost, because some city properties i wouldnt take if you paid me.
Lack of available financing is an issue. Some condo associations have lost FHA financing due to delinquency rates higher than 15%. Cant get govt backed financing, you lose most buyers. Lose most buyers, prices fall. Prices fall, more owners are upside down and dont pay the dues. Dont pay the dues, delinquency rate climbs. Its a death spiral.

"...In other words, lowering the price wouldn't make a difference?"

No, I can't think of any problem that wouldn't percolate to the surface and be reflected in the price that an **informed buyer** will pay.

As to the problematic property languishing unsold... the uniformed party is more likely to be the seller.

Location and condition are the only other two reasons a house may not sell regardless of price. That's why some cities such as Baltimore will buy up whole blocks and sell the houses for $1.00 in order to get investors into blighted neighborhoods to fix the place up and make the neighborhoods habitable, again.

Overpricing is bad for all the reasons you put in the post. However, buyer low balling encourages this type of self defeating behavior. It's a kind of vicious circle.

Unfortunately, banks are not immune from this kind of wishful thinking. Even though their inventory is in extremely poor physical condition located in economically depressed neighborhoods, they continue to think they can get higher prices even after they've been "discounted" to the market.

His experience also corresponds with microeconomic theory.

The total demand for anything is made up of the reservation prices (max one is willing to pay) of individual buyers. If the list price is discouragingly out of line with a buyer's reservation price, the buyer eliminates himself from the market for that particular house, and the total demand for the house, and thus its price is reduced.

Under-pricing a house can use the same concept in reverse to a seller's advantage. I've seen deliberately under-priced houses attract enough attention and competition that they are bid up to a final price that is more than equal or slightly superior homes end up selling for months later.

All homes should be sold Ebay style. Start with a minimum reservation price, and then hold a period of open bidding, perhaps something between a week and a month. Pre-approval required to bid. Net price to eliminate concessions confusions. Such a practice would more accurately reflect true equilibrium.

I have enjoyed reading your blog for a long time but have not commented before. We accidently overpriced our house a couple of years ago. After putting a lot of time and money into the stager's (who was hired by the real estate agent but not very good) suggestions, we thought we had a better house than we did. It is also hard to evaluate comps to *your* house, because we personally valued all of the features in our home. We did two price drops, but after 3 months we ended up pulling it off the market and renting because we did not think that *new* buyers would emerge at the lower price.

But we were also not sure what price it would take to find someone who would buy it just because of the price. We lived on a steep hill (which we actually liked the view from the deck) but this was a deterrent to many people...we thought that if we priced low that we might just induce potential buyers to offer that price to the house that they liked better...we feel like we need to wait to sell until the number of buyers is greater and buyers don't wait until they find the perfect house.

Since you can always be more objective when it is not your house, I have seen this happen to several other houses. I am a nosy neighbor and frequently check out neighborhood open houses with the rest of my neighbors in my new neighborhood. In February I went to an open house and suggested to the realtor that I thought his house was priced $150K to high based on some sales on my street. He pointed out that this street (1 block over) was much nicer (it is more impressive architecturally...but still same schools, basically same size townhomes). They have a new realtor, and based on the pictures have decluttered and depersonalized and come down $100K. ...but still not sold. Another home came on the market and sold in a couple of days with multiple offers...because it was listed at the correct (to low price).

One thing I think is hard in pricing is to look at the features your potential buyers would want in a home. We liked our old home, but when we learned the area it was not the neighborhood that we were the most comfortable in. The people who were looking to move into our old neighborhood were not looking for the same features that we were looking for. I think the home I mentioned before has the same problems. The way it was set up and designed in would be great for a couple who had grown children and whose grandchildren liked to visit...the entire second floor was one impressive owners suite with massive closet and study with built in desks. BUT, the people that buy in our neighborhood are professionals who want walkability and the ability to send their kids to good public schools. I mentioned that to the realtor and he said you could take out the built in cabinetry to convert the office back to a bedroom. That is completely true...but they had included a built in office in the homes pricing.

Thanks for the comments, everyone! J, did you end up selling your home or are you still renting it out? (At least the rental market is favorable for owners these days.)

Great post, I can't agree with the title more. Risk might even be a bit soft in describing what a dramatic effect overpricing a home can do the saleability. The eventual sale that was mentioned definitely is an extreme example, especially in that price point. But outlines what might very well happen and what not to do.

BUT, there is more than just price! The MLS is the hub for information to the consumer and agent, it would be wise to have the most accurate details available listed. For example, finished living space (above and below ground), total square footage, room measurements, professional photos, etc. I realize that this might seem like common sense but often what a seller thinks is being portrayed is not (request your homes listing). Where do buyers start their search? ONLINE! And if your home is not shown in the best possible light (and priced right) then would you go see it? Of course not!

Bottom line, price your home right (competitively) and make necessary timely adjustments and your home will most likely sell.

Overpricing is a big risk. Sellers think it gives them room to negotiate down. In reality, it just means that they'll draw less visits, less realtors suggesting their place to clients, and less people at open houses.

Being 10-20% overpriced can mean lost months and it means losing the CRUCIAL "pop" that a house SHOULD get when it first hits the market. If you start off with a good price, people will see the house hit the market, be interested, and check it out If you lower the price later, you might get a little boost in interest, but nothing like when you first list it. Also, people will start to think there are flaws in the house and start to "smell" desperation. A house that's been on the market for months can't be kept a secret.

I echo what others have said about working hard to figure out a REALISTIC price from the start. What would I recommend?

1. Don't hire your friend as an agent and don't hire the first agent who comes through the door. Make appointments with at least 3 listing agents and ask them what they realistically would recommend for pricing and why. Pick a sharp, realistic realtor, not the one who will say anything just to get the listing.

2. Don't necessarily trust the agent, study the comps yourself and perhaps hire an appraiser ($150-200 bucks is a fair price) to point out weaknesses in your house and give you an unbiased price. $200 isn't much to pay when you're talking about a house worth a couple hundred thousand.

3. Get an inspection and fix any issues that are going to pop up when the buyers have their inspector come in.

4. Get ahead of the market by starting off with a low price and holding an early open house, soon after the house hits the market. With house prices falling now, you're better off selling for a decent price now rather than holding on til next year when prices will likely be lower.

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About Jamie Smith Hopkins
Jamie Smith Hopkins, a Baltimore Sun reporter since 1999, writes about the regional economy. Her reporting on the housing market has won national and local awards. Hopkins is a Columbia native and has lived in Maryland all her life, save for 10 months spent covering schools in Ames, Iowa.
She trained to become a wonk by spending large chunks of time as a geek and an insufferable know-it-all.
Baltimore Sun articles by Jamie
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