When In Doubt, Cut the Price!

There is a rule of thumb in the real estate business that wise professionals keep reminding themselves of whenever pricing a new listing. It suggests that if a property is as little as 5% over what is perceived to be the market value, the seller loses… half of the potential buyers! Not a good idea. Worse: if the property is listed at 10% over “market value,” 70% of the would-be buyers are eliminated. Hence question 1, to the home seller: “Do you want to just list or do you want to sell?” If listing is the deal, be my guest, put any price you want on the contract. If, however, the idea is to sell, then put a price on the house that is likely to attract as many buyers as possible and produce the best possible sale.

Now, question 2, this one to the listing agent: “Do you want to sell the house or do you want to “buy” the listing?” It seems easy enough to get a listing by telling the sellers that their home is worth a lot more than what other Realtors are recommending, but aside from a host of ethical issues, what good does it do?

As we said before in this column, there are three pricing strategies: you can price at “market value” based on pertinent comps, you can underprice a bit in hope of creating a bidding war if and when the local market is ripe for this scenario, or you can overprice and play Russian roulette (and perspire heavily).

A couple of weeks ago, an agent was telling me that in his market, on average, properties end up selling 14% under the initial asking price. Frankly, looking at MLS stats all over the country, such data is not terribly surprising. Many people live in denial.

With this in mind, some homeowners may make the calculation that, to eventually land at a serious Realtor’s suggested price, they should add 14% and wait for the winning offer. Sorry, it does not work that way! That much over can almost guaranty that the house is going to collect dust on the shelf for a l.o.n.g time; at least until such a time when the price is reduced.

I don’t have to remind anyone that a price cut, no matter how much or when, is an emotionally charged event.  So much so that when it finally occurs it is often too little, too late. The principle of a price reduction is to give new momentum to the marketing, and resurrect realtors and prospective buyers’ interest in a property. We need to create drama. The timing and the extent of the reduction are keys to the success of the operation.

Typically, in a great market, a price cut might be pertinent after two weeks of exposure and no action. In a good market, a month is usually enough time to test the market before adjusting the price. Now, the thing to keep in mind is that a price cut must be substantial enough to restart the marketing engine.

A calendar of possible price reductions should always be part of the listing negotiation, as to avoid bad surprises.  If the market is just lukewarm, merely following the trend with a reduction every month or so, is essentially useless as other newly listed homes already integrate the new valuation and, on top of that, have the huge marketing advantage of being fresh. Any price reduction will have to anticipate on the market moves and beat the most recent comps to stay ahead of the pack.

The moral of the story is that, even though everything about pricing is largely hypothetical, experience often teaches that the lower the list price, the higher the selling price….