6 massive pricing mistakes home
sellers need to evade
Why it's critical for any
seller to listen to the market
Key Takeaways
·
Pricing is
both an art and a science, but sellers need to avoid the common mistakes that
they often make.
·
In a good
market, houses go up in value. But the stuff in them doesn’t.
·
If the market
is telling you something, you’d better listen.
So your clients have
decided to sell their home. They’ve had a lot of decisions to make, like hiring
an agent — your home sellers need your
expertise to actually sell the house, and for things like creating a
marketing campaign and deciding how to stage the home.
The nice part about pricing a home is that in
most of the country, the real estate market is pretty transparent — consumers
can get excellent information about what comparable properties have sold
for and what competitive properties are selling for.
It’s not like buying a
car, for example, where they have no idea what other people paid for their
cars.
So it’s easy, right? Well,
not so much. Even in hot markets, many home sellers find themselves languishing
on the market for months, often because they made bad pricing decisions.
In most cases, it’s
because they made some simple mistakes when pricing their home, or one big
mistake afterward.
So here I will describe
the common mistakes that sellers make in hopes that you can steer your clients
away from making the same blunders when it comes to pricing their home — and
I’ll break it down for you the same way I’d explain it to my sellers.
Pricing to the unsolds, rather than
the solds
The biggest mistake most
sellers make is pricing their home based on what’s for sale, not what’s sold.
Every comparative market
analysis is based on an analysis of two types of properties: the ones that have
sold and the ones currently on the market. You need to consider both when
you’re pricing your home, but for different reasons.
You look at the sold
comparables to get a sense of what the home is probably worth, and you look at
the unsold listings on the market to get a sense of the pricing you need to
beat.
But too many sellers
ignore the solds and price their home according to the unsolds — the listings
that are currently languishing on the market. Think about the logic of that.
You’re trying to sell your home. So why would you price it based on homes that
are not sold? If you price it the unsold homes, you’re just going to join them.
No, you price according to
what has sold. That’s the market price. The only reason you need to look at the
unsold properties is to figure out what you need to do to beat the competition.
In fact, those unsold
overpriced homes are great at making your lower-priced home look like a
bargain, sort of like when Amazon shows you a higher “list price” on a gadget
to make the sales price look like a steal.
If you want to get sold,
price to the solds. If you want to be unsold, price to the unsolds. It’s your
choice.
By the way, agents don’t
help matters by calling unsold homes “actives.” Stop that! It’s just sitting
there, doing nothing. What’s so active about that?
Overvaluing the amenities
Another mistake sellers
make is that they put too much faith in the value of unique amenities — granite
counters, bathroom finishes, high-end appliances and so on.
I was once talking to a
seller about how his home was priced over $200,000 more than a comparable
property just down the block. His answer: “Well, I have a sauna in the
basement.”
OK, but you can put a
sauna in your basement for about $10,000, and it’ll be brand new, without
anyone else’s dried-up leftover sweat in it. And this guy was pricing it as a
$200,000 value.
He’s not alone. A lot of
sellers make that mistake. Psychologists even have a name for it — the “endowment
effect,” which is our tendency to
overvalue things just because we own them.
Amenities do have value,
just not enough to make a big difference in price. The old joke in real estate
is that value is based on three things: location, location and location. I said
it’s an old joke, not necessarily a funny one.
And that’s mostly true.
The biggest factor in pricing a home is location, which is obvious to anyone
who has priced out a Manhattan apartment. After that, you look at size — how
big is the home? And then once you know location and size, you can pretty much
establish a general pricing range. That’s when you start looking at all the
other aspects of the home: style, condition, lot quality — and the amenities.
So amenities are important
because they can change where you are in that range. But they don’t move you up
to a new one.
Trying to get full value for
improvements
Not only do many sellers
overvalue their amenities, they particularly overvalue any improvements they
made in the home.
Let’s say that 10 years
ago they bought the home for $500,000. Five years ago, they spent
$50,000 redesigning the kitchen. Then two years ago, they spent $25,000 on
roof repairs. So at the very least, even if the home hasn’t appreciated in
value at all, they should be able to sell the home for $575,000, right?
Haven’t they improved the house by $75,000 with all the work
they did?
Not really. No
one ever gets 100 cents on the dollar for the improvements put in.
If you don’t believe me,
check out the results of Remodeling
Magazine’s yearly “Cost versus Value” report; it tracks the impact of standard remodeling
projects on resale value. In most cases, improvements earn back about 60
percent to 70 percent of what they cost.
Why? Think of it this way:
Almost every thing you’ve ever bought has gone down in value since you bought
it — cars, computers, pianos, anything. Once it’s used, it starts to
depreciate, right?
Well, that doesn’t change
just because you took that thing and stuck it inside a house. Even if your
house goes up in value, it doesn’t mean that everything in the house goes up in
value, too. That refrigerator you put in went down in value. Those cabinets
went down in value. The new roof went down in value. They’re all used now, just
like your car is used.
In a good market, houses
go up in value. But the stuff in them doesn’t.
Pricing based on what the sellers
‘need’
Sometimes, sellers make
the mistake of pricing according to the next home they want to buy, not the
home they own now.
That is, they don’t even
look at the comps. All they care about is what they need for the down payment
on their next home, and they figure out the price from there: “Let’s see. I
still owe $200,000 to the bank, and I need $100,000 as a down payment for my
new home, so we’ll price it at $300,000.”
Here’s the problem: no one cares what
they need.
It’s nothing personal.
After all, they do the same thing. A seller might be buying a home
after selling the current one, right? And will the now-buyer care what
those sellers need for their next purchase? Not so much.
Markets don’t work like
that. Buyers don’t price homes in a vacuum: they make offers based on what
other homes have sold and are selling for. Real estate provides an open and
transparent market, so sellers can’t price their homes according to
their personal needs.
It works both ways. If
sellers get an offer that’s too low, they don’t care if the buyer
says, “But that’s all I can pay!”
They don’t give discounts based
on need, so they shouldn’t expect a premium, either.
Falling in love with the AVM
At least, they price their
home according to the Zestimate if it comes in really high. If it comes in low,
then it’s obviously just a stupid computer glitch and can be safely ignored.
And it’s not just the
Zestimate. Automated valuation models,
or AVMs, are available everywhere now, including on a lot of broker websites.
They’re fun in a real estate porn kind of
way.
But sellers need to
understand that AVMs were designed to provide quick and easy macro-level
valuations for institutional investors who didn’t have the time or ability to
do a detailed analysis. No one thinks that they’re as accurate as an actual
comparative market analysis from a professional real estate agent or appraiser
— not even the people who created them.
After all, Zillow itself
admits to a national median error rate of about 8 percent, which means that half the Zestimates are off by
more than 8 percent. So for homes with Zestimates of, say,
$400,000, only half those homes are going to sell inside a range of about
$368,000 to $432,000. The other half is worth more or less than that range.
Sellers should think
about how they would feel if an agent came to their house
and said, “Well, my advice would be to price it somewhere between $368,000 and
$432,000, and I’m confident that we have a 50 percent chance of selling it
within that range. Yay for me!”
Would a seller have a
lot of confidence in that agent? Well, then, they shouldn’t fall in love with
that AVM.
And the one mistake sellers make
afterward
Finally, even if sellers avoid
the five big mistakes when they’re pricing their home, they can still make a
mistake afterward — namely, they set it and forget it.
Even in the best of
circumstances, the initial home price is a guess. Pricing is both an art
and a science, and you never quite know exactly how the market is going to
react when you list a home.
Indeed, from a pure
Economics 101 perspective, it almost doesn’t matter where
sellers initially price a home because the market is going to correct
them.
If they price it too
high, the home will languish on the market as buyers take a pass until they reduce it.
And if they price it too low, they’ll drive intense buyer demand that
can drive the price up over asking. Either way, through reductions or bidding
wars, they end up at the true market price.
But those economic
fundamentals depend on listening to what the market is saying.
·
What feedback
are you getting from agents?
·
What are
buyers saying?
·
What kind of
traffic is your listing getting online?
·
Is that
traffic turning into showings?
·
Into offers?
·
Have other
homes on the market sold?
·
What for?
·
And what
happened to the buyers who did come to look at your home?
·
Did they buy
something else?
In other words, sellers
need to stay engaged and involved in the marketing of their home and listen to
what the market is saying. If the market is telling you something, they’d
better listen.
With all that said,
sellers need to remember one thing: they’re the boss.
You work for your seller.
You should give your clients all the information they need to make an informed
decision on price. Ideally, they should consider all that information and make
a reasonable decision.
At the end of the day,
though, it’s their home. If they want to price it to the unsolds or price it to
what they need or get every dollar they put into it — then that’s their call.
But it’s kind of on them
if they go against your recommendations and are still living in a home for sale
six months later.
Joseph Rand is one of the
managing partners of Better Homes and Gardens Real Estate – Rand Realty in New York and New Jersey and blogs about his
local markets at the Rand Country Blog and about
the industry at ClientOrientedRealEstate.com.
