Every home buyer wants to find a good deal or at least a fair one. To prevent overpaying for a home, you first need to know about pricing strategy and how to identify houses with inflated sticker prices.
To understand pricing strategy, put yourself in the shoes of the selling side. When it comes to pricing, a seller faces a dilemma. If he or she asks too much, the person’s home could sit on the market. If the seller goes to low, he or she risks leaving money on the table. It’s always a fine line.
Pricing a home is part art and part science. The truth is, there is no algorithm or exact way to determine the price. Homes are not commodities and no two houses are exactly the same. That said, list prices are rarely just pulled out of thin air. There is logic behind it. Most sellers or their real estate agents will pull recent sales history of comparable homes. They will use this information as a benchmark and make adjustments based on conditions and current market trends.
Price Range is Key
Every home has a price range and a spectrum of buyers willing and able to purchase it at various price points. There is usually a sweet spot that attracts enough interest on a home to generate offers. The fair market value is the selling price a buyer and seller can agree on.
Most people assume that every homeowner wants to sell in the shortest amount of time and for the most money possible. While this is usually the case, it isn’t always. Factors like timing can play a big role in defining the list price.
Some sellers are in no rush. Perhaps they don’t have a mortgage and are not on any specific timeline to move. A seller in this situation may want to list his or her property on the high end of the range. The seller understands that it’s a reach, but he or she has the flexibility to wait around for a buyer willing to pay top dollar. Alternatively, a seller needing to move within a short window may be more inclined to price the property on the low end to increase the chances of landing a buyer quickly.
Why are Homes Overpriced?
If nailing the list price is such an important part of the sale, why are some homes priced unreasonably high? There are several reasons:
The listing agent makes a mistake: Real estate professionals are only human. Sometimes agents are overly confident in their ability to sell a home and overshoot. Other times they are uninformed. Even those with a strong handle on the market and a solid plan can still miss the mark.
Sellers are unrealistic: It’s not uncommon for sellers to overvalue their homes. Having an emotional connection to the house can make it hard to analyze the property in an objective way. Even if they receive sound advice from their listing agents regarding price, they can choose to ignore it.
Sellers don’t actually want to sell: Some homeowners are not only unrealistic, they aren’t motivated in the least. These homeowners may test the waters to see if they can get interest at their dream number. The message that they are sending out to buyers (whether obvious or subtle) is that they would consider selling, but only for an absolute premium.
The home has been over improved: A homeowner that sinks a lot of money into fancy upgrades and customizations may want to see a return on investment. Just because a homeowner spent a lot on improvements, doesn’t mean buyers can justify the bolstered cost.
The property is unique: Without any comparable homes to use as a benchmark, setting the price on a unique property is like taking a stab in the dark. A home with distinctive features turns pricing into a guessing game with plenty of room for error.
Is the Home a Golden Goose or an Overpriced Turkey?
The list price is usually a good indicator of what the homeowner wants to make on the sale – give or take. It could be priced on the high end, allowing for a negotiating buffer. Or, it could be listed on the low end to entice a bidding war.
Enough about the seller! As a buyer what are you suppose to do with this information? No matter what property you’re looking at, it’s on you to justify what you think the home is worth.
The best way to become a pricing guru is to get to know the local housing market. An educated buyer has a better shot at recognizing a golden goose from an overpriced turkey. You can start by looking at listings online and comparing basic features like square footage, number of bedrooms, bathrooms, etc. However, to really get in tune with the market you need to see the properties in person. Physically touring homes is the best way.
Once you have a solid baseline of your market, you can run through a comparative market analysis (CMA) to contrast homes. This is an impartial way to look at home values and to evaluate what your money buys.
Touring properties and creating CMAs are both excellent exercises to build up your knowledge of your local inventory. They can instill confidence in your ability to strike on a good deal and pass on a bad one.