A common misconception I often encounter in real estate is that sellers believe they should be pricing a home so there’s room for negotiation. They also tend to perceive their home to be worth more than others think it’s worth. There’s a technical term for this. It’s called The Endowment Effect. It is rare that a buyer will see a home’s value in the same light as the seller.
Let me show you, using two examples, why it’s important to be realistic about what your home is really worth, and why pricing a home so there’s room for negotiation is not a good idea and will not work to your advantage.
Example #1: Sold in a Day
It’s important to understand a seller’s level of motivation when determining the listing price of his or her home. In this case the seller, let’s call him Harry, had another property under contract. Harry was extremely motivated to sell his current home so he had financing available for the home he wanted to buy. We spent time reviewing the comparables of location, condition, and price. The condition of the property was superb and it was in a better location than comparable properties. Since Harry’s motivation to sell was strong, we listed towards the high end of the range of value, but not the highest, and certainly not above the highest. We did not dicker about negotiating room. We simply priced it to sell. And it sold. In one day.
Example #2: Chasing the Price Down
One problem with padding the listing price, or “pricing a home so there’s room for negotiation” is that usually sellers pad it too much and then are slow to reduce the price. Their reason is usually, “It only takes one.” Another problem is that an overly high listing price will scare buyers away. They won’t even bother to take a look.
In this example the seller, let’s call her Sally, was testing the market, thinking the market was hot and high-end homes were doing well. My opinion and Sally’s opinion of the home’s value were about $150,000 apart. Every time I suggested lowering the price my suggestion was rejected. I call this “Chasing the Price Down.”
Unfortunately, Sally first listed her house in 2006 for $795,000. It didn’t sell. Two years later the real estate market took a big hit. In 2012 the house finally sold for $465,000. If Sally had taken my suggestion in 2006 to list the house at a more reasonable $645,000, it likely would have sold for about $595. Instead, it went for $465,000. Yikes!
Certainly in Example #2, the seller was not hugely motivated. She was testing the market and dipping a big toe in the waters. But six years later, when she was truly motivated, the property went for a much lower price than it should have. A comparable property that was listed at the same time in 2006 sold for $572,000. Once again, the Endowment Effect led the seller to believe, despite the evidence I presented, that her property was worth far more than the market was willing to pay. On top of that the market tumbled, further distancing the seller’s desired goals.
If you really want to sell your home, it’s important to first determine a realistic range of value, and equally important to not overprice it. Listing price and selling price can be vastly different if you are not willing to be realistic. Pricing a home so there’s room for negotiation is not being realistic.