In real estate there is a difference between listing price and selling price. Listing price is what you hope to get for your property, which may or may not be realistic. Selling price is what property actually sells for. That’s the reality of listing price vs selling price.
In my last blog, Selling a Home — Determining Range of Value, I talked about how to figure out a reasonable price for your house when you are ready to sell it. The cliff hanger at the end was why it is important to not overprice your home. People are inclined to do that. They perceive their home is worth more than others think it is worth. I wrote about this phenomenon in my blog, The Endowment Effect. People also believe they need to overprice their property so they have negotiating room. Let me show you, using two examples, why overpricing your home will not work to your advantage.
Example #1: Sold in a Day
A seller’s level of motivation is important to understand when determining the listing price of his or her home. In this case the seller, let’s call him Hugo, had another property under contract and was extremely motivated to sell his current home so there was financing available for the home he wanted to buy. We spent time reviewing the comparables of location, condition, and price (see my last blog, Determining Range of Value). The condition of the property was superb and it was in a better locations than comparable properties. Since Hugo’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 to “leave 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 Hilda, was testing the market, thinking the market was hot and high-end homes were doing well. My opinion of the home’s value and Hilda’s opinion were about $150,000 apart. Every time I suggested lowering the price my suggestion was rejected. I call this “Chasing the Price Down.”
Unfortunately, Hilda 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 Hilda had taken my suggestion in 2006 to list the house at a more reasonable $645,000, it likely would have sold for about $595,000. 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 $572,00. Once again, the Endowment Effect led the seller to believe, despite the evidence 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 determine a realistic range of value, and equally important to not overprice it. Listing price vs selling price can be vastly different if you are not willing to be realistic.
In my next blog I’ll talk about how to decide what is the best time to buy and the best time to sell. See you then!