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Pricing traps

Set price for the wrong reasons

 

Establishing your asking price is frequently based on irrational motivations. Any of the six headlines below apply to you? 


Set asking price based on need

The market determines a home’s value/selling price. Wanting a certain selling price doesn’t make your home worth more.

                     Example

A retired couple decided to sell. Despite professional suggestions of a realistic asking price, they priced their home too high. They needed enough equity to pay cash for the home they had seen in a beautiful empty-nester community. 

No serious offers came their way but they were determined to hold out. In the year they waited to sell, the price of their empty-nester patio home decreased considerably. But so did the value of their home. It’s hard to price logically when you need a certain profit.

Set price based on what you paid

This often occurs when sellers recently bought but must turn right around and sell. During a normal or slowly appreciating housing market (let alone a down market), the passage of time has not had a chance to reflect an increased value let alone cover the agent's commission.

                      Example  

One builder constructed a pair of identical homes that were on opposite sides of the street. The costs to build were the same except that one house had to have its water and sewer lines rerouted due to unforeseen problems. This house incurred additional expenses of $6,000. 

It would be tempting to factor that $6000 cost into the asking price. But this builder knew that despite the difference in cost, there was no difference–from the buyer’s perspective–between the two finished products. The houses were priced the same, and they both sold. One simply made $6,000 less profit. 

An investment you have in your own home doesn’t necessarily translate into increased value in the buyers' eyes.

Base Price on the Highest Sale

A home's value usually falls within a range that's based on selling prices in a neighborhood. But homeowners usually want to base their asking price on the home that sold for the highest price in this immediate area. That one sale doesn’t reflect typical values, just as a similar home that sold for the lowest price doesn’t either. Use logic and reason to establish your price. 

A CMA I conducted had this problem. One of the last three houses sold there contained a sale price way over the top for the neighborhood. It was the only one on the market at the time the new owner was looking, who was paying cash, but just had to live close to their grandchild three houses away. Man it was hard to convince the seller I was working with that this was a freak sale. It took them three times as long to sell their house as they would only inch down on their asking price.

Set Price Based on Quality

Extra structural components–roofing or structural reinforcements, for instance–that are hidden from view won't bring much in the way of added selling value. These include top-of-the-line furnaces, underground sprinklers, premium mechanical upgrades, heavy-duty nails, etc.
Some values are lost because people can't see them. Think about that. Buyers only believe what they see. Even cutting edge luxury features don’t always command a decent payback. Appraisers don’t value these hidden components either. 

Super structural features and top-of-the-line features command premium prices when they're new. They're admirable qualities but not ones that provide a good pay back. If you knew then that you’d be selling now, would you have installed these top quality items when building or improving your home? 

The Misleading Appraisal:

To establish a property value, homeowners often refer to an appraisal they had in the past. Appraisals became more common as refinancing, home equity loans and lines of credit gained popularity and as more people became aware of their home’s appraised value. Owners were pleasantly surprised to find out that their home had greatly appreciated.

Or had it?

When lenders request an appraisal for an existing owner, they aren’t as interested in the value of the home as they are in their ability to recoup their loan. Many of these appraisals and subsequent loans that were given had little to do with the actual market value of the property.

The inflated appraisal figure arrived at to tap into the value of a home was often influenced by the requested loan amount and the desire of the lenders to loan more money. The approved line of credit or loan amount had more to do with the owner's credit, the strength of equity the owner had in the property, the owner's loan payment history and the owner's ability to repay this new loan.

These items influence the amount of risk a lender will assume in making a loan but have little to do with the home’s real market value. Older appraisals are horrible tools for pricing a home.

Add to the list of reasons the economy went straight to Hell in 2008 and lenders are at the top of the list.

 

Leaving lots of Room to Negotiate:

Why not ask a lot. They can always make an offer.

Overpricing is the NUMBER ONE reason why homes languish on the market when they are listed with an agent and why so many by-owners eventually list their home. Price your home so that it compares well with other homes in its value range.  

Owners like to set a high asking price so that they can leave a lot of room to negotiate. FSBOs are particularly guilty of this. They figure the buyers can always make an offer, which is true - in theory. Most buyers, however, will simply not bid on an overpriced home. Here’s why:

 Your home needs to be seen by the buyers who are looking at houses in the price range where yours should be. Think about this: If it’s worth $250,000 and you ask $300,000, it will be seen by people looking at $300,000 homes. It won’t compare well to other homes they are shown! Sure, the buyers can always bid low on your palace, but they want a $300,000 home.

Those looking at $250,000 homes won’t even think about seeing your home! They’re most likely looking at homes priced from $225,000 to $275,000. As an agent, I stayed away from showing buyers homes higher than the range they want or are qualified to be in. Show them the next range up and then their range starts to look like crud and they decide not to buy. I certainly couldn’t make any bread that way.

When you set your price to leave yourself a LOT of room to negotiate, you're appealing to the wrong crowd. You're attracting buyers who want a higher priced home. The old concept of leaving yourself “room to negotiate” has given way to a generation of savvy buyers. They use the internet to educate themselves on home offerings and values.

You need an offer to start negotiations. Price your home so that it shown to your true buying audience and has a chance of attracting offers.

Also, some buyers won't make a bid for fear of alienating the owner with a low-ball offer. They'll wait for the price to be lowered– if they don't find another home in the meantime. 

 

 

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