Dangers of Overpricing

Accurate pricing is key to obtaining top dollar in the sale of your home

Pricing

A key factor in selling a home quickly and for top dollar is to avoid price reductions.

The pictured sign above says it all: "A house is made of walls and beams. A home is built with love and dreams."

In pricing a home, many sellers have an extremely difficulty time pulling the emotion out of the equation. After all, it is worth so much more in factoring in the memories. Unfortunately, when it comes to selling a home, none of those emotions or memories factor into the price.

Ultimately, when a home initially comes on the market, the price will determine a seller’s success. One of the most crucial steps in being able to sell quickly, open escrow, and obtain the highest possible net proceeds from the sell of a home is to carefully arrive at its Fair Market Value. Yes, the current market is a sizzling Hot Seller’s Market where homeowners are obtaining multiple offers that are remarkably close to their asking prices. In many cases, they are even able to get more than the asking price. Yet, in every price range, homes sit without success, leaving these sellers wondering what in the world they are doing wrong. 33% of all homes in Orange County have been on the market for over two months.

Despite the hot market, buyers really do not want to pay much more than the most recent closed sale. Given that there is a shortage of homes on the market and that demand is exceptionally strong, buyers are willing to stretch a little bit, but not a lot. Accurate pricing is still fundamental regardless of the temperature of housing. Throwing a price out there just to test the market is not a wise strategy. Ultimately, when the asking prices of homes must be reduced in order to secure offers to purchase, it not only takes longer to sell, sellers sell for less. The net proceeds check at the close of escrow is less if a price reduction is required.

It is very telling to look at the sales price to last list price ratio. This refers to the final list price prior to opening escrow. These are averages, meaning there are exceptions, but the overall trend is stunning. In Orange County, 76% of all closed sales in August did not reduce the asking price at all. The sales price to last list price ratio for these homes was 99.6%, meaning, on average, a home sold within 0.4% of the asking price. A home listed at $700,000 sold for $697,200. In addition, 15% of all closed sales reduced their asking prices between 1% and 4%. The sales to last list price ratio for these homes was 97.8%, and, on average, it took 65 days to open up escrow. A home listed at $700,000 sold for $684,600, $12,600 less than homeowners with no reduction. For homes that reduced their asking prices by 5% or more, 9% of closed sales in August, the sales to last list price ratio was 94.7%, after being on the market for months. A home listed at $700,000 sold for $662,900. Everybody would agree that closing at $697,200 is a whole lot better than $662,900.

The data is staggering in looking at the sales price to original list price. This is the price when a home initially comes on the market prior to any price reductions. For homes that reduced the asking price between 1% to 4%, the sales to original list price ratio was 95.4%. For example, a home that was listed originally for $733,750 had to reduce the asking price to $700,000 to find success. Homes that reduced the asking price by at least 5% had a sales to original list price ratio of 85.3%. A home that was originally listed at $820,600 had to reduce the asking price, often more than once, to $700,000 to find success.

Accurately pricing is critical in obtaining the highest and best sales price. Homes that do not have to reduce ultimately sell for more in a lot less time. The amount of market time increases substantially for those that must reduce. And, there are a lot of price reductions occurring every week right now. An astonishing 11% of all active listings reduced their asking prices last week in Orange County.

Carefully and methodically pricing a home is vital to cashing in on today’s Hot Seller’s Market. The first few weeks after coming on the market is the crucial time period with the greatest exposure and heightened buyer activity. This occurs because there are many buyers who have not yet isolated a home and they are eagerly waiting on the sidelines for something to come on the market that meets their criteria. Every time a home pops on the market, there is a flood of initial activity as potential buyers clamor to be one of the first to take a look. There is more activity in the initial two weeks in entering the fray than any other time when a home is marketed. With the Internet, this period is even more important. Most buyers subscribe to a service that allows them to search homes that are on the market. When a home is newly listed, buyers receive email notifications and they are at the top of the list of homes available that match the buyer’s criteria.

When sellers overprice their homes and do not properly take advantage of the first few weeks after coming on the market, eventually they must improve the price through a reduction. Reducing the price to be more in line with a home’s Fair Market Value is not met with nearly the same fanfare as a home new to the market. The excitement is no longer there. When something is brand new to the market, that is exciting. When something has been exposed to the market for a while, it becomes a bit “shop worn” and loses some of its marketing luster.

A WARNING to Sellers: overprice a home and risk wasting valuable market time and obtaining a smaller net proceeds check at the close of escrow. Instead, carefully and methodically arrive at the asking price and achieve the best outcome with the most amount of money.