"You can always come down but you can't go up. So, let's start high!"
One of the most frequent and interesting statements I hear from potential seller clients I'm interviewing when we are discussing 'Pricing Strategy' is ... "You can always come down but you can't go up. So, let's start high!" ... referring to the desire to raise their asking price higher than the stats suggest is the Market Value in order to get a leg-up on the buyer and give themselves some 'wiggle-room' before negotiations even begin.
You'll see in the graphic below that there are some risks involved with this type of pricing because as you increase your asking price above the Market Value you will also decrease your exposure to serious buyers in the market that will be willing to look at your property.
For most people, this is likely how the majority, if not all, of the pricing and sales negotiations they've ever been involved in have unfolded. Let me paint a picture of the most common scene in real estate pricing and negotiations. It looks like this ... The seller sets an asking price and a buyer makes a low offer in which the seller and buyer go back and forth a few times and eventually settle somewhere in the middle. Commonly referred to as "meeting in the middle" or "splitting the difference".
You've probably experienced this yourself or through someone close to you. This approach is the most common and widely used approach throughout real estate markets around the world. Primarily because sellers fear leaving money on the table by setting the price too low and aren't comfortable with the thought of pricing their home at or even below the most likely sales price because they're assuming that ALL buyers will want to make a lower offer than their asking price, even if it is already at the fair market price.
(This is not always the case and we think there's a better option that most people never truly consider that we'll cover below.)
Fortunately, this isn't the only strategy to pricing and negotiating and a lot of other factors shape the choice of which strategy is 'best' to use for a sale. Factors such as:
- Current/trending market conditions (ie. Buyer's vs Seller's market)
- Direct competition (are there other suitable options in the neighborhood)
- Uniqueness of the property (is it the only house in a culdesac for this desirable community or is it located on a body of water with a specific view that is to-die-for)
- Amenities nearby (walking distance to parks or shopping & restaurants or in a great school district)
- Financing options (are interest rates super low and experts predict they'll rise in the next few weeks or does the property disqualify certain loan types because of an in-ground pool or secondary living quarters)
- Terms of possession (do you need to rent the home back for 3-6 months after closing)
The most critical thing to keep in mind is that there simply isn't a one-size-fits-all approach to pricing and negotiating real estate. It's important to understand which strategy may be the best fit to accomplish your specific goals and take into account the other factors that may impact your sale. (Your Marketing Strategy and Plan will also vary based on which strategy you choose.)
It's Time to Add a New Strategy to Your Negotiating Arsenal!
A different strategy that we've had immense success using in this recent Seller's Market is to slightly 'Underprice' the Market Value and generate greater levels of initial interest from a larger pool of buyers. (See graphic above in the 0% to -10% below market area). Being at market value or slightly below can double the number of buyers who will be looking at your home right out of the gates and that additional exposure sets the stage for huge success.
This strategy creates an urgent response with serious buyers resulting in competition amongst the ones that don't want to miss out on an excellent opportunity and these buyers will be looking at the property early on. This competition can result in multiple offers that drive the price up to or many times above the asking price.
Most times this strategy also has a much shorter time on the market than the approach outlined above where you start high and eventually work your way down and results in much better 'terms' when it comes to deposits, inspection periods, concessions, etc. This 'Underpricing' strategy works in ALL markets but is extremely effective in a 'Seller's Market' where supply/inventory is lower than demand/buyers.
It's important to also realize that in a Seller's Market (like we've been in for most of 2017) you simply can't afford to miss these serious buyers that come early on. If the days on market for your listing climbs too high (~75+ Days) you run the risk of becoming stigmatized in the minds of buyers and other agents as the one that 'something must be wrong with because nobody else wanted it'. This Social Proof plays a big role in whether a home sells fast and for top dollar or not. This negative stigma is very hard to overcome and the end result is typically a much longer time on the market and a much lower final sales price for the seller than if they had started at the market value. I've actually not met very many sellers whose goal is to be on the market a long time AND sell for a low price, so avoid this approach at all costs.
Case Study of a Real BP&Co Client - Linda Bond!
To give an example of how we've successfully used the 'underpricing' strategy lately, here's a quick story from one of our recent closings.
Earlier this week we closed one of our listings at 192 Windy Gap Rd, Forest City NC 28043 for our seller client, Linda Bond. After reviewing the market stats we chose to set our listing price at $200,000 to ensure that we showed up in the search results of the buyer's that would likely cap their online searches at a $200,000 max price. (*See Pro-Tip at the bottom of article for more on this.)
The market suggested that we could expect to see somewhere in the $205,000 to $210,000 range as the most likely sale price or Market Value, but the immediate competition we were facing was much lower and our market's average sales price for the Forest City area is much lower than this range. So, we chose to be more aggressive with our pricing and marketing strategy and priced it at that critical $200,000 bracket cap in order to generate more exposure early on and hopefully get competing offers.
Our strategy paid off huge for Linda and we were able to sell for $211,000, which was $11,000 above our asking price of $200,000 with multiple offers generated and all of this happened within the first 4 days of hitting the market!
Needless to say, Linda was thrilled with the results and on top of that, because we had competing offers, we were able to negotiate 7 days of possession (at no charge) for Linda after closing before she had to officially turn over possession to the buyers. That extra time after closing to finalize the move can be a huge stress-relief when juggling all that goes into the final days surrounding a closing.
One other note on this particular sale that I'd like to share with you is that our sales price of $211,000 was over $12,309 (or ~6%) HIGHER than the Zillow 'Zestimate' of $198,691. Technology is great and can provide some additional value when determining an asking or selling price, but a knowledgeable professional is PRICELESS.
I hope this information has been helpful and has opened your mind to the possibility of considering 'other' strategies for both Pricing and Negotiating when you are selling or buying real estate. If we can answer any questions for you or elaborate on any of these points feel free to contact us!
*Pro Tip: When searching online for homes and saving searches, buyers will often use big bracket numbers like $100,000, $150,000, $200,000 and so on, as the cap or max for their search because they're typically already filled in as options in drop-down menus on the search bar. This can also work in reverse in the lower price ranges and a buyer may set their bottom or floor of their search using a big bracket number and go up - $150,000 to $200,000 or $200,000 to $250,000. When choosing your asking price don't get sucked into the ",900's" pricing where everything must end in a ",900" such as $199,900 or $249,900 because you may eliminate an entire group of buyers who will never see your home's listing over a $100 difference. Ex. - If you're priced at $199,900 and your buyer starts their search at $200,000 and goes up to $250,000 you were just missed over $100. 😞