One of the most emotional decisions in selling a home is setting the price.
Biggest fear. Home sellers want to get the most money possible for their homes, of course, but even more so, home sellers don’t want to sell their homes for less than they’re worth. That’s the biggest fear of every home seller, that they’ll be talked into selling their home for less than it’s worth.
Trust. You certainly can’t trust the opinions of home buyers and their real estate agents. You might even have doubts about the opinions of your own real estate agent. And if you’re particularly self aware, you might be worried what the wishful thinking part of your brain is telling the rational part of your brain.
So who do you trust? Let’s look at the data. I’m a former economist, I love numbers, let’s see what the numbers tell us.
Vizualize How Real Estate Really Works
So I created this new graph. I haven’t seen one like it anywhere else.
Unique. This interactive graph gives you unique insights into how home buyers and sellers come to an agreement on price. It shows how the number of homes sold and the negotiating leverage between buyer and seller change over time.
The height of each bar shows you the number of homes that sold. You can mouse over each bar to see the underlying data.
SFD in Phoenix in 2014. I looked at all single family detached homes sold via the metro Phoenix multiple listing service (MLS) in 2014 that were not foreclosures and not short sales. This only includes homes that actually sold, it does not include homes that were for sale but failed to sell.
Balanced market. The metro Phoenix real estate market in 2014 was a balanced market. It wasn’t a buyer’s market. It wasn’t a seller’s market. It was a normal market that leaned in favor of sellers with the monthly inventory ranging from 3.9 to 5.4 months of supply. This graph would look differently for hot markets like San Francisco, Denver, Dallas and Seattle currently.
Notice in the upper-right corner you can select the “Week Sold.”
“Sold” means “under contract” here. What I’m calling sold here is more specifically “under contract,” “pending” or “in escrow.” They all mean the same thing, that a buyer and seller have agreed on price and terms and have signed a contract to buy/sell a home. The actual transfer of title and exchange of money (the “closing”) doesn’t usually take place until 30 to 45 days after the contract is agreed to and signed by both buyer and seller. The term “sold” is often used to mean “closed” so, yeah, I know using “sold” to mean “under contract” could be a little confusing.
More Homes Sell Week 1 Than Any Other Week
Week 1 is huge. As you start clicking on the different weeks in the upper-right corner of the graphic, you’ll notice how quickly the number of homes sold falls off from Week 1 to Week 2 and so on. The number of homes sold each week falls fast the first few weeks and then falls slowly after that.
It turns out that 18% of the homes that actually sold in 2014, sold the first week they were on the market. Half were sold by Week 5.
More Homes Sell Above List Price Week 1 Than Any Other Week
More is better. Notice that during Week 1 that it’s not uncommon for homes to sell for 1% to 5% MORE than their list price. But also notice that the number of homes that sell above their final list price drops off quickly after the first couple of weeks on the market.
The market speaks. The good news here is if you make a mistake and under price your home, buyers could notice, send you multiple offers and that could, ultimately, lead to selling the house for more than your (low) list price. It happens. But if it’s going to happen, it’s most likely to happen the first week or two the home is on the market.
[Note. In hot markets a common strategy is to price homes on the low end of market value in an effort to generate multiple offers and a higher sales price. It’s kind of like a slow motion auction. This strategy works very well in hot markets like San Francisco and Seattle but in markets that aren’t white hot it’s a dangerous strategy that can backfire and is not commonly used. Back to the graph above, I rarely saw an intentional underpricing strategy being used in metro Phoenix in 2014.]
Don’t underprice. You definitely do not want to underprice your home in a normal market but it’s nice to know there is a safety mechanism that can help protect you if you miscalculate and underprice your home right out of the gate.
Buyers Don’t Buy Homes That Are Too Overpriced
Less is bad. Now, look at the homes on the graph that sold for less than their final list price, the bars with negative percentages. They go from -1% to -15% but notice there are very few sales where the sales price was more than -7% from the final list price.
Buyers are reluctant to make offers on homes that are way overpriced.
Let’s just try this price. Sometimes I run into home sellers who say, “Hey, I think it’s probably worth around $X but let’s just try this price. I know it’s high but it only takes one buyer! They can always make a lower offer.”
Unfortunately, home sellers who overprice too much are pricing themselves out of the best market they’ll ever see, the first two weeks their homes are on the market when their negotiating leverage is at its highest.
Let the graph tell the story. Sure, a buyer could come in and offer 10% less and that does occasionally happen as you can see on the graph. But typically, as you can also see on the graph, buyers just don’t buy houses that are too overpriced. Buyers could, theoretically, make very low offers on very overpriced homes but typically they don’t.
Lost advantage. By the time that “Let’s just try this price” seller eventually lowers the price enough to be within shooting distance of fair market value and they get an offer, that seller has long lost the negotiating advantage.
Time changes everything. The same list price that would generate multiple offers in Week 1 may not generate any offers in Week 12.
Just look at the number of buyers who bought in Week 1 versus Week 12.
It’s as if there were an auction with 20 bidders in the audience Week 1 but only 3 bidders in the audience Week 12.
Which auction do you think would get you the highest price for your house?
The Market Wants to Pay You Full List Price. Let It.
Full list price is a magnet. The most intriguing thing about this graphic – the thing that you noticed immediately when you first saw it – is how many homes sold for full list price (0% on the X-axis). A strong force is pushing homes that sell Week 1 to sell for full list price. Take advantage of it.
Time is of the essence. But notice how fast the number of homes that are sold for full list price fell between Week 1 and Week 2, between Week 2 and Week 3, and so on. The seller loses negotiating leverage fast.
- More homes sell the first week on the market than any other week.
- More homes sell for more than full list price the first week than any other week.
- Buyers often buy homes that are 2% to 3% overpriced but not those priced 7+% too high.
- Homes have a very strong tendency to sell for full list price if they sell during the first two weeks they’re on the market.
If you want to get a premium price for your home, price it close enough to market value that you’ll get an offer or offers Week 1 or Week 2.
It’s a good thing. Many home sellers freak out when their home sells Week 1, “Oh my gawd, we underpriced it! I knew I should have listed it for more! But that real estate agent of mine talked me into lowering the list price. I should have gone with my price. If it sold the first week on the market it must be underpriced!”
I hope this graph shows you that you have a far stronger negotiating position when your home goes under contract the first week or 10 days it’s on the market than you will later.
This is unique graph that gives you a peek into the inner workings of how the real estate market really works.
Thanks for reading this far!
Understanding this graph will help you price your home so you make the absolute most amount of money possible when you sell your home.
See all posts in the How to Price Your Home series.
What do you see in the graph? What have I missed? Leave a comment below.