Let’s dive into one rule of thumb home sellers often use when pricing their homes for sale. It’s a good rule of thumb but it’s only half right.
Let’s start high because we can always lower the price later.
The idea is to price your home high to start and then lower the price until you find the highest price at which it will sell.
It’s generally a good rule of thumb but you have 3 problems.
PROBLEM 1 – Pricing Yourself Out of the Best Market
First week is best week. Homes that go under contract to buyers the first week on the market have a very strong tendency to sell for full list price. Yep, full list price.
I looked at all non-distressed, single family detached homes sold in 2014 via the metro Phoenix MLS (57,702 home sales) and found the median (typical) sale price was the full list price for homes that went under contract to buyers the first week on the market.
I have a full post on this but the important point is that buyers are much more willing to pay full list price when houses first hit the market because buyers know they have a lot of competition from other buyers the first week and they fear losing the home to other buyers.
After homes have been on the market for a while without being sold, buyers quickly lose their fear of losing the home to other buyers and negotiate a lot harder on price.
If you price your home too high to begin with, the typical buyer won’t make an offer on it. Buyers look at your list price and estimate your bottom line price. If buyers think your bottom line price is too high – because your list price is too high – the typical buyer won’t make an offer on your house regardless of what your actual bottom line price is.
BTW, it’s common for homes to sell the first week on the market. More home sold (went under contract) their first week on the market than any other week.
PROBLEM 2 – You Lose Negotiating Leverage
Sellers lose negotiating leverage fast, and then slow. Home sellers lose a lot of negotiation leverage after a home has been on the market a week or 10 days. Then home sellers lose negotiating leverage slowly as the home stays on the market unsold.
Fast. As mentioned above, the typical home buyer will pay full list price when they buy a home that had been on the market for a week or less.
But by the time the home has been on the market for 3 weeks, that seller’s advantage is completely lost and buyers are typically able to negotiate the price down 2% from the list price.
Slow. After that, the sellers negotiating leverage continues to fade but slowly. If a home has been on the market for 4 months, buyers are typically able to negotiate the price down 2.5% from the list price.
PROBLEM 3 – The Longer Your Home is On the Market, the More You Need to Lower the Price to Get Offers
Buyers key on how long a home has been on the market almost as much as they key on price.
The first 2 questions buyers typically ask about a house are, “What’s the price?” and “How long’s it been on the market?”
Same house, same price, but very different. Buyers will think of the same house with the same price entirely differently if the house has been on the market 4 months versus 4 days.
The longer your home is on the market;
- The more you need to lower the price to get buyers to make offers, and
- The less negotiating leverage you have with buyers once you do get an offer.
Combine those 2 effects and you get this chart.
WEEKLY – Typical Reduction in Final Sales Price from Original List Price by Weeks on the Market
MONTHLY – Typical Reduction in Final Sales Price from Original List Price by Months on the Market
Note: These charts are of sold homes. Normally, about 20% of listings in the MLS are so overpriced they fail to sell at all.
Problem in a Nutshell
Goal. This rule of thumb tells you to start high and lower your price until you find the highest price at which your home will sell.
Problem. The problem is the highest price at which your home will sell is likely to be thousands of dollars less if it sells, for example, during its 4th month on the market instead of its 4th week or its 4th day.
1) Get clear on your home’s value
Get as clear as you can be about the fair market value of your home before you put it up for sale. That way you’re less likely to overprice it too much and cause it to languish unsold on the market losing value.
Appraiser. Hire an appraiser if you’re uncertain about your home’s value. It will likely save you a lot of time and make you money.
Real estate agent. Be aware that some agents will pitch you a high list price because they know you’re very likely to hire the agent that pitches you the highest list price.
2) Adjust your price fast
Time is money. Don’t wait 2 months to lower the price on your unsold house. I suggest lowering the list price every 3 weeks, every 4 weeks at the most.
5-Week Rule. Half the single family, non-distressed homes that ended up selling in metro Phoenix in 2014 were under contract within 5 weeks of hitting the market. If your house isn’t under contract by the 5th week, it’s taking you longer than it takes most people.
Invisible price cuts. A series of 1% price cuts won’t cut it. At that rate, it could take you many months before you get an offer while your likely sales price is falling the entire time.
Don’t overprice your home too much. Lower your price fast.
Ideally, right out of the gate you price your house close enough to fair market value that the list price doesn’t scare off potential buyers and you get offers the first week it’s on the market when your negotiating leverage and likely sale price are highest.
2% Rule. If I wanted to get the first-week premium price, I wouldn’t price a home more than 2% above its appraised value or a brutally honest estimate of its fair market value.
Hot markets. Hot markets like San Francisco and Seattle right now often take a different direction. In hot markets, sellers often price homes on the LOW end of market value to encourage multiple offers and competitive bidding (kind of like a slow motion auction) and to try and get the house under contract the first week it’s on the market.
Luxury homes. Luxury homes typically take a lot longer to sell and are an entirely different animal.
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See all “How to Price Your Home” posts here.