There are truly 3 home pricing "strategies" used in modern day real estate: pricing under value, at value, or over value. In this video, I go over these strategies and breakdown what WILL happen along with WHAT could happen.
THE HOME PRICING STRATEGY
So you see the perfect home go up for sale on your way to work, the real estate sign was just placed in the ground, you think to yourself, that home is not going to last long at all. 3 months later, that sign still appears to be in the yard, but as an outsider looking in, it doesn’t make sense at all.
Did the home have Bright pink walls? Zebra tile in the kitchen? A container of mannequin heads in the basement? Maybe.. But those things are easily dealt with and looked over.
Chances are, the home wasn’t priced correctly or there is something extremely wrong with it that will cost the new homeowner thousands of dollars.
I am going over the 3 good and bad home pricing strategies used today.
Under value
At Value
Over value
When it comes to pricing your home, it’s important to swallow your pride and understand that your treasure might just be another’s trash, for lack of a better phrase. You may have spent 15-20 wonderful years in a house that has been nothing but good to you, but as an outsider looking to purchase your home, you need to put on their shoes for just a moment.
Pricing your home factors in seasonality, current market conditions, current buyer wants and needs, as well as the characteristics your home features that truly makes it unique.
To put simply, there’s 3 home pricing strategies, and they are: Pricing your home under value, pricing your home at value, or pricing your home over value.
Some of these strategies may be a little questionable, but there is definitely a time and place for each one or heavy influence by the homeowner based on their emotional connection to the home, and of course that’s very well understood.
Let’s start off by diving deeper into the first strategy, pricing a home under value. You might be thinking, why in the world would I price my home under value? I want to get the most money possible for my home Andrew.
Believe me, I understand you 100% but hear me out for a second, there are several circumstances where this strategy is very fitting, such as: needing to sell your home quickly, selling without renovating, selling a home that was just remodeled, and of course, listing in a sellers market.
The biggest reason for this strategy is to create more attention on your home, and encourage buyers to price their offer more competitively. Think about it for a moment, have you ever listed an item for sale on facebook marketplace or craigslist? Did you ever realize how many messages you were getting because the item was “lightly used but basically brand new”? People tend to not question the price and jump right to, okay when and where can I meet you? Of course, there’s always those people that ask if the item is still available and offer half price to push their luck, but you know what I mean.
My point is, pricing your home under value causes a frenzy where people tend to offer more if it means they can get their hands on your home. You may or may not have heard of bidding wars, but in the grand scheme of things, they are a great occurrence despite how stressful they can be. Oftentimes, if a real estate professional receives a few offers within a few days of the home being active, they will ask for the highest and best offers due at a certain point 3-5 days later.
This pushes buyers to give it all they got when submitting an offer, and it weeds out the buyers who thought about submitting a lowball offer. After 20-40 showings in those 3-5 days, the agent will lay out all the offers received and you can pick the best one that fulfills your wants and needs in the sale of your home.
But what’s a good offer? There’s 5 contents of an offer that could be appealing or unappealing during a real estate transaction.
#1 A word that tends to come up most often is contingency. A contingency is something that gives the buyer the right to back out of a contract depending on the circumstance. For example, a common contingency in real estate is a home inspection. In an offer you can mark that you want a home inspection before you proceed with the purchase of the home. If something from the home inspection comes back unsatisfactory, you have the right to back out of the transaction and your deposit will be given back to you. Think of it as a safety net to put simply.
Another commonly used contingency is a home sale contingency. This contingency is used when the buyer wanting to purchase your home has to sell a home of their own. If the buyer’s home sells by a specified time, the transaction continues to move forward.
#2 An escalation clause is appealing during an undervalue scenario, as it typically states buyers will outbid any and all offers up to a specific point. So if that doesn’t scream frenzy, I Don’t know what does.
#3 As I mentioned before, a home inspection is a contingency, but there’s also a way to waive a home inspection. Why would you ever do that you might ask? It creates a more appealing offer, and according to research done by the national association of realtors, about 20% of closing delays are due to home inspections. So, if you’re looking to get your offer noticed, consider waiving the home inspection, but do yourself a favor and have a handyman on speed dial just in case.
#4 The possession date hurts more real estate transactions than you might think. If the buyer is currently renting but doesn’t want to break their lease, they may ask for 30-60 days after closing, but what if the seller is selling their current home to buy another? Can you see how that situation could be a little sticky?
And last but not least, #5 Cash or financing? When a buyer offers cash for your home, it eliminates the need to get mortgage approval and the closing can happen much quicker. Not only does it eliminate the need for mortgage approval, it also eliminates the need for an appraisal, as they are performed to determine the home's value and how much a mortgage lender is willing to lend a buyer. That’s why cash is king! But there’s benefit for buyers who have a high down payment as they can be granted an appraisal waiver from the lender, which would create some appeal to the seller.
The majority of these scenarios sound great don't they? But in what circumstance would this strategy not work? If the housing inventory is plentiful, buyers won’t feel obligated to get into a bidding war because there are comparable homes out there that they can turn to. If home prices in the market are trending downward, buyers won’t see your home as a great deal, as the market value of homes is already on the low.
And lastly, if your home is priced too far under market value, buyers will assume there is most definitely something wrong with your home. Have you ever heard the saying if something is too good to be true it probably is? That is my point exactly, they won’t even bat an eye your way and just assume the worst.
We’ve covered the pros and cons of pricing your home under value, but what about pricing your home at value and above value. Well, when you price your home at the market value, you will see similar scenarios as pricing your home under value. There most likely won’t be as much of a bidding war or showing traffic, but there will surely be a few interested buyers who offer what you ask. The home may sit on the market a little longer than if you priced it under value, but if there is no sudden urgency that may not be a bad thing.
When it comes to listing your home above market value, It really isn’t a strategy but more so something I wanted to raise awareness of, as it tends to be a very common trend in the real estate market. You may be wondering why, and that goes back to when I talked briefly about the emotional connection a seller has to their home and the importance of swallowing your pride. Well, a lot of homeowners don’t swallow their pride and whatever price they say, goes and they hold to it. And don’t get me wrong, it’s understandable, but in the long run, it’s hurting more than helping.
A couple indicators that proves your home is priced well above market value are: taking a look at the analytics and seeing less than 2-4 visitors a week taking a look at the home, getting a lot of foot traffic but no offers, the days on market are above average, you receive offers on the home but everything is substantially less than the list price, the neighbors houses have sold for less and are in better condition, and lastly, you fell victim to hiring the real estate agent who promised the highest price for your home.
Okay so you admit it, you were a little over zealous on your home’s list price, now what do you do? First, pay attention to price filters on home search websites. Did you think it was better to price your home at $219,999 instead of $220,000 because you thought it would create an illusion to be cheaper? Yay I can’t wait to save a dollar… All jokes aside, what if buyers are looking between 220,000 and 250,000?
You just missed out on that opportunity because you wanted your home a dollar less. They say ending your price in zero’s means there’s room for negotiations, but throwing in some nines appears to be firm, but Let me ask you, when you search for homes online, do you set your minimum and maximum price from $199,999 to $219,999, no you don't put 120,000 and 220,000. That doesn’t mean you should raise your home’s price by one dollar, it means you should decrease the price in whole numbers to avoid price filter issues.
Secondly, let the agent make a “price improvement” on the home, it draws new and recently uninterested buyers back to the home. Price improvement is a play on words that simply means there was a price decrease made, but believe it or not, pairing that price improvement with an nearing open house pushes buyers to go check out the newly priced home.
Thirdly, consider offering an incentive. Will you cover some of the buyers closing costs or needed repairs, how about offering a home warranty to give the buyer some confidence, increase the commission offering to the buyer’s agent to push them to sell the home a little bit more or you could even leave a few personal items with the home if it creates value for buyers. A marketing campaign can be created by an agent to create awareness of the incentives as well as a brief description in the agent's remarks of the listing.
Pricing your home is the single most important part about selling your home, that’s why it’s crucial to have a real estate professional like myself on your side to help you do just that. Since I serve the great state of Michigan, if you’re a resident and would like a comparable market analysis done on your home, please don’t hesitate to reach out so I can help with your curiosity on your home’s value.
Cheers,
Andrew
Andrew McManamon is a Michigan REALTOR® with Signature Sotheby’s International Realty and provides real estate services to Buyers, Sellers and Investors throughout SE Michigan including Livingston County, Oakland County, Washtenaw County, Genesee County & beyond. Andrew has become one of the rising stars of Michigan real estate agents. Prior to his real estate career Andrew was responsible for managing a senior living facility in Brighton, Michigan as a dining supervisor and an activities assistant. Andrew’s passion to help people is unlike any other, and he continues to strive to be best resource he can be. Andrew graduated from Cleary University in Howell, Michigan with a double major and currently resides in White Lake, Michigan.