Science test tubes with chemicals

Pricing a home for sale is not an exact science.

Even after a thorough data analysis, the best that anyone can really do is make an educated guess when setting the price on a home.

At ACH, we use a number of factors to decide what a home should be priced. Some of them include:

  • Pricing of similar homes currently on the market
  • Pricing of similar homes that recently sold
  • Pricing of similar homes that failed to sell
  • Average $/square foot for similar homes that recently sold
  • Supply and demand ratios
  • How many homes are successfully selling vs failing to sell
  • Appreciation rate (or depreciation rate) of neighbors who owned their home for the same period of time
  • General housing market conditions

But even after we conduct a thorough pricing analysis, we won’t know if our pricing is correct until we put the house on the market and see how buyers react.

Large companies use market research firms to survey potential buyers before they price a new product and put it on the market. But these companies know exactly what products they are competing against. They know the features and pricing of their competition and can use that in their market research. They can survey hundreds of people in advance and get their reaction.

When a home is put on the market, there is no way to know what it will be up against. New home listings come on the the market with no notice and the existing competition can reduce their price at any moment. Once the competition does sell, they announce their reduced sale price on closing day for everyone to see. Home sellers who are still on the market are impacted by all of this, but none of it could be predicted when they set their initial price.

In real estate, the first buyers to come see a home act as our test market group. When these buyers rush to schedule showings and offer glowing feedback, we can trust we are at the right price and the house should sell easily. If our marketing has worked and resulted in showings, but the buyers tell us that they expected the house to have better features or to be in better condition, then we need to reconsider our pricing.

But what does it mean if we don’t get many showings?

Today’s buyers use the internet to screen homes rather than physically going to see them all.

Don’t assume a property which is not getting physical showings wasn’t seen by buyers online. If a property’s advertising is getting a large number of internet hits but is not getting showings, the first thing to look at is the marketing.

Consider the buyer who has looked at 100 homes in their price range for a specific part of town. They start seeing patterns in the features that they can expect at their price point. They expect to see pictures…and lots of them. They also start making assumptions that if the house was in good condition and updated, there would be pictures that showed them all of the rooms. They look at poor quality pictures and make judgments about the house based on those pictures. You would be surprised how many times buyers have told me that they eliminated a house because there wasn’t a picture of the kitchen or the backyard, and the omission must have been purposeful. Buyers assume that if a house looks good, the listing agent would have shown everything to them.

But this article is about pricing, not marketing. So we are going to make an assumption that the marketing is great. There are lots of well-lighted professional pictures that make the house look even better than it really is.

If that house isn’t getting showings, then it is overpriced.

Why do I assume that a house with good marketing and internet visits but limited showings is overpriced?

Every house will sell if it is at the right price. Even the house with the biggest problems will sell if it is cheap enough.

Let’s look at it from a perspective that most of us have experienced.

Television store display

Imagine you went into a store to buy a TV. Most of the TVs are large flat screen models with high definition and tons of fancy features. They also come with a price tag that run hundreds or thousands of dollars. Now imagine that there is one TV on the wall that that was built 3 years ago. It is just as big as the other large TVs, but it doesn’t have any of the latest features. It sticks out with its silver casing instead of a trendy black one and looks plain compared to the rest of the TVs. If this TV was priced the same, or even just slightly less than the models with today’s features, it would never sell. But if that TV was priced 50% less than its high priced competitors, there would definitely be some people who would sacrifice the latest features for a better price..even though they could afford to pay the higher price tag. There are also others who simply couldn’t afford the large fancy TVs. If they had to chose between a plain large TV or a small one with up-to-date features, some of them would chose the 3 year old model.

Let’s think about this in terms of houses available for sale.

Imagine there are 10 homes for sale in a particular neighborhood that are all priced at $250,000. All of the homes are 2 story homes with 4 bedrooms and a finished basement. There are some minor differences between the homes, but nothing that would make one house so much better or worse than the others. Except for one. This home backs to a busy street, has outdated appliances and wallpaper in several rooms. Buyers see these things as negatives and decide not to waste their time on this one.

Even if the owners of this house priced their house at $240,000, they probably still wouldn’t get showings. For $10,000, buyers would rather have a house with a good yard which doesn’t need a lot of work.

Now imagine that the owners of this house decided to price their home at $200,000. They open themselves up to 2 groups of potential buyers. There are some people who want a 2 story in that subdivision and are willing to fix it up themselves if they can get a good enough deal. They could afford the more expensive homes, but they don’t mind the backyard and like the idea that they can afford to redecorate and put in the appliance that they prefer, while still saving money in the end.

Then there is also another group of people.

This group simply can’t afford $250,000. They had been looking at less expensive ranch style homes in this subdivision even though they really wanted a 2 story. They were also looking at 2 story homes in other subdivisions, but they didn’t like those areas nearly as much. The 2 story priced at $200,000 in their favorite subdivision which needs some redecorating becomes a gem to these buyers. If they can get a 2 story in their favorite subdivision, they’ll simply live with the wallpaper for a few years. They recognize that the old appliances still work perfectly fine and they’ll put up with a less than ideal backyard. They have a different set of expectations on what makes a great house.

At $200,000, online buyers pick up the phone and schedule an appointment. But at $250,000, these same buyers will see a house that doesn’t look nearly as good as the other options. They’ll skip over it without a second thought.

Part 2 – How Long Should You Wait Before Reducing Your Price?