The Dangers of Over Pricing
Monday, January 31st, 2011This is the story of John and Jane Doe. They are very nice people and they are selling their very nice home. They just want the best price they can get. This story plays out over and over again in the market place. It will happen tomorrow in Calgary and it will happen again and again all across Canada. But it won’t happen to you because you will understand “the dangers of over pricing”.
John and Jane Doe had their REALTOR do a Comparative Market Analysis and he/she determined that the “market value” of the Doe’s house was near $450,000. The REALTOR suggested listing the house on MLS for $460,000.
John said that in the past, homes in his neighbourhood have sold for much more and he wanted $475,000, not a penny less. He wanted to list their home at $495,000 so there is room to bargain with the buyer and come down to his price. The REALTOR, not able to convince John otherwise, listed the home for $495,000.
Bill and Bonnie Buyer are looking for a home in the $475,000 to $500,000 range; they have looked at several homes in this price range and have not found that “special one”. When John and Jane’s house came on the market, The Buyer’s REALTOR arranged for a viewing of the home right away. In fact, there were several people just like Bill and Bonnie who had been waiting for just the right home and want to see the Doe’s place ASAP. There is some initial excitement. The Does are very pleased that they have over 20 couples go through their home in the first week! It is a very nice home and with all of this interest it is sure to sell!
… They wait…and wait…and wait. There are no offers. What went wrong?
“The right buyers did not see the home and the wrong buyers saw it, but were not interested”.
The right buyers were looking in the price range of $450,000, they are not looking at higher priced homes. The right buyers, those that can afford the Doe’s home, would pay a maximum price of $450,000. They may even go a few thousand higher for the right home in the right location. When they searched for homes on the MLS, they were looking for homes in the range of $430,000 to $460,000. If they had a REALTOR working with them they may take their search a little wider, but generally it would be in that range, certainly, no more than $470,000.
The right buyers did not see the Doe’s home, priced at $475,000. They simply did not consider searching for homes priced that high. They can’t afford a home priced that high.
The wrong buyers saw the home, they came in droves to check it out, but they did not make an offer because it was inferior to the homes they have seen in this price range, especially those that are correctly priced.
What happens now?
John and Jane’s home stayed on the market for several weeks before they decide to reduce the price to $475,000. By that time, only new buyers coming into the market at that price range saw it, but it is still inferior to anything they were looking at.
The Does lowered the price again, this time to $460,000. Now it had been on the market for several months. Finally, an interested buyer came to the table. The new buyer and his REALTOR knew the market value of the home, but because the home was on the market for so long, the new buyer saw an opportunity to get a bargain. He offered $440,000. The Does were under pressure to sell, but they held firm because they know its true market value and they finally settle at $450,000.
Food for thought:
Market Value can be defined as “the price a knowledgeable buyer is willing to pay for property in light of the current competition and under the current circumstances”. In this information age, are there any buyers who are not knowledgeable?
Had the Does priced their home at $460,000 to start, how much would they have gotten for their home? How long would it have taken to sell? Possibly a week or two, maybe even a day if the right buyer was waiting. There is a very good chance that they would get market value or better.
Imagine what would have happened if the Does were selling in a falling market. Would they ever be able to catch up to the price and sell their home?
A REALTOR’s job is to help people buy and sell homes for the best possible price, in the least amount of time with the fewest problems. The REALTOR has certain obligations to their client. Setting the selling price is NOT one of them. The client sets the price they want to sell the home for, the REALTOR can only advise the client as to the best possible course of action based on the market value of the home.
In light of all of this and as an aside, should you choose your realtor because he will list the home at the highest price?
John and Jane Doe had their REALTOR do a Comparative Market Analysis and he/she determined that the “market value” of the Doe’s house was near $450,000. The REALTOR suggested listing the house on MLS for $460,000.
John said that in the past, homes in his neighbourhood have sold for much more and he wanted $475,000, not a penny less. He wanted to list their home at $495,000 so there is room to bargain with the buyer and come down to his price. The REALTOR, not able to convince John otherwise, listed the home for $495,000.
Bill and Bonnie Buyer are looking for a home in the $475,000 to $500,000 range; they have looked at several homes in this price range and have not found that “special one”. When John and Jane’s house came on the market, The Buyer’s REALTOR arranged for a viewing of the home right away. In fact, there were several people just like Bill and Bonnie who had been waiting for just the right home and want to see the Doe’s place ASAP. There is some initial excitement. The Does are very pleased that they have over 20 couples go through their home in the first week! It is a very nice home and with all of this interest it is sure to sell!
… They wait…and wait…and wait. There are no offers. What went wrong?
“The right buyers did not see the home and the wrong buyers saw it, but were not interested”.
The right buyers were looking in the price range of $450,000, they are not looking at higher priced homes. The right buyers, those that can afford the Doe’s home, would pay a maximum price of $450,000. They may even go a few thousand higher for the right home in the right location. When they searched for homes on the MLS, they were looking for homes in the range of $430,000 to $460,000. If they had a REALTOR working with them they may take their search a little wider, but generally it would be in that range, certainly, no more than $470,000.
The right buyers did not see the Doe’s home, priced at $475,000. They simply did not consider searching for homes priced that high. They can’t afford a home priced that high.
The wrong buyers saw the home, they came in droves to check it out, but they did not make an offer because it was inferior to the homes they have seen in this price range, especially those that are correctly priced.
What happens now?
John and Jane’s home stayed on the market for several weeks before they decide to reduce the price to $475,000. By that time, only new buyers coming into the market at that price range saw it, but it is still inferior to anything they were looking at.
The Does lowered the price again, this time to $460,000. Now it had been on the market for several months. Finally, an interested buyer came to the table. The new buyer and his REALTOR knew the market value of the home, but because the home was on the market for so long, the new buyer saw an opportunity to get a bargain. He offered $440,000. The Does were under pressure to sell, but they held firm because they know its true market value and they finally settle at $450,000.
Food for thought:
Market Value can be defined as “the price a knowledgeable buyer is willing to pay for property in light of the current competition and under the current circumstances”. In this information age, are there any buyers who are not knowledgeable?
Had the Does priced their home at $460,000 to start, how much would they have gotten for their home? How long would it have taken to sell? Possibly a week or two, maybe even a day if the right buyer was waiting. There is a very good chance that they would get market value or better.
Imagine what would have happened if the Does were selling in a falling market. Would they ever be able to catch up to the price and sell their home?
A REALTOR’s job is to help people buy and sell homes for the best possible price, in the least amount of time with the fewest problems. The REALTOR has certain obligations to their client. Setting the selling price is NOT one of them. The client sets the price they want to sell the home for, the REALTOR can only advise the client as to the best possible course of action based on the market value of the home.
In light of all of this and as an aside, should you choose your realtor because he will list the home at the highest price?
