Selling Your Home

Pricing Strategy

Introduction

In order to find the one buyer on planet earth that is willing to pay more money than anybody for your house, you must have an effective pricing strategy. That strategy should create an environment where the two best buyers on planet earth end up bidding against each other for your house. Most agents fail to realize that the true secret to selling a house quickly and for top dollar is through the use of a pricing strategy, and not a result of the initial price. Due to this lack of understanding, agents often price a house incorrectly from the very beginning and end up costing their clients thousands of dollars at closing.

Market Analysis

A good pricing strategy begins with an accurate current market analysis of your house that can only be achieved by actual research. Unfortunately, most agents do not know how or are unwilling to do the research and rely heavily on valuation websites. Let’s be clear, the value of your home cannot be determined by simply putting your address into a search bar on a website and clicking a button. While such websites are wildly popular, there is just no way for them to provide a precise valuation of a home. There are too many factors involved and relying on such websites will generally lead to disappointment.

Setting the Price

Once the research has been completed and you have a fairly good idea of what your house is worth, it is time to set the initial price. When setting the price, it is important to understand a basic fact about human psychology. The human brain needs to organize things in a simplistic fashion. Otherwise, we would not be able to store and recall all of the information that we need in order to function from day to day. This leads us to think in terms of round numbers.

Most agents and buyers fail to realize that a homebuyer is never approved for a specific loan amount. For example, say that a buyer is in the market to purchase a house and receives a loan pre-approval from a loan officer. The pre-approval is not based on a specific loan amount, it is based on the monthly payment that the borrower can afford to repay. It is almost mathematically impossible for the approved monthly payment to actually equal a round number. The loan officer simply converts that number into a round number for the buyer.

When buyers begin looking for a home, they will always search in round numbers. For example, buyers will search for homes priced between $475,000 and $500,000. If you want to sell your house for the most money possible, you must take this into consideration when setting the price. Always set your asking price just below one of these numbers. In this case, the appropriate asking price would be $499,900. Otherwise, you are just giving money away.

Most agents do not understand the basic concept of pricing a home. Too often they come up with some crazy number as a listing price, hoping that it will draw some attention to their listing. This is evidence that the agent does not have a pricing strategy. What it really does is cost the seller tons of lost money.

Price Reductions

From time to time it becomes necessary for sellers to reduce the asking price of their house. This is an important and necessary part of an effective pricing strategy that should not be taken lightly or made haphazardly. Price reductions need to be considered and planned out before you put your home up for sale.

Since most agents do not have a pricing strategy, they have no idea of when or how to make an appropriate price reduction. Usually the price changes they make are completely random in nature and without any real thought as to what is necessary to generate more interest in the house they are trying to sell. In fact, they are so inept at it that practically every initial price change will not expose the house to even one more buyer.

You already know that because of human nature, buyers and their agents like to search for homes in round numbers. Generally, those searches occur in $25,000 increments. It is also recognized that the number of buyers interested in a house will increase exponentially when the price for that house decreases. When you put these two facts together, you will come up with a very simple plan for those rare times when you need to reduce the price of your home.

The primary reason for reducing the price of a house is to find more potential buyers. There is no other reason. Therefore, you must lower the price to a level where those potential buyers can be found. When you consider the facts we just stated, it becomes obvious that you must make a price reduction of $25,000 in order to reach the next pool of potential buyers. Anything less would simply be giving money away.

A mistake that most agents make is to price a house at $485,000. If a buyer is willing to look at and fall in love with a house priced at $485,000, would the buyer be willing to look at and fall in love with the same house if it is priced at $499,000? Of course! However, if the buyer falls in love with the house at $485,000, he or she is never going to offer $499,000. Of course not. Basically, the agent is just giving away $15,000 of the buyer’s money without getting any additional potential buyers for it.

Does It Matter What the Seller or Agent Thinks About the Price?

It is important to note that nobody cares what you, the seller, or me, the agent thinks. Let’s say that we both determine that your house is worth $500,000. However, the two best buyers on planet earth bidding against each other only think your house is worth $450,000. Does it matter what we think? No, it does not. This is undeniable proof that what we think does not dictate the selling price.

Let’s examine the price of three different houses. These houses are identical in every way. They are on the same street right next door to each other, facing the same direction, are the same model with the same square footage, and are decorated, furnished, painted, and landscaped identically. These houses are like those you see on many of the home improvement shows out there. Everyone knows that each of these homes is worth $500,000. The buyers know it, the sellers know it, and the appraisers know it. However, a superior real estate agent using this superior pricing strategy easily sells each of these houses for $515,000.

There is a difference with each of these houses that I forgot to mention. The first house is owned by a 92 year-old lady who purchased it in 1965 for $15,000. In her mind, she thinks the house is worth $300,000. She has not really been paying attention to real estate prices. The second house is owned by a 55 year-old man who bought the house 10 years ago. He has been paying attention; he knows that the house is worth $500,000. The third house is owned by a 27 year-old medical resident on his way to becoming a doctor. He bought the house a year ago because his agent told him the neighborhood is increasing in value. He feels that his house is worth $550,000.

What does the 92 year-old lady think of the agent that sold her house for $515,000? She loves the agent. Her agent is the greatest thing ever. How do you think the 55 year-old feels? To him, his agent is a genius and he is going to let everyone know about it. What about the soon to be doctor? He thinks his agent is a fool who does not have a clue about his job.

What is the difference with these three transactions? Customer satisfaction. Although all three houses were successfully sold, the satisfaction of the sellers is what is different. A great agent will do the same great job regardless of what anyone thinks.

Foundational Principles of Pricing

It is time to examine the foundational principles of pricing. Have you ever seen a situation where someone sold his or her home for less than the asking price? Absolutely, it happens all the time. Have you ever seen the opposite situation where a house sold for more than the asking price? Certainly, this is common as well. It is undeniable evidence that there is no relationship whatsoever between the asking price of a house and the sales price!

When you are deciding the asking price of your house, you are not deciding how much you’re going to get – you’re deciding how long it is going to take to sell the house. If the asking price for a house determined the final sales price, we would simply overprice everything and make everyone wildly rich. In all actuality, the market has determined the sales price of a house before the sign ever goes up in the front yard.

If you have ever been to an auction, you know that an item basically starts at a price of zero with a large group of people bidding on it. The price of the bid steadily increases until it reaches a point where only one person is bidding against another person. Ultimately, only one person is left and declared the winner. What do most real estate agents do? Initially, an agent overprices a house and starts out with nobody bidding against nobody. Then the agent waits 3 months and makes ineffective price reductions that do nothing for the seller.

How To Avoid Selling For Less Than The Original Asking Price

The best way to sell your house for more money than it is worth is to have an auction, but not one where you begin at zero dollars. Obviously, the goal is to sell the house, but it would be crazy to sell the house until we know what the absolute top dollar is. Therefore, job number one is to find the top dollar for the house. There is only one way for you to determine the absolute top dollar of your property. That is to have the two best buyers on planet earth that love your house more than anyone else bidding against each other to buy it. There is no other way.

Job number two is to get the house sold. In order to get the house sold, you need to have two choices. Your first choice is to price the house at the highest price a crazy person would pay for it if they loved it more than anyone else and could get an appraiser to go along with them. The second choice is a unit of time. Specifically, how long does it take with real buyers who have real money and real estate agents to get out and see your house? That time is usually about two weeks. Therefore, every couple of weeks without even thinking about it, you should reduce the price of your house to the next $25,000 price point until one of two things happen. One is that you get an offer so good that you cannot pass it up.  The other is that you receive multiple offers and bid them up as high as you can, then decide if you want to sell or keep it forever. Those are your options.

Many sellers mistakenly believe that buyers will always offer less than the full asking price for a house. The reason for this belief is that too often they see houses selling for less than the original asking price. Remember, the price of your house is determined by the market before you even put it up for sale. Why do so many houses sell for less than the original asking price? This happens for one of two reasons.

The first possible reason is that the agent does not really know what he or she is doing. As a result, the agent will price the house above market value hoping to find that one buyer willing to pay more for the house than anybody else. Even though this strategy never works, agents continue to use it.

The second potential reason is that the agent is just telling the sellers what they want to hear so they can get the listing. Agents participating in this type of activity are placing their interest above the seller’s interest. Their view is that they can reduce the price later, but their most important goal is to get the listing. While many homeowners have an unrealistic view of the price of their home, it is the agent’s responsibility to give them accurate information. It is unethical for an agent to knowingly overprice a house just to secure the listing.

The only way to sell your house for more than it is worth is to get multiple buyers bidding against each other for your house. This will not happen if your house is overpriced from the beginning. Slightly underpricing your home is not a problem, it is the solution. There is no risk in underpricing your house unless you are too eager to take the first offer that comes along. Remember, when you’re deciding the asking price, you’re not deciding how much money you’re going to get, you’re deciding how long it is going to take to get the money you’re entitled to.