So you have decided to sell your home. You have a number of decisions to make, like hiring an agent – homesellers need someone who will be honest with them to actually sell the house, as well as for things like creating a marketing campaign and deciding how to stage the home. But the most important decision is simple: pricing.
The nice part about pricing a home is the fact that in the majority of of the country, the real estate market is pretty transparent – consumers can get excellent information about what comparable properties have sold for along with what competitive properties are selling for. It’s nothing like purchasing a car, as an example, where they have no idea what other people paid for their cars. So it’s easy, right? Well, not so much. Even in hot markets, many homesellers experience the languishing on the market for months, often because they made bad pricing decisions. In most cases, it’s simply because they made some simple mistakes when pricing their house, or one big mistake afterward.
So here we will describe more common mistakes that sellers make in hopes that we can steer you away from making exactly the same blunders with regards to pricing your home – and we’ll break it down for you the same way We explain it to our sellers.
Pricing to the unsolds, rather than the solds
The biggest mistake most sellers make is pricing their property based on what’s for sale, not what’s sold. Every comparative market analysis will be based upon an analysis of two types of properties: the ones that have sold and the ones currently available on the market. You should consider both when you’re pricing your house, but for different reasons. You look at the sold comparables to have a sense of what the home is probably worth, and you look at the unsold listings on the market to get a sense of the pricing you need to beat.
But way too many sellers ignore the solds and price their property based on the unsolds – the listings that are currently languishing in the marketplace. Think about the logic of that. You’re trying to sell your house. So why would you price it based on homes which are not sold? If you price it the unsold homes, you’re just going to join them. No, you price based on what has sold. That’s the market price. Really the only reason you need to go through the unsold properties is to determine what you must do to beat your competitors. The truth is, those unsold overpriced homes are great at making your lower-priced home look like a bargain, kind of like when Amazon shows you a higher “list price” on a gadget to make the sales price look like a steal. If you want to get sold, price to the solds. If you’d like to be unsold, price to the unsolds. It’s your choice.
Overvaluing the amenities
Another mistake sellers make is that they put too much faith in the worth of unique amenities – granite counters, bathroom finishes, high-end appliances and so on. We were once talking to a seller regarding how his home was priced over $200,000 more than a comparable property just down the block. His answer: “Well, I have a hot tub and outdoor kitchen in the back yard.”
OK, but the truth is can put a hot tub on your lania for about $5,000, and it’ll be brand spanking new, without anyone else’s dried-up leftover sweat in it. And this guy was pricing it as being a $200,000 value. He’s not alone. A lot of sellers make that mistake. Psychologists even have a name for it – the “endowment effect,” which happens to be our tendency to overvalue things simply because we own them.
Amenities do have value, simply not enough to make a huge difference in price. The existing joke in real estate is always that value will be based upon three things: location, location and location. We did say it’s an old joke, not necessarily a funny one. And that’s mostly true. The biggest factor in pricing a property is location, which is obvious to anyone who has priced out a Manhattan apartment. After that, you look at size – how big is the house? And after that once you know location and size, you are able to pretty much establish a general pricing range. That’s when you start considering all the other aspects of the house: style, condition, lot quality – as well as amenities. So amenities are essential may change where you are in that range. But they don’t move you up to a new one.
Looking to get full value for improvements
Not only do many sellers overvalue their amenities, they particularly overvalue any improvements they made in the home. Let’s say that A decade ago they bought the home for $500,000. Five years ago, they spent $50,000 redesigning the kitchen. Then two years ago, they spent $25,000 on roof repairs. So at the minimum, even if the home hasn’t appreciated in value at all, they ought to be able to sell the home for $575,000, right? Haven’t they improved the house by $75,000 with all the work they did? Not likely. Not a soul ever gets 100 cents on the dollar for the improvements put in.
If you don’t believe us, check out the results of Remodeling Magazine’s yearly “Cost versus Value” report; it tracks the impact of standard remodeling projects on resale value. In many instances, improvements earn back about 60 percent to 70 percent of what they cost.
Why? Consider it this way: Almost every thing you’ve ever bought has gone down in value since you purchased it – cars, computers, pianos, anything. Once it’s used, it actually starts to depreciate, right? Well, that doesn’t change just because you took that thing and stuck it inside a house. Regardless of whether your house goes up in value, it doesn’t suggest that all things in the house goes up in value, too. That refrigerator you put in went down in value. Those cabinets went down in value. The new roof went down in value. They’re all used now, much like your car is used. In a good market, houses go up in value. But the stuff within them doesn’t.
Pricing based on what the sellers ‘need’
Sometimes, sellers make the mistake of pricing according to the next home they want to buy, not the house they own now. That is, they don’t even evaluate the comps. All they care about is what they need for the down payment on their next home, and they figure out the price from there: “Let’s see. I still owe $200,000 to the bank, and I need $100,000 as a down payment for my new home, so we’ll price it at $300,000.” Here’s the issue: no one cares what they need.
It’s nothing personal. After all, they do exactly the same thing. A seller might be buying a home after selling the present one, right? And will the now-buyer care what those sellers need for their next purchase? Not so much. Markets don’t work like that. Buyers don’t price homes in a vacuum: they make offers determined by what other homes have sold and are also selling for. Real estate provides an open and transparent market, so sellers can’t price their homes based on their personal needs. It truely does work both ways.
If sellers get an offer that’s too low, they don’t care if the buyer says, “But that’s all I’m able to pay!” They don’t give discounts based on need, so they shouldn’t expect a premium, either.
Falling in love with the AVM
Finally, sellers make the mistake of relying too much with a Zestimate. At least, they price their home in line with the Zestimate if it comes in really high. If it comes in low, then it’s obviously just a stupid computer glitch and can be safely ignored. And it’s not just the Zestimate. Automated valuation models, or AVMs, can be found everywhere now, including on a lot of broker websites. They’re fun in a real estate porn kind of way.
But sellers should understand that AVMs were designed to provide quick and easy macro-level valuations for institutional investors who didn’t have the time or ability to do a detailed analysis. Not one person thinks that they’re as accurate as an actual comparative market analysis from a professional real estate agent or appraiser – not even individuals who created them. All things considered, Zillow itself admits to a national median error rate of approximately 8 percent, which means that half the Zestimates are off by more than 8 percent. So for homes with Zestimates of, say, $400,000, only half those homes will certainly sell within a range of about $368,000 to $432,000. The other half will probably be worth more or less that range.
Sellers should evaluate the way they would feel if an agent came to their house and said, “Well, my advice will be to price it somewhere between $368,000 and $432,000, and I’m positive that we have a 50 % possibility of selling it within that range. Yay!” Would an owner have a lot of confidence in that agent? Well, then, they shouldn’t fall in love with that AVM.
And the one mistake sellers make afterward
Finally, regardless of whether sellers stay away from the five big mistakes when they’re pricing their house, they can still make a mistake afterward – namely, they set it and forget it. Even during the very best of circumstances, the initial home price is a guess. Pricing is both a form of art and a science, and you never quite know specifically how the market is going to react when you list a home. Indeed, coming from a pure Economics 101 perspective, it almost doesn’t matter where sellers initially price a home because the market is going to correct them.
Should they price it too high, the home will languish on the market as buyers take a pass until they reduce it. And when they price it too low, they’ll drive intense buyer demand that can drive the price up over asking. Either way, through reductions or bidding wars, they end up at the true market price. But those economic fundamentals depend on paying attention to what the market is saying.
We work for you the seller. We give our clients every piece of information they need to make an informed decision on price. Ideally, they should consider all that information and make a reasonable decision. At the end of the day, though, it’s their home. Should they wish to price it to the unsolds or price it to what they need or get every dollar they put into it – then that’s their call. But it’s kind of on them if they go against our recommendations and are still living in a home on the market six months later.