What you May Not Know About Pricing a Home
Pricing a home in an uncertain market is much harder than it has been in the past few years, where so long as a home was priced low enough, it would garner multiple offers and be bid up to what the current market could bear.
How This Effects Sellers
The reason multiple offers generate over asking bids is obvious—somebody wants to own that home and offering below or at the asking price is a waste of time with other competitive bidders.
But what you may not be aware of, is the discrepancy in the offers received. Frequently we see offers ranging from at the asking price to hundreds of thousands of dollars over asking. What nobody except the seller and their agent knows is that the spread between the highest offer and the second highest bidder is often $100,000 or more apart.
This is exactly why when pricing a home, you want to price it so that multiple bidders will compete, and the winner will have paid too much—more than anyone else was willing to bid.
In investing it’s referred to as the Great Fool Rule Theory—and it works to a seller’s advantage. This is a study performed at Berkeley where they proved that bidding caused people to overpay. They call it The Bidder’s Curse aka The Winner’s Curse.
Here is an excerpt from their analysis linked above:
“An example that compares closely to our empirical analysis and research design is real estate auctions. Ashenfelter and Genesove (1992) document auctions of 83 condominium apartments in New Jersey, which — when the auction sale unexpectedly fell through — sold at significantly lower prices in face-to-face negotiations. The findings in this paper suggest that the large number of auction participants was a key determinant. It ensured the presence of overbidders.” — The Bidder’s Curse, Young Han Lee Ulrike Malmendier, May 13, 2008
The Rest of The Story
The recent sales we pulled in San Mateo County tell the whole story. We looked at all sales for homes listed after the market changed in April of 2022 to date of this writing, (July 29,2022).
The average days on market was 12, and the sellers received 106% of their asking price—not bad. But looking closer, we broke down the sales further to find a correlation between homes that received under their asking price and those which received over their asking price as compared to how long they were on the market, and the numbers tell the rest of the story.
Pricing a home too high means it will languish on the market, but it also means you will receive far less for your home.
Homes which were priced well, attracted multiple offers, and sold for over the asking price, in on average 9.5 days for 112% over the asking price
Homes which sold right at the asking price, sold on average in 12 days.*
Homes which sold for less than asking, took 21 days to sell, and the seller’s received only 93% of asking.
That represents a whopping 19% difference between a home that languishes on the market and one that sells quickly.
For the median price home in San Mateo County, that 19% deficit represents a loss of $361,000 in real dollars.
Price Reduction Correlation
Homes that sold over the asking price represented 70% of all sales. There were only five of those homes which had price reductions, and all sold over the original asking price once lowered. Our experience tells us that these homes probably received multiple offers after the price reductions which is the only rational explanation as to why they would be bid up beyond what a buyer could have purchased the home for prior to the reduction.
Homes that sold at the asking price represented only 4% of the sales, or 20 homes. (*We excluded another 25 homes that sold at the asking price as they were non-arms’ length transactions—sold off market in zero days).
Homes which sold under the asking price represented 26% of all sales, with 40% enduring price reductions averaging $213,00 in reductions of the asking price.
Pricing Your Home
As we’ve discussed in a prior post, many sellers make the mistake of focusing on two questions. How much do you charge and how much is my home worth—two of the least important questions.
To answer the first question, how much an agent charges may be inconsequential if they are the one able to net you that 19% more—It makes a full commission look paltry in comparison.
The second question of how much your home is worth is equally unimportant to ask your agent. What your agent needs to know is how to price it to attract bidders. What he or she thinks your home will sell for, doesn’t change the outcome of what you will receive.
Often sellers fall into the confirmation bias trap. They hire an agent based upon the answer to these two questions almost entirely. The agents who tell them what they think their home is worth—or more—that is aligned with their preconceived notions, is the agent they subconsciously tend to be drawn to as they feel a common bond with a like-minded being.
Buying a Listing
This trap is what many agents leverage. Some agents will tell you what your home is worth based solely upon what they think you want to hear—or even higher. It’s called in our industry “Buying a Listing”. Sellers are of course delighted to hear that their home is worth more than they thought. Why? Because the agent told them so? But the agent is not buying their home—they’re just buying the listing—so their opinion is irrelevant and does more harm than good, as we have demonstrated. These agents represent some of the above 26% that promised a high price, and were forced to backtrack and convince the seller to lower the price until the home finally sells.
Failing to properly learn the right questions to ask an agent, is gambling with your biggest asset, and we all know the house will eventually take everything.
Here are a few more good reads if you are considering selling your home:
How to Stop Agents from Behaving Badly at Your Expense
Why Open Houses May Not Ever Have Been Necessary After All
If you’re considering selling your home, contact us for an honest evaluation.
Drew & Christine Morgan are REALTORS/NOTARY PUBLIC in Belmont, CA. with more than 25 years of experience in helping sellers and buyers in their community. As Diamond recipients, Drew and Christine are ranked in the top 50 RE/MAX agents nationwide and the top 3 in Northern California. They may be reached at (650) 508.1441 or emailed at info@morganhomes.com.
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The information contained in this article is educational and intended for informational purposes only. It does not constitute real estate, tax, insurance or legal advice, nor does it substitute for advice specific to your situation. Always consult an appropriate professional familiar with your scenario.
