Updated: 8/26/2011 1:10 PM ET|
The psychology of pricing your home
So you've decided to put your house on the market? Price it so that more buyers see it -- and notice it. Here's are 10 tips for getting the sale you want.
You're selling your home. Here's the big decision: Should you set the price high, expecting buyers will bargain you down eventually? Or should you start low to attract a lot of attention and get the inevitable discounting over with upfront?
You might be surprised how important this decision is.
Experts agree that starting with the price high on the idea that you can always drop it later is a costly mistake. Pricing doesn't just determine how much money you stand to make -- it also dictates whether buyers even give your home a serious look.
With so many competing properties for sale, yours has to pop out immediately as a good value or buyers will move on, unlikely to return. You get one first shot at your home's debut, and it's easy to blow it.
"The amount of traffic that a listing gets in its first week is five to seven times what it gets in its ensuing weeks," says Glenn Kelman, the CEO of Redfin, an online brokerage and listings site. "Let's say you lower the price (later). No one will notice. You really are broadcasting that discount to a much smaller audience of buyers and will have the perception it is damaged goods."
It's worth more because it's mine
Your job as a seller seems simple: Price it right to make the sale. You analyze the competition thoroughly and coldbloodedly. You know the prices of the properties that have recently sold in your neighborhood and their similarities to and differences from your home. You know the current competition and understand precisely what homes a little better and homes a little worse than yours are selling for.
That shouldn't be too difficult -- for Mr. Spock. But for us humans, emotions, history, attachment and expectations get in the way.
"The buyer is looking at 'What are comparable houses selling for?' and the seller is thinking, 'What did I pay for this six years ago?'" says John Gourville, a marketing professor and expert in buyer behavior at Harvard Business School.
Home sales and purchases are loaded with illogic and irrationality. Compounding the problem is our tendency to cling to things. Behavioral scientists try understanding why. Economist Richard Thaler of the University of Chicago's Booth School of Business describes this "endowment effect," the tendency for things, even little things, to become worth more in our eyes once we own them. (This cartoon, at Nudge, a blog Thaler runs, conveys the idea succinctly.)
Researchers find that the pain of a loss is two to three times greater than the joy of an equivalent gain, Gourville says. In other words, it's hard to accept receiving less than you paid for something.
But in this difficult market, realistic goals may be making a quick sale, getting the best return possible and preventing buyers from niggling over price. In areas clogged with short sales and foreclosures, a realistic goal may be making any sale at all.
Here's an arsenal of expert pricing tips, tricks and strategies to help you gain the upper hand:
Making the debut count
No. 1: Don't get penalized for starting too high. Identify your home's true value, and set the price slightly under that. At worst, you'll lose about $10,000, but you might make a quick sale. If you're further under market than that, buyers are likely to bid the price back up, Kelman says.
An error on the high side, however, can cost you more than just time. Once you drop your price, buyers smell blood. "They say, 'He's knocked $30K off the price; he'll do it again.' It's death by a thousand cuts," Kelman says.
Don't think no one will realize you've dropped the price. The best listing sites show how many times a price has been reduced and by how much, as well as how long a home has been listed.
No. 2: Test your price against reality. Try this: Pretend you're the buyer. Search online in your price range in neighborhoods with similar quality schools about the same distance from downtown or the nearest major work center. If your place doesn't pop out as an obvious value next to other properties people can buy for the same money, your price is too high.
"Most people really don't want to price it as well as they have to in this market," says Ardell DellaLoggia, an associate broker at Sound Realty in Seattle and a popular blogger.
Altos Research, a Mountain View, Calif., company that analyzes data for the real-estate industry, routinely compares initial listing prices around the country with final sales prices. Sellers generally start out with prices a bit too high, forcing them to later offer discounts to get a deal done, says Scott Sambucci, Altos' vice president of sales and analytics. Nationally, he says, discounts are averaging 8% to 9% off a property's last listing price.
Finessing the numbers
No. 3: Decide how quickly you need to sell. Ask yourself which you need more: time or money. DellaLoggia says there are only a couple of correct prices for your home: the sell-in-30-days price and the 60-to-90-days-on-market price. If your house is worth $415,000 but you must sell quickly, price it at $400,000. If you can wait 60 or 90 days, try $425,000.
No. 4: Massage the last digits. Many salespeople prefer numbers ending in nine. "Is it $15.00, or $14.99? If it's $14.99, the buyer thinks it's $14.00," says Andrew Phillips, an executive vice president of Halstead Property, which serves New York City, northern New Jersey and parts of Connecticut. He teaches classes in pricing to his firm's agents.
Not that anyone's fooled, but a precise number indicates deliberation, lending it credibility. Above all, you're supposed to avoid zeros. (See "Selling a house? Try to avoid zeros.") Round numbers invite buyers to negotiate, this thinking goes. Take $300,000: It supposedly tells a buyer, "Make an offer." What about $293,750? The difference is less than $7,000, yet the latter price seems to be not only a better deal but also a more-definitive, firmer price.
Be careful, though; these "rules" can backfire. "We've found that listings priced at $324,999 sell at a larger discount to list (price) than those priced at $324,500," Kelman says. "That's probably because buyers perceive the price ending in '999' as being a cheap gimmick, whereas those ending in '500' seem carefully priced."
At best, twiddling with the last digits delivers only "incremental" benefits, Kelman says. Yet it's hard not to try for every possible advantage. Kelman found himself doing exactly that when he recently sold his home in Seattle, selecting a price ending in 550.
No. 5: Embrace the zeros. Here's another school of thought: If you want to draw the most eyeballs to your Internet listing, you should select a big round number, like $400,000, says DellaLoggia. This doubles your home's exposure, putting it in searches for properties priced at $300,000 to $400,000 and also in searches for $400,000 to $500,000. The next-best option is a price ending in a $50,000 increment, such as $250,000. And then $25,000.
Evidence suggests buyers know this. The real-estate website Zillow.com examined the 3,470,804 home listings on its site in one recent weekend and found that 97% ended in a zero. The next-largest group, just 1%, used a price ending in 9.
Sellers prefer nines, however, for the second digit in a price ($290,000, for example).
No. 6: Think in increments of $25,000. Most listings sites force buyers to define their searches in increments of at least $25,000. In price brackets above $500,000, some sites offer searches only in $50,000 increments. If your home would be accurately priced at $419,000, you might as well offer it at $400,000 or $425,000 -- the same shoppers will see it.
Yet it's interesting to note that, while roughly half of Zillow's unique users in a recent check actively searched for or were "thinking about buying" a home, most (92%) browsed through the listings rather than using the site's filters to search by price range.
Among those using Zillow.com's price filters:
- Most used $100,000 increments (example: "$200,000 to $300,000" or "$250,000 to $350,000").
- $50,000 was the second-most-used increment.
- $200,000 increments were third-most-used.
- $150,000 increments ranked next.
No. 7: Know your price bracket. Buyers shop by price ranges (also called brackets). These aren't hard-and-fast categories; they're psychological break points that help buyers -- and their agents -- organize searches.
Brackets vary by market and by price. An experienced agent is the best guide to your particular market. At the high end, a bracket might span $250,000 -- from $1 million to $1.25 million, for example. Under $1 million, breaks might occur every $100,000, down to $500,000 and then every $50,000.
It's important to select your price bracket thoughtfully. "We've analyzed this and found that moving from one price 'brand' to another -- say, the difference between $324,500 and $325,500 -- can reduce traffic to the listing by as much as 7.1%, which is significant," says Kelman, of Redfin.
No. 8: Stake out the top end of a price range. Buyers are prone to creep into the price bracket above their target range. "Buyers always spend a little more than what they first think. Nine times out of 10, if they're looking for $300,000, they're going to bump that to $350,000," DellaLoggia says.
Today's low interest rates encourage this: Each additional $10,000 in price (at 4.5% over 30 years) adds only about $50 to the monthly principal and interest.3
Once buyers open the gate to a higher price bracket, they focus on homes at the higher end of the range, DellaLoggia says. Since they're spending more, they're looking for a big bump up in quality.
The lesson for sellers: Choose your competition wisely. Once buyers hit the search button, they see all homes in a price range at once. Your $510,000 home will suffer in their eyes next to one at $550,000.
If $510,000 is your correct price, in this tough market it's best to scale back to the top of the $475,000 to $500,000 category.
Interesting note: Homes on Zillow are much more likely to be priced just under a break point than just above it. You'll find three times as many listings in the $10,000 range just below a $100,000 increment as in $10,000 range just above it, the company says.
No. 9: Don't try to build in discounts. "You can't price your home for the lowballer. You'll only get lowballers looking at your home," DellaLoggia says.
Her rule of thumb, which she attributes to Coldwell Banker Realty: If your home's condition is 95% the best it can be, price it within 5% of what you think the selling price will be. Example: If the house will sell for $275,000, add 5% to take it to $288,000. You can even try $300,000. But not $325,000.
No. 10: When you must drop the price, be decisive. When your home has languished on the market for months, you need to engage a fresh group of shoppers, Halstead Property's Phillips says. An incremental discount won't work. Bite the bullet and make your price drop substantial.
How substantial? It depends, Phillips says -- on the property, the market and the psychological implications of the new price. A 15% reduction on a $240,000 property might be about right, except that it leaves the price at $204,000, so you'd also consider the added boost to be gained from dropping it to $200,000 or $199,000.
On the other hand, 15% off a $2.5 million property brings it to $2,125,000, a bigger reduction than necessary to get it before new eyes. It's an argument for engaging an agent who knows the market inside and out.
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