The Art of Home Pricing

Kristn.jpg

This is an excerpt from the speech we routinely give sellers on proper pricing.

We do not make the market for your home, we simply market. We can advise you on a likely range of sale price, given current market conditions and based on our knowledge of comparable listings and sales, and on the fact that we have seen most if not all of the homes with which you will be competing. The numbers are the “science” part of pricing; ultimately we will be relying to some extent on our intuition (gut instinct, if you will). Proper pricing to achieve the highest possible price in the shortest possible time is, after all, as much “art” as it is science.

You see, there is not a single market value for any given home, but a range of value, as each would-be buyer is going to perceive value to a varying degree. One person may be willing to pay a premium for your Koi pond or proximity to the neighborhood park while another may consider little personal value in these things. Our responsibility as agents is to find the guy who actually covets most those features which your home has to offer.

This range of value concept is why Value Range (VR) pricing can be such a powerful tool for maximizing a seller’s chance of success. For a refresher course on Value Range Pricing and why it works, I’ll refer you back to Broker Bryant’s most fabulous article on the topic. For the link-lazy, I offer the following CliffsNotes:

  • VR pricing establishes a range within the seller is willing to negotiate.
  • A proper range will include a low number lower than the market’s perception of value and a high number higher, thus giving both parties an opportunity to negotiate their way to a palatable price.
  • VR pricing benefits the seller by providing a wide berth within which to maneuver. The home will be exposed to a larger potential buyer pool, and the likelihood of finding the one buyer who values the home most is increased.
  • VR pricing benefits the buyer by exposing them to a property they might not have otherwise seen and by giving them the confidence to submit an offer anywhere within the range knowing that they won’t be thrown to the curb. This is because the seller is obligated to “respond” to any offer written in the range; that response can be an acceptance or a counter offer, but it can not be an outright rejection.

Just out of curiosity, I took a brief look this morning at sale prices for homes sold since January 1, 2007 in Scripps Ranch. I was interested to see how the VR homes faired in comparison to their fixed-price counterparts. What I found was consistent with what I have seen in the past. That is, VR pricing on average returns higher sale prices in a shorter period of time.

Pricing Strategy # Sold (Since 1/1/07) Avg. Days on Market Avg. $/SF Avg. $
Value Range 33 67 $330 $819,392
Fixed 23 73 $323 $774,326

The average difference of $7 per square foot may not look like a lot on the face, but when you consider that the homes in each of these categories averaged approximately 2500 square feet, a difference of this magnitude equates to approximately $17,500, which is more than a bunch of bananas. Couple this with the benefit of shorter market time, and I find a compelling case to employ value range pricing.

When Bad Ranges Happen to Good People

One of my big beefs in life is when I see a perfectly good pricing strategy misused to the point where it not only removes any benefit of the range concept but harms the sellers in the process. I am talking about the range that isn’t a range at all. This morning I offer two examples, coincidentally (or not) from two listings belonging to the same agent. One home is offered at a range of $1,475,000 to $1,495,000, while the second home is listed at a range of $765,000 to $775,000. When a price says that the seller is willing to entertain all offers “between” yet there is barely a “between” involved, what you have is essentially a fixed price, only worse. With ranges this narrow, one of several things will happen:

  1.  An offer will be proferred quickly at the asking price, at which point the seller may have indeed underpriced their home, or at the very least will always wonder if they could have gotten more.
  2. The potential buyers will consider the price non-negotiable. Few buyers will want to begin and end negotiations at a single point; therefore, offers are unlikely unless the home is indeed considered under-valued.
  3. The potential buyers will consider the price too high. Implicit in range pricing, which says “I am willing to negotiate between these two numbers”, is the corollary message “I am unwilling to negotiate below the range”. Therefore, again, offers are unlikely.

The exceptions to (2) and (3) above, of course, are the few situations where bold, bargain hunters will ignore the range altogether and present a very low offer or, more commonly, will wait until the seller has a boat load of market time under their belt, thus perceiving seller desperation and an opportunity to capitalize.

So, back to the art of pricing. No pricing structure can ever deliver a sale price above market value, but a good pricing plan can maximize sale price within a reasonable range. A poor strategy can all but guarantee poor results, however, which is not a pretty picture.

Get your Instant Home Value…