by Susan Lavery
When a real estate agent is listing a home for sale, he or she performs a CMA (Comparative Market Analysis) to determine what price the home should command in the current market. However, once the home is listed on the MLS or any other public site for potential buyers and buyers’ agents, there are two schools of thought as to the best way to get the highest price for the property.
Some agents overprice the property, figuring that many buyers like to haggle a bit in order to feel like they’ve gotten the best of the deal. When inventory is low (a “seller’s market”) and especially if the type of property and location are both in high demand, this strategy works very well.
Other agents take the opposite approach, listing a property so low that interest is keen and offers come in quickly. This can lead to a “multiple offer” situation in which buyers become so anxious and so competitive that they offer higher than they might have otherwise paid in order to “seal the deal.” The problem with this approach is convincing the seller to agree to it, because it is a bit of a gamble.
Theory aside, which method actually works best? We can look to statistical analyses of market history for the answers. What these show is that pricing a home 10 to 20% higher than similar homes in the same area results in a slightly higher selling price, and over 20% yields the best price selling price yet. Underpricing the market actually results in a selling price several hundred dollars less than the higher listings, in spite of multiple offers and so-called “bidding wars.”
This is tied to a behavioral trait known as “anchoring,” which is a common tendency to rely upon the first piece of information offered when making decisions. Home attractiveness and desirability are very subjective, and buyers will tend to rate and weight the features that justify the first price they see.
Many agents recommend underpricing a home in order to sell it quickly, which maximizes the agents’ profit when factoring in the time, effort, and money spent marketing it. And if a quick sale is important to the seller, the tactic is a good one. However, if time spent on the market is not important and maximum dollar return to the seller is, then it seems as if pricing a home up to 20% over market value will best accomplish that goal.