Why is overpricing your home so damaging? Simple put, the house won’t sell! Sure, it may eventually sell, but in my expert opinion, it will sell for less than it should have, if it had been priced correctly in the first place. This article addresses the key pitfalls of overpricing and why you should avoid them.
The process of selling your home, likely your most priced possession, is an emotional one. The reality of the situation though is once you decide to list your house, it becomes a business transaction. A commodity for sale in the real estate market.
Today’s home buyer is savvy, paying attention to what’s selling and for how much, and is likely driving their own real estate search online. Although everyone likes a deal, realistic buyers are prepared to pay fair market value for a home. If paired with a realistic seller, a successful real estate transaction will ensue.
Everything done in the listing and selling process is meant to accomplish one goal; sell the house! Certainly there are factors that can increase the likelihood of getting top dollar for your home, ranging from professional staging, having all repairs completed, professional photos, and a solid online marketing plan to name a few. All this aside, the price the market will bear is still the most important factor in the sale of your home.
A common mistake with home sellers who overprice is the false belief that every home improvement translates into a dollar for dollar increase in value. Unfortunately that is not the case in real estate valuation. Some upgrades have very little return on investment when selling a house.
Pricing your home too high – because you paid a certain amount for it, because you have so much into it with upgrades, landscaping, installed a pool, etc, or solely because it means so much to you – is a surefire way to stall the successful sale of your home.
Buyers don’t care that you need X amount of dollars to pay off your line of credit, pay out your mortgage, or buy your next house. None of these factors influence the actual market value of a house. These are YOU problems. Why should the buyer inherit them? All a buyer cares about is paying what is fair.
You are free to list your home for any price you choose. However, any quality real estate agent will tell you that overpricing a home can lead to serious pitfalls.
Real estate agents are in the business of selling houses, and a good REALTOR® wants to work with clients who hold realistic expectations. When sellers demand an unreasonable listing price, many agents will avoid taking the listing as they know it is doomed to fail.
Past experience, and expertise tells them, this listing will only cost time and money. Agents only get paid after a listing has sold. Nobody wants to work for free, invest their time and resources, and not see it through to fruition.
There is a direct financial impact to REALTORS® when they take a listing, from professional photos, lawn signs, electronic lockboxes, as well as marketing and advertising costs. Your agent will invest hundreds of dollars to help you get your home sold. They want it to sell for top dollar and will give you helpful tips and advise to help you prepare the home for sale, help you negotiate favourable terms once you get an offer, and happily place a SOLD sign on your lawn.
You need to meet them halfway. They can’t achieve the mutual goal of selling your house if the asking price is unrealistic, and not in line with fair market value.
Attracting the Wrong Kind of Agent
A good agent will tell you honestly that you want more for your home than you can reasonably expect. However, there are also agents out there who will tell you exactly what you want to hear. In the industry, we call this “buying your listing”.
Overpricing a home is part of their strategy to get your listing. They will encourage your high expectations only to tell you later that you are overpriced.
I know what you’re thinking: Why in the world would an agent want to take a listing they have no chance of selling?
Here’s their strategy:
- A Signed Contract. You may pick them over a good agent because they told you your house was worth more. At the very least, you are locked into a 90 day contract with them.
- Advertising: They are using your home to pick up buyer clients to sell them something; not necessarily your home. They want to have their sign on your lawn in hopes of attracting other listing clients in the neighbourhood. Your neighbours may be enticed by your over inflated price and hope they can sell for that too.
- Ask for a Price Reduction: As little as a week after signing, with little to no showing activity, they will inform you that the price is too high, that they “overshot the mark” and you need to reduce your price in order to attract buyers.
Don’t let listing price be the top criteria for picking the right REALTOR®. Remember, this may only be a tactic to “buy your listing”. Instead ask questions like:
- How many successful real estate transactions have you completed in the last 12 months?
- What’s your average list to sale ratio from your original sale price prediction in the last 12 months? What’s the average for the local market as a whole?
- What’s your average days on market for homes you’ve listed in the last 12 months? What’s the average for the local market as a whole?
- How many of your listings in the last 12 months had to reduce their price before a successful sale was achieved.
- How many of your listings failed to sell?
Overpricing homes is part of an unscrupulous agent’s game plan. There are a lot of great real estate agents out there with integrity who won’t overprice your home. It is your job to find one!
Lack of Buyers Looking
Any knowledgeable agent will tell you the most interest and activity on your home will be when it first hits the market. Over the next five weeks, if the house hasn’t already received an accepted offer, the interest will wane.
From day one, the last thing a seller wants is a lack of buyer activity. When you overprice, you lose the interest of quality buyers.
Overpricing your property scares off prospective buyers who may be serious about an offer as they will pick up that a property is overvalued for its worth and will end up looking elsewhere. A home in your immediate area could be sold within a matter of days or weeks if it is marketed at the right price.
Keep this in mind, when a home is overpriced, it will actually help other homes for sale in the neighbourhood sell.
Sellers will often say, “Can we at least try it at the higher price? Won’t they still come and see it and just offer less?”
The answer is a resounding NO. When agents price a listing they are using data from completed sales that compare to your home. Criteria such as the average list to sale ratio for comparable properties, days on market, and the current state of the real estate market in the area, all play a roll in determining fair market value. Agents make an educated guess on what the house should sell for and suggest an appropriate list price.
Buyers are working with agents who will inform their clients:
- Based on comparable sales, the home is overpriced, and advise them not to see it.
- Sellers who overprice their homes are generally not very negotiable. Why would they be reasonable to negotiate with when they grossly overprice their home? On average homes should sell between 97-98% of the list price. The buyers agent will advise the client not to waste their time considering the house.
- This home is out of their price budget. The agent will dissuade their clients from looking at homes outside their budget. Sadly for the seller, this could have been avoided if the home was actually listed closer to fair market value. You have lost a serious potential buyer.
Extended Marketing Time
In Real Estate, sellers fail to understand, time is your enemy. An inflated list price will cause your house to languish on the market as the days and weeks roll on with little to no activity.
There is an ideal time frame to sell a home, and it usually falls within the first 5- 6 weeks the home is on the market. Most agents take listings from 90-120 days. If the listing fails to sell within that time period, you risk having your listing expire – extended days on market or an expired listing will stigmatize your property.
REALTORS® cringe when a seller says, “I’m in no hurry to sell, I can wait for my price. I can always reduce my price later if it doesn’t sell.” Besides indicating a lack of motivation to sell, this kind of thinking is a huge mistake.
The number one question every buyer asks their agent when looking at a home is:
“How long has this property been on the market?”
When a listing is fresh on the market sellers have the upper hand and buyers know this. If they want a particular home, they know that they have to be reasonable about the price they offer. When a home is new to the market, it hasn’t had a lot of exposure yet. Sellers and their agents will agree to hold out for serious offers, closer to asking price, when I listing first hits the market. This is especially true if both the agent and seller feel strongly that they priced the house at a fair market value.
After a listing has had adequate exposure on the market, without a successful sale, the pendulum swings the other way. Now the buyer will feel as though they are in the driver’s seat. Buyers equate extended days on market with factors such as:
- “There must be a reason it hasn’t sold yet? Is there something wrong with the property?”
- “The seller must be getting desperate, let’s make a low offer and see if they take it.”
This is because the days on the market heavily influences what a buyer is willing to pay for your home. Contrary to what many home sellers think, overpricing a home does not lead to a higher sale price. It is the exact opposite.
Unless you have an all cash offer — and let’s face it, that’s not the norm — banks will order an appraisal for any property they will loan money for purchase. Even if a buyer has agreed to pay your inflated price, the appraiser only cares about one thing: fair market value. The market rules the appraiser, and he or she will appraise your property accordingly.
When the appraiser comes back with a valuation, noticeably lower than the price the buyer is offering, the bank will balk at giving the buyer a mortgage. This can take you from a successful sale to a denied mortgage application, leaving you looking for further buyers or accepting a lower price.
Solution: A Realistic Price
Often times in a listing presentation, a seller will shut down and stop listening to an agent’s recommendation on price as soon as the number is south of what they are hoping for. Despite the proven sales data in front of them, they are stuck on a number that they believe their home is worth.
When the listing fails to sell, unrealistic sellers will find every excuse in the book why the home hasn’t sold, most commonly blaming the agent, instead of being objective about the obvious fact their home is overpriced.
Imagine the following scenario. Your home has been listed for sale for the last 3 months. You’ve had little to no showing activity on the home and you are disappointed that the home hasn’t received an offer yet. Consider the following questions:
- Do you have an undesirable property?
- Is it in a bad neighbourhood?
- What’s the state of the market? Is it a buyer’s or seller’s market or is there just not a lot of people buying right now?
Provided your answers to the above questions are you have a beautiful home, in a desirable neighbourhood in a robust market, there is only one obvious answer. The home is overpriced. Buyer’s are not prepared to buy what you are peddling.
The take away is this. Find yourself an honest real estate agent and listen, with an open mind, to their expert advice on price. Many will advise you that it is better to list a little lower, and encourage a bidding war, than risk all of the problems that listing too high brings. Stay realistic in your pricing, and accomplish your ultimate goal of selling your home.
And remember this: The most important factor for selling your home is the listing price you set from day one. All of the marketing and advertising in the world will not sell an overpriced home.