Market forces are very strong, but some folks still dare to resist. Home sellers frequently fall into the trap of overpricing their homes, thinking it can’t hurt to price the home a little high so there’s “room to negotiate.” Except it can hurt – and sometimes a lot.
Setting the right sales price can mean the difference between a quick sale at the home’s fair market value or a long and frustrating process, potentially chasing the market down to a lower sales price.
Let’s explore the reasons why overpricing can be a big problem and what the consequences are for sellers.
Why Is Overpricing a Home Such a Downer?
What’s the downside of trying to sell a home for more than it’s worth. Let’s explore some negative consequences of failing to strike while the iron’s hot.
The Contract Price Exceeds the Appraised Value
Appraisers don’t care about your wishes. If you’re lucky enough to get your lofty asking price, an appraiser will still base the home’s value on comparable homes that have recently sold.
Most buyers need a mortgage. The lender will only approve a loan based on the appraised value, which will almost certainly come in lower than the contract price. Therefore, a seller must either drop the price to the appraised value or request more cash from the buyer. Since most buyers will not pay more than the appraised value, sellers insisting on more cash will likely crater the deal and send them back to square one.
Old Listings Get Stale
New listings get the most attention, which gradually wanes the longer a listing sits on the market. “Stale listings” are hard to move and eventually buyers begin to wonder what’s wrong with the house. Adding insult to injury, the price must ultimately be dropped to drive more interest, which can further stigmatize the home.
Buyers Think They Rule
The longer a listing sits on the market, the more buyers feel they can negotiate, and their offers will invariably undercut the actual market value of the property. So, price it right out of the gate!
Searches Will Miss Your Listing
Serious buyers can’t make offers on a home they don’t see. If your home listed at $425,000 is overpriced by $25,000, then buyers searching for homes under $400,000 won’t ever see your listing. In a soft or declining market, they might search for higher priced homes that have been on the market a while. In that case, see the above explanations about why you will likely wind up back at fair market value.
How Does Overpricing Happen?
Let’s consider the common causes of an overpriced home.
An Outdated Appraisal
Timing is everything and an appraisal is a snapshot in time. The most accurate and relevant appraisal is done for a lender after the home is already under contract. This allows the appraiser to account for all current and pertinent information like recent renovations or upgrades, the most recent sales data, and information about the neighborhood.
An outdated appraisal is rarely reliable for an accurate market value. But what does outdated mean?
In a changing market, an appraisal that’s even a couple months old can be unreliable. Appraisers will use comps that are 6 months old or more, especially for unique homes or a thin market with very few comps. So, an appraisal that’s several months old could have comps that are almost a year old, which may not do the trick.
Also, an appraisal is not an exact reflection of the market. Only by marketing a home to the public can real market forces dictate the value of the home.
The Wrong Realtor
Not all Realtors are created equal. Some simply aren’t that good or haven’t gained enough experience yet. Some sellers try to use a relative who lives in another city and doesn’t know why homes a few blocks over sell for more.
Unfortunately, some Realtors will purposely overprice a home just to get the listing over another, more realistic Realtor. It may be nice to hear, but the higher price is probably not supported by the market data, which should be carefully examined.
And finally, some Realtors will simply follow a sellers dream that’s rooted in emotional attachment. Unfortunately, strong feelings don’t matter to a buyer. Ironically, a Realtor who’s willing to turn down an overpriced listing is probably the exact Realtor you need to sell your home.
Assessed Value
The assessed value of a property is determined by the local government for tax purposes. It’s often based on the latest sale price plus an annual increase; or a market value that is periodically determined by the local assessor (like every 1-3 years).
Since markets change over time – sometimes quickly – the tax assessment rarely coincides with the current market value. So never rely on the assessed value to price your home for sale.
Online Valuation Models
There are various websites that generate estimated home values from an automated valuation model, or AVM. These estimates can be useful as a ballpark estimate, but they rarely peg the exact market value.
Online valuation tools are most accurate when there are numerous sales of homes that are very comparable and close to the subject property. As the sale volume and comparability decrease, so does the accuracy of the estimates. The valuation models also fail to adjust for upgrades from one home to the next, which can affect accuracy.
Other Home Listings
Only sold properties should matter when setting the sale price. A home that’s listed for sale may not be a good comparison, especially one that’s been on the market for an extended period.
Furthermore, your neighbor may have set an unrealistic price which likely be reduced the moment you list your home. This can easily happen in a declining market.
Faulty Valuation Methods
Aside from using comparable sales, there are other ways to value a home.
When comps are scarce, appraisers can use the cost approach to value a home, which calculates the cost of building a similar property from scratch and subtracting depreciation.
Another method is capitalizing income, which is typically used for income-generating properties. It involves estimating the potential income and applying a capitalization rate to determine the value of the property.
Price per square foot is a more simplistic method of deriving a home value but is typically unreliable. It only works if homes are very close in size, age, and amenities, which is not always the case.
The Right Way to Price a Home to Sell
The most efficient way to arrive at a listing price is to contact an experienced real estate agent in your area to perform a comparative market analysis (CMA). A CMA will fully account for a home’s location, size, age, condition, amenities and features that affect market value.
Alternatively, an appraiser could be hired. However, that would typically be an unnecessary cost since a good Realtor is just as reliable and is acutely aware of current market conditions and trends.
A good Realtor is highly incentivized to nail the correct price, so the home sells for maximum value in a timely fashion – and the seller is happy.
Even if a seller is planning to try the for-sale-by-owner route, a Realtor will usually provide a listing price with some hope of listing the home at a later date.
Final Thoughts
As a seller, a major hurdle to overcome is the belief that the sale price can always be dropped later if necessary. Yes, the price can be reduced later, but the chances of getting top dollar are also reduced. Homes that sell for top dollar are actually those that tend to sell quickly relative to other homes.
As discussed at length, pricing a home right from the outset can be critically important – unless money doesn’t matter!
If you’re looking for the right listing agent to sell your home for top dollar in the least amount of time, connect with a top Bakersfield Realtor.
