Is your home headed for the clearance bin? If you set your sales price too high, it could end up there.
Retailers know that if they mark down a product enough, it will eventually sell. A $300 pair of shoes might go unsold for months, but on sale for $150, they’re suddenly a bargain.
Does that work for a home? Sure, a home that’s been reduced over and over will eventually sell. But is that a good thing? Not so much.
Setting the right price from the beginning is key. Retailers know this, but they also know how to use pricing strategies to sell their product down the line. And, they don’t face the same repercussions home sellers can when their product sits on the shelf too long. By thinking like a retailer and always remembering that price is key, you can assure your success with the sale of your home.
One Big Cut
If you do have to lower your price, and your agent is advising you that a large reduction is necessary, you probably want to listen. “The last thing you want to do is chase the market down or keep lowering and lowering your price, which sends a message to buyers that the property isn’t worth the price,” said Tripp Jones, a leading real estate agent in the Santa Clarita and San Fernando valleys in CA. Rather than mark down repeatedly, “take one big cut at it, and try to get to a more reasonable sales price if you’re still over market value or if the property isn’t moving.”
Jones recently had to ask a seller for a $15,000 price reduction on a home that was initially priced too high and wasn’t attracting attention, and did so knowing full well he would have to settle for less. “I figured if they balked and I got them to a $7-10,000 reduction, at least that would be enough to generate interest in the property,” he said. “Sometimes, as a Realtor, you have to ask for more than you want to get what you need.”
Prices Drives Sales
If two stores have the same item, which one do you buy it from? Unless you are completely loyal to a particular store or unconcerned about money, you’re most likely to shop at the one with the lower price.
Take the Halloween business.
The corner pop-up Halloween store has a Star Wars costume you’re dying to wear to your company’s big costume party. But it’s more than you want to spend. Halloweenmart.com, the oldest online Halloween store in the country, has the same costume for 20% less in their year-round Las Vegas store and in their warehouse. Where would you buy it? The answer is easy.
“We have seen time and again how price drives sales,” said Carrie Sheerin, Vice President of HalloweenMart.com. “Everything from what products we order to how we merchandise that product to how we structure our sales is about creating value for the buyer and ensuring our profit at the same time. It’s a tricky balance, but the retail pricing model works.”
Applying the retail pricing model to home sales is not black and white, but the main idea is still applicable (again, always consider the price!). Retail models have a strict formula for determining profit margins, but there is no hard and fast rule for what you can or should expect to make on your home, especially with so many variables – equity; home size, style and condition; market strength; neighborhood trends just to name a few.
But the bottom line is determining your sales price strictly based on how much you want for the home is not typically a successful strategy.
Which is why it’s sometimes better to price low than high. Think of this as the Black Friday effect.
You probably won’t see people lined up down the street for toothpaste on special, but consider the example of Black Friday, where people wait out in the cold all night and risk hypothermia and being trampled to death for a half-price flat-screen TV (It begs a mention that Black Friday 2013 was the most successful in history for Walmart).
It’s all about perceived value. It’s all about the deal. Or, as Reader’s Digest calls it, the “Herd Mentality.”
“Given the high stakes of real estate, a buyer doesn’t want to be the only one interested in a house. By pricing your property on the lower end of the value range, you could stimulate interest among more than one buyer and create a herd mentality,” they said.
Pricing a home on the low end, especially if you are in a particularly desirable neighborhood and/or if the inventory is exceptionally low, can be a good way to drive multiple offers on a property. Think lowball pricing doesn’t work today? The listing agent of this Menlo Park, CA property who set an intentionally low price at$659,000, had 200 people attend open houses over two weekends, got nine offers and sold for $755,000 begs to differ.
To the 9s
In addition to setting the right price, experts also use say there is a formula for pricing success that goes beyond market values and profit margins to get into the psyche of the buyer. The basic idea: nines are better than zeroes.
“Is a $499 iPad a bargain compared to one that costs $500? Not exactly. But retailers have long priced products just below a round number because, psychologically, $499 feels more like a deal than $500, even if the difference is only $1,” said Reader’s Digest. “In real estate, the ’99’ strategy is nearly always employed. In most cases, knocking off $1K to bring the price below a rounded figure doesn’t make that much difference to a buyer or seller.” Plus it can open the buyer pool up to those who are qualified “up to” a certain price point.
But if you’re priced too high for the market, no amount of 9s are going to help.
“Everyone wants the absolute most they can get for their home. No one wants to leave money on the table,” said Jones. But price the home too high, and you may just be sitting there while other homes that are priced better sell around you. And no one wants that. It’s important for sellers to remember that what they bought their house for or what they want to get for it is not the same as what it’s worth.”