Valuations: The Price Puzzle

Your guidance is more valuable to sellers now than it’s been for a long time.

October 1, 2006

For the past several years, it’s been relatively easy to price a typical home — all you had to do was look at sales prices for similar homes nearby and add 10 percent to 15 percent. Those days are behind us.

Today, pricing has never been more critical or difficult. Some sellers refuse to accept that prices have leveled off; others are confused about the changing market conditions.

For those of you who are new to real estate or have forgotten what a transitioning market is like, there are some things you’ll want to keep in mind when helping your clients determine the right price.

Price vs. Value

First, you have to understand the difference between price and value. Two homes might have identical prices and similar specifications, but there are a number of factors — location, upgrades, and condition, for example — that could make one home a better value than the other.

The best way to assess your listing’s value proposition is to be extremely familiar with the other homes it’s competing against. There are many places, including broker Web sites, national real estate Web sites, and print and online advertisements, to gather general information about competitive listings. But you must complement this intelligence with firsthand knowledge. That enables you not only to compare the specific features (such as the number of bedrooms and baths) and the square footage of listings but also to take into account whether the kitchens and baths have recently been updated, a roof has been installed in the past year, or the property has been attractively landscaped.

By visiting properties, you’ll also be able to evaluate the homes’ locations within a particular community. Does the back of a property abut woods or another home? Is the home on a corner lot or in the middle of the block?

An Appealing Price Point

Second, you want to find a price point that will generate interest among multiple buyers. By attracting more than one interested party, you create a greater sense of urgency and competition.

One method that some practitioners use to create interest capitalizes on the fact that buyers often search for properties within certain price groupings, such as $480,000 to $500,000. If a reduction is necessary, the listing agent could drop the price to $479,000, the top end of the next price grouping. That exposes the listing to a new crop of buyers who might otherwise not have found it.

Before suggesting a listing price, have a conversation with your sellers to determine their motivation. Are they serious about selling their home or just testing the waters? Do they need to sell fast because they are relocating or have signed a contract on another house? Or are they willing to wait for the highest possible offer to maximize the equity they receive?

This conversation gives you an opportunity to discuss realistic expectations. Be sure to talk about recent changes in the market, such as rates of appreciation and average days on the market. If your sellers have an understanding of current market conditions, there’ll be less stress, confusion, and anxiety for everybody.

Reprice, early and often

Your goal is to price each listing correctly when it first comes on the market. But pricing a home isn’t a one-time task, especially in a changing market. You’ll need to stay abreast of changes — new listings, recent transactions, overall inventory shifts, price adjustments or improvements to previously listed houses — that could affect the perceived value of your seller’s home. Review your listings at least every 30 days — more often if there’s a lot transaction activity. Market conditions, such as average days on the market and the level of activity on homes similar to your listing — the number of showings and whether any offers have been made — will help you determine whether it’s time to adjust the price.

Don’t let a listing languish at the wrong price. Your best chance for a full-price offer comes in the first three weeks. If, as sometimes happens, there’s just no activity on your listing, consider a price reduction, or a series of timed reductions, to generate interest and excitement.

Your job is to use your expertise and professional judgment to analyze market information and make recommendations to your clients. That guidance is more valuable in the current market than it’s been for a long time.

Different Strokes

Pricing strategy depends on what you and your sellers are comfortable with. Some options practitioners use to attract buyers include:

  • Drama pricing. A home’s price is set about 5 percent less than that of similar properties.
  • Value-range marketing. The price is set at a range, such as $500,000 to $550,000, which is specified in the comments section of the MLS listing. The high end is listed in the price field. The technique can be a way to get a conversation about a listing started.