To get top dollar for his Portland, Ore., home, Alex Hickman played lowball. He set his asking price below that of comparable homes nearby — and got six offers in four days.
“We strategically listed it under market and tried to create kind of a frenzy,” says Hickman, a 26-year-old credit union examiner. (Bing: Tips for winning a bidding war)
Hickman purchased the home in 2005 for $325,000 and listed it for $497,000. He says a $505,000 asking price would have been more reflective of the market, especially since the property’s first-floor apartment could generate rental income. Hickman had also finished the basement of the home, which is in desirable Southeast Portland, an older neighborhood with few new construction projects. So his go-low pricing strategy was a gamble, one his real estate agent initially counseled against.
“It creates a havoc that doesn’t serve anyone well,” says Rebecca Walter, Hickman’s agent at Redfin. A low asking price doesn’t necessarily increase what buyers offer, she says, since they are more willing to compete on other terms of the contract, such as paying all cash for the purchase or waiving the inspection to speed the sale.
In residential real estate, the asking price is often as much about psychology as it is reality. Michael Seiler, professor of real estate and finance at The College of William & Mary in Williamsburg, Va., said that most homebuyers don’t realize that setting an asking price is primarily a negotiating tactic. “When you set a list price, you’re sending a signal to the market,” he says.
Mike McCann, a real estate agent with Berkshire Hathaway HomeServices, Fox & Roach in Philadelphia, says pricing can be “a delicate balance.” Most sellers overestimate the worth of their home, he says, and some agents will start with a too-high price to avoid hard feelings. Others agents may start high just to get the seller’s business or, conversely, they’ll price too low for a quick sale and commission, he adds.
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Most agents say that getting sellers to start with a realistic asking price is one of their biggest challenges. Steve Beckman spent $150,000 on renovations to his 100-year-old farmhouse in Ojai, Calif., which he purchased for $325,000. When selling five years later, Beckman, a 61-year-old retired landscape designer, asked $500,000 — with both financial and emotional factors coming into play. It sat on the market for almost 1.5 years, eventually selling for $242,000, far less than he and his wife, Mary, had wanted. “We didn’t even get a nibble at the asking price,” says Beckman. “Nobody cares what you paid for it.”
Large gaps between the asking and sale price are somewhat uncommon, says Stan Humphries, chief economist at real estate website Zillow. In May, median sale prices were only 3 percent lower than asking prices in 35 metro areas across the U.S., according to a Zillow analysis. Separately, real estate agents surveyed by the National Association of Realtors said that only 3 percent of homes sold for less than 23 percent below the asking price in 2013; and only 2 percent of homes sold at 12 percent or more above asking price.
Homes without comparable sales data often see the widest price gaps, says Prof. Seiler. If the property has historic value, for example, is set on a unique plot of land or has a one-of-a-kind design, it can be more difficult to price. Without comparables, “an appraiser will have no clue what a property is worth and a buyer wouldn’t know either,” he said.
Comparable prices become less relevant when inventory in a desirable neighborhood is unusually low. “This creates a real feeding frenzy for real estate,” Humphries says.
No one claims to fully understand the psychology of pricing. But some common practices have emerged. For example, research has found that an exact asking price, such as $795,475, often indicates that the price is less negotiable than a round number, such as $800,000, Seiler says. “Those using precise pricing show confidence in the price,” he says.
Additionally, pricing at $999,900 rather than $1 million influences buying decisions on a subconscious level. The home “seems way cheaper,” according to Seiler. And even when a home sells above asking price, the initial lower asking price can make buyers feel like they are getting a great deal. “The goal is to make it stick in your head that you’re getting a bargain,” he says. “It’s the way our brain looks at numbers.”
Developer Sebastian Rein took that approach when he priced a home in the Mar Vista neighborhood of Los Angeles at $2.995 million — just $5,000 less than the intended $3 million price tag. The strategy got the property “a wider audience,” he says. The 4,400-square-foot home sold within a week at $3.1 million. “When you come to market, you have a month or six weeks before it starts to fade in people’s minds,” says Rein, who listed the property with L.A.-based Partners Trust. “There’s a velocity you have to achieve when you come to market.”
Of course, unplanned events can sometimes trump price. This January, Karen and Curtis Spillers put their five-bedroom, 1910 home in Wilmette, Ill., on the market for $835,000, a price they considered aligned with the market. Then, a winter storm dumped close to a foot of snow on the ground during the open house. Despite the weather, over 100 people showed up, says Spillers, 53, a technology public-relations executive who bought the home almost 25 years ago.
Within 24 hours, the couple had five offers, eventually accepting a $900,000 bid. They credit the timing: Coming on the market in January meant there was only one other home for sale in their Chicago suburb, which has highly rated schools. The couple, now living in St. Louis, didn’t expect to get a premium on their asking price. “We couldn’t have been happier with the results,” she said.