Overpricing can happen and does all the time. But what about underpricing a home? The answer may surprise you.
What goes into pricing a home
Pricing isn’t as simple as looking into a crystal ball. It takes an agent’s extensive experience and detailed market knowledge to appropriately set a home’s listing price. These are the most important factors:
The concerns with overpricing
“What’s the harm?” you may think. There are several concerns, and none are beneficial to a seller. First and foremost, an overpriced home will sit and toil on the market. Have you ever seen a home with 193 days on the market? What thoughts go through your head? Something must be wrong with it … It’s overpriced … Is on an old burial ground? … I bet the seller’s getting desperate …
None of those thoughts in buyer’s minds are good for a seller. The home becomes stale, and instead of the list price helping that home sell, it’s simply driving people to decide to buy other homes around it. Worse yet, an overpriced listing almost always sells for less than it could have if priced well — sometimes tens of thousands of dollars less …
Perception vs. Reality
In general, people would prefer overpricing to underpricing a home. Why? One of the biggest reasons is the psychological feeling of having some “wiggle room”. Understandably, people don’t like to feel that they do not have options, especially when they themselves are the ones choosing the listing price. So they opt to price it above where it should be.
The process of buying a car is an analogy often used in real estate. The assumption is that cars are overpriced and therefore there is substantial wiggle room. Some may view having less “negotiating room” as a sign of weakness. The truth is, there really aren’t many other things in American society that we negotiate on with a seller — we don’t haggle with the gas station clerk, put the squeeze on the butcher, or tell the clothing store that they need to drop their prices. It’s just cars and homes, so why not approach them the same way.
While indeed counter-intuitive, selling real estate is different. Nothing else being sold has a known market time — a clock showing how long it has gone without selling. And no sale is more important to most people than their home. Know how long that laptop you’re eyeballing has been sitting there? Has that sedan been languishing at the dealership for 10 months, or perhaps just a few hours? You don’t know, and honestly, you don’t care. Reason: the value of the car, the laptop, etc. are not adversely affected by the knowledge of how long someone’s been trying to sell it. With a home, it absolutely is. Unnecessary wiggle room can be deadly.
What does “underpricing a home” mean?
Underpricing a home would generally mean that a list price below market value would cause a home to sell for less than it could have if priced higher. Bottom line, it rarely if ever happens. Why? Because buyers will respond with emphatic exuberance in the form of showings, and LOTS of offers — as more offers come in, the offers keep getting better. In the end, with the guidance of a knowledgeable and experienced realtor who can leverage the situation for maximum benefit, the home will almost invariably sell for top value.
Should a seller underprice their home?
Although there is not a substantial downside to it, I do not recommend underpricing a home. There isn’t normally a need to. I always recommend that a home be priced as close to market value as possible as it will generally maximize the chances of the seller netting the most money, getting the best overall terms, and minimizing their headaches.
My focus is always on what will help the seller net the most money from their sale. Period, end of story. Selling a home can be a challenging, emotional, frustrating journey. The best way to remove those hassles is to price it exactly where it should be. If even with multiple offers, buyers do not drive the price above the listing price, the home wasn’t “underpriced” to begin with.