“The Psychology of Pricing To Achieve Top Dollar for Your Home” by Nick Pallis ©

NickPallis-057The conversation begins like this – Listing Broker: “We need to lower the list price of your home.” Seller: “If it’s a matter of price, why don’t buyers just make a lower offer?”

If there is a bane to every Real Estate Brokers existence, it’s explaining why over-pricing a home leads to one of the greatest deterrents to selling a home for top dollar. Because psychologically, the closer a home is priced to the market’s true “perception” of value, the higher the eventual closing price. Let’s examine why.

In a previous article about negotiating residential real estate, I address the issues associated with making emotional purchases. I explain that whether buying a stick of gum or a shiny new car, at its core, making a purchase is an emotional decision and yet, when it comes to buying or selling the place we call home the emotions can run especially high.

For buyers and sellers alike, the two primary drivers affecting a decision to buy or sell, are 1) the desire for gain and 2) the fear of loss. In that same article, I write about the importance of considering the self interest of the opposing party, in this case if you’re a seller, it means considering what prospective buyers will be feeling as they walk through your home. Recognizing that buyers buy based on emotion first, then justify their decision with logic, how much will the home stand apart compared to the others they are looking at given its price point and what kind of emotional connection will it create?

For a moment, let’s imagine ourselves in the buyer’s position. We will likely tour dozens of properties of varying quality and condition, then naturally gravitate toward those few homes most appealing to us within our predetermined price range and finally, make an offer on one of those homes at the top of our list. The point here, is that as long as a home is in our price range, the chance of us choosing a home that is not one of our top picks based on comparable quality and condition are next to nil. So for the seller, the only tool at their disposal to control how their home stacks against the comparable competition within a given price range, is to make sure it’s priced similar to those few homes most appealing to us, the buyer, at the top of our list.

So back to our seller’s original question of: “…why don’t they just make a lower offer?” At this point in the buyer’s decision process, it’s all about “the house” and how it compares to every other home the buyer can “already afford,” within their pre-determined price range. If a buyer is looking for a highly desired, “blue triangle” and your house is perceived as a lesser desirable, “green square,” they’ll have no interest – even at a lower price. Also if your home is overpriced, the buyers that would otherwise be interested in making an offer at a lower price are unaware of the home, because it, along with every home in its price range is higher than what they can or want to afford and their agent will not bother showing them those homes, including yours.

So here’s the key. The single most important goal as a seller should be to price the home so that it is positioned within the top three choices within the comparable marketplace. The reason for this is twofold. 1) By placing it in the top three choices, there’s a much better chance of attracting an offer within the first third of the average number of days its takes for homes to sell in that neighborhood (average days on market), and furthermore, 2) this increases the probability of simultaneously attracting more than one buyer prospect, both of which drive the final selling price, higher.

For example, if the average days on market is 90 days, pricing the home in the perceived top three choices for the typical buyer dramatically increases the chance of attracting an offer within the first 30 days. For a high-end estate, the average days on market may be closer to six months and thus, a corresponding two months to receive that first offer would be the goal. The benefit created is an elevated negotiating position to command closer to, if not full asking price. It’s proven time and again that the longer a home sits without an offer the more it stagnates, becomes shop worn and ultimately ends up selling for a lower selling price. This is because the later an offer is presented in the sales cycle the lower the dollar amount of the offer and moreover, these offers rarely have to compete with other offers. As the saying goes, “you never get a second chance to make a first impression,” and in this instance, it’s all about creating interest from the onset.

To the second point, the earlier a buyer submits an offer during the listing process, ie, the first 30 days in our former example, the greater the probability of either a) simultaneously attracting more than one buyer, or moreover at the least b) the perception that there’s likely a second buyer interested as well, even if there is not. Again, this creates a substantial negotiating advantage for the seller.

So the psychology behind this pricing strategy is to create momentum, demand, excitement and competition for the home when it first hits the market, which brings us back to our original premise that, 1) buyers buy based on emotion first then justify there decision with logic and moreover, 2) every buyer has a desire for gain and a fear of loss. Positioning your home as one of the top three choices in the comparable market given its price range allows us to tap into the emotional drivers of our pool of prospective buyers.

There’s no better evidence to the effectiveness of this pricing methodology than what took place during the build-up of the real estate bubble in the mid 2000’s. Unfortunately due to loose lending practices, this was a time when there were more financeable buyers than available homes. In representing a sellers best interest, Brokers strategically priced properties at the artificial low-end of perceived value, then purposely held off on accepting offers for several days or for up to a couple of weeks. This created a feeding frenzy, setting up multiple offer situations with built-in escalator clauses which drove prices well above list price and to a much higher level than otherwise would have been achieved had they initially priced the home higher. Although over-priced homes eventually sold during those times, they did not garner near the price run-ups of the lower pricing strategy as described.

The psychology behind this pricing model works extremely well in a sellers market, and yet, it is the de-facto, proven strategy for achieving top dollar in “every” market. The difference in a buyers market however, is that even with multiple offers, there is a resistance for most buyers to pay more than the full asking price. So in a strong “buyers market,” pricing it low enough to adhere to the strategy but high enough to attract close to, if not full asking price without leaving money on the table wins top dollar every time.

Now, there are two final points to effectively pricing a home for top dollar. First, hire a competent broker to best determine the pricing “sweet spot” for your home. That’s crucial. Second, to the degree a home is prepped for the market, ie, de-cluttering, cleaning, painting, staging and landscaping, will dictate to the extent in which the buyers’ emotional drivers will be peaked when viewing your home. This in effect, determines whether a home can be listed at a wholesale or a retail price point and is the topic of next month’s article entitled, “Wholesale vs. Retail Return on Investment, A Case Study in Selling Your Home.” Happy selling!

Nick Pallis is a Broker with Windermere Real Estate located in Kirkland, Washington, serving Seattle’s Eastside communities. Visit www.nickpallis.com.