Priced to Sell . . . or Sit?

"Leave Room to Negotiate"
vs. "Priced-to-Sell"

No realtor-client conversation is more anticipated -- or important -- than the one about suggested selling price. Every owner wants to maximize their sales price. No seller wants to feel, leaving the closing, that they left money on the table. (And no realtor wants their client to feel that way!)

So what's the best way to maximize the selling price?

Especially to people who love to negotiate, it can be counter-intuitive, but my advice -- at least when it comes to residential real estate (vs., say, oriental rugs) -- is to price to sell. That is, realistically, as opposed to at a marked-up price chosen for supposed negotiating leverage.

There are three reasons.

One. While it is true that all real estate is unique, the reality is that buyers make their purchase decisions in the context of what else is currently for sale.

In today's buyer's market, there are many more homes for sale than buyers looking. Many of these homes are destined to sit, unsold, for months. Statistically, more than 30% of the homes currently on the market will not sell at all, simply expiring at the end of the listing.

To sell in a market with lots of inventory (read, competition), a home must not just match its peers, it must stand out: in staging, condition, marketing, and . . . yes, price. Choosing a too-high asking price is the best way to torpedo the interest of prospective buyers.

As an example, take a house whose fair market value is about $250k, as indicated by the comp's ("comparable sold properties"). However, to leave room to negotiate, the owner insists on listing at $300k. What happens?

The $250k home gets compared to homes selling for $300k -- and found wanting. Instead of getting second showings and serious interest, the $300k "wannabe" simply makes the other homes in its mis-chosen peer group look better.

By contrast, now imagine that the $250k house is listed at $239,900. Instead of being outclassed, it looks like a deal. Buyers watching the market take notice, and scramble to get in to find out what the "catch" is. Once they're in, the positive surprises continue -- and so does their anxiety that someone else will snap it up first. Voila! Buyer Urgency -- a rarity in today's market (and catnip to any anxious seller --and their realtor).

In such a situation, more than one buyer can emerge, which can easily drive the selling price up to (or even past) the $250k original target price.

Two. Other Terms. While price is probably the biggest issue in a deal, other terms matter, too. Especially in the middle of a credit crisis, how much earnest money the buyer puts down, and how fast they commit to getting their financing, makes a big difference to sellers. So, too, can a swing of weeks (or months) in the preferred closing date. A Seller who is selling a home everyone wants has much more leverage negotiating other terms to their liking, and insisting on language that strengthens the deal.

Three. Post-deal Leverage. The presence of multiple prospective buyers helps the seller even after a deal is struck. No home today is purchased without an inspection. Depending on the home's size, condition and vintage, it is not unusual for a buyer's inspection to uncover several thousand dollars in possible issues.

How those issues are resolved is a matter of negotiation.

In my experience, buyers who feel they paid a rich price can drive hard bargains, expecting sellers to make generous inspection concessions to preserve the deal (assuming they don't want out altogether). By contrast, buyers who "hear footsteps" are careful not to rock the boat. (Note: if the deal does derail, the seller must subsequently update their disclosure to reflect any material defects.)

Of course, like any strategy, the price-to-sell approach has exceptions and caveats.

The more unique a home is, the harder it is to find good comp's, and the wider the suggested price range. In practice, I'll often characterize the comp's for a given property as being either "tight" or "loose." If your home is a landmark in a one-of-kind setting, you have much more latitude to price aggressively.

Sellers who insist on a too-aggressive price will often argue that they are in a better position to negotiate concessions. Buyers never pay full price anyway, they reason, so why not accommodate that instinct by building in the markdown that they're sure to expect? Plus, if someone really is interested, they're always free to offer less, anyways.

Again, the problem is, buyers don't make offers on homes they don't go through, or that they find disappointing if they do. (Ponder for a moment the observation, "if your parents don't have kids, you won't, either"). Also, although there are many buyers who feel no compunction about making "low ball" offers, many buyers in the land of "Minnesota nice" are reluctant, even when a home's asking price is obviously inflated.

With so many other homes to look at, buyers' reaction to an over-priced home can be summed up in one word: "Next!"

Arguing for a higher initial asking price, many sellers rationalize that, "I can always lower the price later." True enough, but as every realtor knows, the best and most intense interest comes at the beginning of the listing. Re-attracting buyers who weren't impressed the first time through takes a great deal of effort -- and often a much lower selling price. To their chagrin, many sellers who start too high discover that, once their home has languished on the market for months, they must over-shoot fair value on the low side to actually sell.

Finally, to work, a price-to-sell strategy has to be executed by a good realtor. Contrary to what most people think, the realtor's job is not to sell a given home (shh! . . well-priced, well-marketed homes sell themselves). Rather, the realtor's job is to make the home as appealing as possible to the broadest range of prospective buyers, then to market like crazy to generate showings and traffic.

Like the line about a tree falling in an empty forest, a real estate value means nothing if no one knows about it.