There are all sorts of methods for pricing a home and they all work during a boom market.  But not now.....Now it is time to find out which methods for pricing actually attract buyers, which actually attract listings and which are just plain funny.  I have heard at least three different ways to price homes and I like one of them because it works.  It has never failed me in selling a home or piece of land when the seller has been willing to take my advice about price.

Method Number 1:  Pricing for a Dark Age

One popular method listing agents use to generate a price for your home is to price your home based upon where your current active competition has priced their homes.  I first heard of this method in a class taught by a very old school agent who was retired but still teaching the state required real estate class for new agents.  He argued that since home shopping was done by comparing homes a buyer would purchase a home which is priced just below its competition.

As I have thought about it, that method of home pricing would probably have worked before Al Gore "invented" the internet (lol).  So what my teacher was saying would have made sense when he was at the height of his practice.  Back in the "dark ages" buyers didn't necessarily have access to the prices of every home available on the market.  They only knew the prices of the homes which they had seen.  It was the agent who had the book and controlled the flow of information to the client.  This wasn't a good or bad kind of situation it was just a reality--like life before copiers.  Real estate offices and publications were the places buyers went to get prices.  The internet has destroyed this practice and made it seem Byzantine.  Today's internet savvy buyer has a whole range of tools to do price comparisons without having to see homes.  In doing so, the internet has introduced a whole new level of rationality in our pricing and made pricing based upon comparisons of on market homes obsolete.

Let me explain that last statement.  The pricing of homes on currently the market is not necessarily rational or based on what the market will bear.  Think about this, the more over priced a home the more likely it will be on market when you go to price your home.  If you only use on market comparables you are likely to overprice your own listing.  Before the advent of the internet, niche markets worked because buyers didn't have access to all the listings on the market.  They told the listing agent what they wanted to see and the listing agent took them to houses which matched their criteria.  However, no buyer is set on every feature of a particular niche market and the internet allows buyers to get information on what they would pay if they were willing to move away from their current niche and into one which has more rational pricing.

So how does irrational pricing take place in the real world if you price homes based upon what is currently on the market?  Let's look at an example.  Let's say that in a given market there are 5 homes of 2000 square feet which have four bedrooms two and one half baths and a three car garage.  They all have the same or similar value in fixtures.  They are truly comparable homes.  They are all priced right around $375,000, some a few thousand higher and some a few thousand lower.  According to the active comparison method of pricing, it would seem to make sense for a highly motivated seller to price a home at say $369,000 just below the competition.  If the comparison method worked the home should sell to the first buyer who needed what these homes offered. 

However, what the seller and listing agent do not know, is that a price of $369,000 is still $10,000 over market.  Each of the homes on the market in our example is over priced by at least $10,000 compared to other homes on the market.  This means that these homes are sitting on the market while homes in other niches are selling instead.  In fact in our fictional example two of these homes have been on the market for over six months and the rest have an average of three months on the market.  Buyers who have the information provided by the internet are making the necessary compromises and finding something else which is priced appropriately. 

Of course, if the seller had listed a week earlier they might have gotten the pricing right because there were two other comparable homes on the market which were priced at $359,000.  In that case, the motivated seller might have priced at $355,000.  However, those homes both sold quickly because they were priced correctly compared to the other parts of the market.  Because they sold quickly, they are now pending rather than active on the market.  In fact, although there were at the time 7 comparable homes on the market, one of the homes which sold last week in our example actually received two offers after being on the market for less than a month.  (I have seen this several times this year.  Homes which are priced correctly receive multiple offers while many homes sit on the market for months without any showings.)

You might argue that my theory makes great sense in the world of theory but that I still haven't given you an example from the real world.  Let me do so from my market.  During the recent boom years Prune Hill in Camas Washington was the flavor of the month for Clark County.  There was high demand for these homes and the often received a significant premium perhaps 5% to 10% above their competition in Vancouver or other areas.  As the market has cooled over the last year, so has the demand for Prune Hill.  With more homes on the market many buyers are finding that they can get the homes they want in Vancouver without having to pay the premium of Prune Hill.

(The Home I sold on Prune Hill) 

Correspondingly, Prune Hill has seen one of the bigger declines in home prices over the last year.  In order to sell homes on Prune Hill you have had to bring your prices in line with the wider market.  Many sellers on Prune Hill have not understood this and so have sat on the market without getting a sale because they are still trying to maintain the premium they received during the boom.  If you use the active comparison method to price your home on Prune Hill you could easily end up with a price that is well above market.

Method Number 2:  Voodoo Home Selling

The second method of home pricing was explained to me during a seminar I took in the fall of 2005.  This one I really don't like.  I think that it panders to sellers and completely ignores economics.  The theory goes something like this.  When you price a home you need to consider how many homes are selling in that price range and target your home to a reasonable price range which is near the value of your home but has the most available buyers.  This theory argues that you might actually have to increase the price of your home in order to get showings and sell your property.  (I had to actually work hard to keep my jaw from falling to the floor when I heard this.)

What a comforting thought for a seller!  They actually are not getting showings and offers because they are priced too low, and if they go up in price and align themselves better with their neighborhood or a higher percentage of the buyers etc. they will sell their home faster.  The theory goes that the right buyers are not seeing the home because it is priced below them.  Again this might make sense in the dark ages before the internet.  Agents might have assumed that the home was a dump and so they might not have shown the home.  However!!!  You cannot expect me to believe that with the advent of the internet that a buyer who can only afford Formica is going to miss an under-priced home which offers granite when it comes up for them on Windermere.com?  If your home isn't selling there is only one direction for your price to go--down.

Method Number 3:  Sold Comparables

I believe the most accurate method for pricing a home is to find comparable homes which have already sold.  The only way to guarantee a rational price for a seller's home is to find out what buyer's have actually paid for that home.  Only once you have done that should you consider how your active competition has priced its homes and if necessary adjust your price slightly in order to compensate for your competition.

Let me give you an example from this fall.  The summer was a little spooky in the Vancouver Washington real estate market.  There are over 2000 real estate agents registered with the Clark County Association of REALTORS.  However, there were only 700 recorded MLS transactions in July and just a few more in August.  That means that many of us were starving.  (The fall has been better.)  At the time we had nearly 6 months of inventory on our market and any home which wanted to sell had to stand out from the crowd.  In September I received a listing from a relocation company.  (That's another subject! Grrr!)  Anyway, I looked at the pricing and based upon the sold comps I felt that an appropriate price would be $239,000.  The home also offered a true cherry hardwood floor which was a significant upgrade for the neighborhood.  Because both the seller and the relocation company were motivated to get rid of the home I had considered dropping the price below where the sold comps had come in, in order to give incentive to the buyers.  However, I decided that I would price the home right at $239,000 and depend on the home's cleanliness and great flooring to provide the needed incentive.  It worked very well and I had a sale within a month while I know that other comparable homes at the time had hardly a showing.

(This is a picture of the home I sold this fall.)

Again there is only one way to get a reliable price.  You must work from comparable homes which have already sold.  Homes which are still on the market are there for a reason.  They are too expensive in their current location and at their current quality to generate a sale. Any other argument is more about mollifying an angry seller and not about generating a sale.

Of course what this article has not talked about is those two important words hidden in the last paragraph-Location and Quality.  But those are a topic for a second and third post.  For now, remember homes do sell in a buyer's market!  If you are willing to price it based upon sold comps, yours can be one of them.  Questions?  Feel free to email me or give me a call.