How to Price a Home in an Accelerating Market

While the notable gains in the housing sector are helping to boost the national economy, this isn't exactly breaking news.  However, there's always a lag between what buyers and sellers discover for themselves versus what real estate professionals have seen for well over 12 months.  The challenges are now well documented:  A substantial lack of inventory combined with buyers eager to take advantage of historic low interest rates is creating a somewhat frenzied environment ofcompetitive offers.  The logical product of this equation is accelerated home prices.

But how do you know how fast (or slow) prices are increasing?  In a market like this, end of month sold data is almost too old to rely on as the most current barometer.  Tracking the current asking prices of comparable properties can help.  However, because there is no single globally accepted formula for determining a house's market value (just ask Zillow, Trulia, or any appraiser), list prices remain in the realm of fantasy until a buyer comes along and magically transforms a list price to a purchase price.

So what is a Seller (or REALTOR) to do?  How do you price a home in an accelerating market?  If you strike up a conversation with someone who has seen hot markets in the past, you'll inevitably start talking about "testers".  Testers are listing agents who understand how markets and greed work.  Sellers typically want 2 things:  1) best price/terms for a sale in the 2) shortest amount of time.  Testers acknowledge this and will also have the tough conversation with a Seller to properly prepare them for a competitive market (see my companion blog Properly Preparing Buyers For Competitive Offers).  Part of that tough conversation is discussing the dangers of over-pricing (aka getting greedy).  When a home first hits the market, the first 2 weeks are by far the most critical since every pre-qualified buyer is scanning the MLS hourly (or every 15 minutes as our MLS updates the public side of things).  These are also buyers that have likely already lost out on other listings and have learned to act quickly when a desirable property pops up.  With that kind of attention and motivation, you want your house entering the market with the very best first impression possible.

What are the components of a great first impression?  Yes, photos, virtual tours, snappy descriptions, and other enhancements are critical.  However, price is one of the first terms selected in a search. In a hot market, buyers aren't necessarily looking outside of their pre-approved purchase price.  If your home is priced outside that range, it won't be seen.  You need to know where the bulk of the buyers are in any given price range and shoot for the highest price in the most populous segment so you get the greatest exsposure to the eyeballs that are most-likely-to-buy.

The secondary skill that good Testers employ is pre-agreeing (in writing) that if the house does not hit a benchmark number of showings within the first 7 days - the home will automatically be reduced to a more aggressive price.  That benchmark number is the average number of showings it takes to get a contract.  Any longer and the immediately qualified and action-oriented buyers will have moved on and the home will inevitably languish and likely sell for an even lower price. 

Generally, I'm a "price-it-right-from-the-get-go" kind of REALTOR and rely on aggressive pricing to create competitive situations to generate over-asking price scenarios regardless of whether it is a buyer-favored or seller-favored market.  Yet in an environment like we're 'enjoying' right now, the fear of leaving potential net proceeds on the table fuels Sellers to ask perhaps more than the market will actually bear.  A good Listing Agent can exercise good judgment, employ a prudent 'testing' methodology, and create a win/win for sellers and buyers alike!

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