One of the most difficult concepts to explain to a home seller is the notion that setting a lower initial asking price for a home usually results in a higher selling price for that property.  At face value, this seems counterintuitive because the idea of lower asking prices conjures images of distress sales, foreclosures and auctions.  This paper will discuss both the theoretical and practical benefits of Right Pricing as it relates to designing a marketing strategy for home sales.

The Theory

To understand the concept of Right Pricing, it is helpful to begin with the understanding that the buyer’s perspective sets the tone, pace and price levels in any given real estate market.  Prospective home buyers typically visit a wide range of available homes before deciding on which home they wish to purchase, and what price they are willing to pay for that home.  This comparative shopping process is an expression of the economic Principle of Substitution which holds that an informed purchaser would pay no more for a home than the cost of acquiring another offering similar utility.  Put simply, buyers do their homework to develop a perspective on market price levels in each market.

With that in mind, it is easy to understand the benefits that accrue to the home seller when a home is priced competitively to its market.  Home buyers viewing that home recognize it as an example of ‘real’ pricing offered by a seller who is willing to accept a fair price for the home.  This scenario acts as a flashpoint which attracts the interest of buyers….and of equal importance, Realtors working with buyers…. which in turn serves to increase the number of home-viewings for that property.  The result of such activity is to create a Sense of Urgency, which tends to increase the likelihood of purchase offers being presented for the home…perhaps multiple offers.  In this scenario, the seller is better able to control the price negotiations as purchase offers tend to be nearer to asking price, which is more likely to result in a higher selling price for the home in the least possible time. To recap, the benefits of Right Pricing are:

• Promotes buyer & agent interest
• Purchase offers tend to be higher in relation to asking price
• Generates home-viewings
• Creates a ‘Sense of Urgency’
• Puts the seller in firm control of price negotiations
• Sets the stage for multiple purchase offers during a shorter marketing time period
• Likely to result in a higher home selling price in a the 1st 30 days of marketing

But just as Right Pricing brings many benefits to a home seller, Over Pricing can have equally powerful negative effects.

This is because home buyers, recognizing the over pricing on a home, interpret this as a seller who lacks motivation and is less likely to accept a fair price for their home.  Different from the Right Pricing scenario which creates a sense of urgency, this marketing strategy encourages buyers to take a ‘Wait & See’ stance, which over time has the effect of discouraging buyer & agent interest, reducing the number of home viewings and experiencing fewer purchase offers over time.  As this cycle plays out over time, the seller is relegated to attracting discounted offers for their home.  In fact, as the overpriced home’s asking price goes higher, the purchase offers are prone to go lower. This is because home buyers will attempt to offset that overpricing by lowering their initial offer price such that the middle point of the price negotiation coincides with what they perceive to be a fair market price.  So, a home seller who sets their asking price $20,000 above the perceived ‘fair price’, is likely to attract offers $20,000 below that price.  And as the asking price goes higher, the initial offer prices are encouraged to discount even further.

Another undesirable effect of Over Pricing is that marketing time becomes extended, which serves to delay the sale, eliminates all sense of urgency and will eventually lead to the need for price reductions.  And price reductions send a chilling message to home buyers already concerned about whether home prices will fall in the future.  Such concern

causes home buyers to wonder whether now is the right time to buy ….or…..should they ‘wait & see’ whether home prices will trend lower.  And price reductions serve to reinforce those concerns further eroding any sense of urgency to purchase.  Also important is that delaying the sale of a home in a weakening real estate market will almost always result in a lower selling price over time.

In the final stages of Over Pricing – after extended days-on-market and several price reductions – a home begins to attract interest from buyers who are looking to profit from sellers under duress.  These buyers, often referred to as bottom feeders, tend to offer deeply discounted prices for homes.  In the end, the Over Pricing scenario has many adverse effects, including:

The results of recent studies show homes that were Over Priced took longer to sell and sold for a lower price, and

were equally conclusive in that homes employing Right Pricing sold for a higher price in a shorter time.