The list price you choose serves two purposes:
One – Get people in the door &
Two – Be high enough to not compromise your best possible outcome.
Sellers often think the best way to choose a list price is determine the true value of a home, and then add some or a lot of negotiating room, but this is flawed thinking. I will get back to why this is so, at the end of the article.
To pick the correct list price, review the comparable sales, homes currently in escrow and homes currently on the market. Make an honest assessment of what you think the “Best Possible Outcome” might be. Envision the scenario where you find the perfect buyer, the stock market and consumer confidence stays high and interest rates stay low. Then assume that the sun, earth and the moon align to give you the perfect outcome. What would that price be? Then set your list price there or just above. Maybe $5,000 or $10,000 higher, but not more than $20,000 higher.
Why do you not want to list higher than the “Best Possible Outcome”, or just a smidgen higher? Because the higher the list price rises above the “Best Possible Outcome” the more marketability is reduced. An accurate and attractive list price is one of the most important marketing decisions. It directly affects how buyers perceive a listing. Buyers know when a listing is well priced and this attractive list price creates a “buzz” about a listing that generates excitement and offers.
Setting the list price is a balancing act between the increased marketability and showing activity as a result of a correct list price, and protecting a seller’s “Best Possible Outcome”. Once a list price is high enough to protect the seller’s “Best Possible Outcome”, raising the list price above that figure produces no additional profits, and just reduces marketability. The result, less serious offers or more likely, no offers at all.
“But don’t you worry about a getting a low offer, and not having room to counter?” a seller might ask me. No, this is not a problem at all. A low offer can always be countered or outright rejected. A low offer is still a vote of confidence from the buying public. Even if a buyer is trying to get a “deal”, they will always write an offer on the best listings, so just ignore the low offer and take it as a compliment.
As a seller do you need a lot of negotiating room? The best way to answer this question is to look at the sales data your agent provides to you. The closed sales will show the list price and the sales price. Go down this list of sales and look at how much buyers actually negotiate. What you see is that most listings sell for between full price or slight overbid to no more than $20,000 off the list price. Now keep in mind this is for your average tract home in the Long Beach area. There of course is the rare exception, but large differentials between list price and sales price are very rare, and in certain tract markets non existent.
Estate neighborhoods may have more negotiating room, but the process still applies, just with slightly larger numbers. This is due to less homes for sale, and there being a greater range of potential value for a custom homes with less direct competition.
Now to get back to answering the original question asked at the beginning of this post, “Why don’t I, as a seller, want more negotiating room”, meaning greater than $20,000. Well if out of 20 sales that may have occurred, for homes like your in your neighborhood, none have sold with greater than $20,000 of negotiating room (and this is very typical), then we can use some inverse logic that proves lot of negotiating room will have fatal results.
If no homes in your area have sold where the buyer and seller negotiated more than $20,000, then if the list price of your home is more than $20,000 above where it is likely to sell, then nobody will buy it.
At this point seller will usually wonder, “But why would they not at least make an offer?”. This is a very valid questions. The answer lies in the nature of Real Estate market. In a tract neighborhood, prices have a relatively narrow range of value. As an example, if a buyer is looking at an original three bedroom, 1 bath home in Los Altos, the range may be only $100,000 or less between an absolute Dog Fixer, and a complete Gem of a home. $20,000 makes the difference between your home looking interesting, but not being the Belle of the Ball. $20,000 in mis-pricing most often results in your home being considered, but ultimately it is passed on for the more accurately prices listing.
This becomes even more critical when your home is a at an important price break point. Let’s say you believe the “Best Possible Outcome” for your home is $480,000 – $500,000. If your home is listed for $499,000. Then your home is compared against homes between $450,000 and $500,000. Your home will look like a top performer. If you are priced at $519,000 to allow for negotiating room, your home will be compared against homes in the $500,000 – $550,000 range, and while you may have a nice home, it is likely that buyers will make offers on other homes, especially since these are buyers that can go higher.
What I say applies to tract neighborhoods where there is significant inventory, and homes are more similar to each other. If your home is in a custom area which is exclusive with VERY few homes on the market, then an accurate list price is less critical. If for instance there are only 3 or 4 homes for sale in your entire neighborhood, then it is likely that people will see your home and make offers, even if they feel it is a bit too high. So of course there are exceptions to the rule. The key is knowing how and when to apply these rules, and when to bend the rules to your advantage.