Friday, January 18, 2013

Pricing 101: why you have to get it right the first time.

Even the smartest sellers are sometimes rather optimistic about what their homes are worth.

And they figure they might as well start high because they can always drop the price later if the place doesn’t sell.

Here’s the problem:

Whenever a new property comes on the market, there is a pool of buyers out there who have already seen everything available, have a good idea of where the market is, know exactly what they want, and are ready to buy.

These people are well informed. They’ve probably been all over Streeteasy checking sold prices of similar properties, and if they haven’t, their brokers have. If a sale isn’t made to one of these buyers, the seller has to wait as more buyers enter this pool.

But this new group of buyers will know that the property has been on the market for a while. They figure either something’s wrong with it or else the price is too high.

If nobody else has been willing to pay the price the seller wants, why should they?

When a knowledgeable buyer walks into an overpriced property—assuming he’s even willing to look at it—instead of noticing the good points, he’s noticing the flaws. And what’s going through his head is going to be something like, “They want $2,000,000 for THIS? Who are they kidding?”

Even if the apartment or house has everything he wants, he’s not even going to make an offer. The seller is obviously unrealistic, so why bother? The buyer knows that if the seller is serious, the price will come down.

But when it does, buyers will know its history. It’s like looking at a jacket on a sale rack. If it’s drastically reduced, maybe there’s a button missing. Maybe it’s going out of style.

Maybe this house has mold. Maybe this apartment has noisy neighbors, or the building’s financials are questionable, or there’s some other flaw that’s not immediately obvious.

If the price is dropped a second time, the effect is even worse. And the longer it stays on the market, the more shopworn it gets.

In a falling market, this is not just bad, it’s disastrous.

In the early ‘90s, when the market was more or less in free fall, many sellers made this mistake. I remember one listing in particular. It started out with an asking price of $1,250,000—about $250,000 over market.

After a few months, the price dropped to $1,200,000. But by that time, its market value was more like $950,000. After further drops, it finally sold for $850,000, or $150,000 less than it would have brought if it had been priced properly in the first place.

Too many times I’ve heard sellers say, “I just think somebody’s going to walk in here and fall in love just like we did.” Sure they are. No question. But nobody’s going to love it enough to pay more than it’s worth.

Underpricing is not such a great idea, either. For a while, brokers were purposely underpricing properties, getting numerous offers at the first open house and then asking the buyers for their “best and final” offer by a given time.

Bidding wars are not fun for anybody, especially the ones where the offers are over the asking price. It’s true that some bidding wars end happily with a quick sale, well-satisfied sellers and buyers who are glad that at least they got the property they wanted.

But far too often, the result is bad feelings all around and no signed contract.

The unfortunate result of many bidding wars is that in the heat of the moment, buyers bid over their heads. Or if they win, they worry that they’re paying too much. After all, nobody else wanted to pay that much. And in the cold gray light of dawn, they walk away before signing a contract.

And by that time, those others who made offers have moved on to other properties, and the seller and broker have to start all over again.

I made a more or less random and completely unofficial study of 109 co-ops in Manhattan that sold for more than $1,000,000 in the past six months, in order to see the differences between the last asking price and the price the property actually sold for.

Seventy six of them, or about two thirds, sold at prices within 5% of the asking price, either over or under. Twenty five of them, or about a quarter, sold at or above the ask.

Overall, both the average and the median differences were a minus 4%.

Clearly, the lion’s share of apartments that sell are the ones that are priced at or very close to their actual market value.

So how do you figure out what that is? Check this post: How to price

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