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Five Mistakes Sellers Make When They Price Their Home, and the One Big Mistake They Make Afterwards

Five Mistakes Sellers Make When They Price Their Home, and the One Big Mistake They Make Afterwards

You’ve decided to sell your home. Now, you have a lot more decisions to make, like hiring an agent, creating a marketing campaign, or deciding on the work you need to do to “stage” your home.

But your most important decision is simple: price.

The nice part about pricing a home is that in most of the country, the real estate market is pretty transparent – you can get really good information on what comparable properties have sold for, and what competitive properties are selling for. It’s not like buying a car, for example, where you have no idea what other people actually paid for their cars.

So it’s easy, right? Well, not so much. Even in hot markets, many sellers find that themselves languishing on the market for months, often because they made bad pricing decisions. In most cases, it’s because they made some simple mistakes when they priced their home, or one big mistake afterwards.

Mistake #1: They Price to the “Unsolds,” rather than the Solds.

The biggest mistake most sellers make is pricing their home based on what’s for sale, not what’s sold.

Every comparative market analysis is based on an analysis of two types of properties: the ones that have sold, and the ones currently on the market. You need to consider both when you’re pricing your home, but for different reasons: you look at the sold comparables to get a sense of what your home is probably worth, and you look at the unsold listings on the market to get a sense of the pricing you need to beat.

But too many sellers ignore the solds and price their home according to the “unsolds” – the listings that are currently languishing on the market. Think about the logic of that. You’re trying to sell your home. So why would you price it based on homes that are UN-sold? If you price it the unsold homes, you’re just going to join them.

No, you price according to what has sold. That’s the “market price.” The only reason you need to look at the unsold properties is to figure out what you need to do to beat the competition. In fact, those unsold overpriced homes are great at making your lower-priced home look like a bargain, sort of like when Amazon shows you a higher “list price” on a gadget to make the sales price look like a steal.

If you want to get sold, price to the solds. If you want to be unsold, price to the unsolds. Your choice.

(By the way, agents don’t help matters by calling unsold homes “actives.” Stop that! It’s just sitting there, doing nothing. What’s so “active” about that?)

Mistake #2: They Overvalue Their Amenities.

Another mistake sellers make is that they put too much faith in the value of unique amenities: granite counters, bathroom finishes, high-end appliances, etc.

I was once talking to a seller about how his home was priced over $200,000 more than a very comparable property just down the block. His answer: “well, I have a sauna in the basement.” Okay, but you can put a sauna in your basement for about $10,000, and it’ll be brand new, without anyone else’s dried-up leftover sweat in it. And this guy was pricing it as a $200,000 value!

He’s not alone. A lot of sellers make that mistake. Psychologists even have a name for it – the “endowment effect,” which is our tendency to overvalue things just because we own them.

Amenities do have value, just not enough to make a big difference in price. The old joke in real estate is that value is based on three things: location, location, and location. (I said it’s an “old” joke, not necessarily a “funny” joke).

And that’s mostly true. The biggest factor in pricing a home is location, which is obvious to anyone who has priced out a Manhattan apartment. After that, you look at size – how big is the home? And then once you know location and size, you can pretty much establish a general pricing range. That’s when you start looking at all the other aspects of the home: style, condition, lot quality — and the amenities.

So amenities are important, because they can change where you on in that range. But they don’t move you up to a new one.

Mistake #3: They Try to Get Full Value for Their Improvements.

Not only do many sellers overvalue their amenities, they particularly overvalue any improvements they made in the home.

Let’s say you bought the home for $500,000 ten years ago. Five years ago, you spent $50,000 re-designing the kitchen. Then two years ago, you spent $25,000 on roof repairs. So at the very least, even if the home hasn’t appreciated in value at all, you should be able to sell the home for $575,000, right? Haven’t you improved the house by $75,000 with all the work you did?

Not really. You never get 100 cents on the dollar for the improvements you put in. If you don’t believe me, check out the results of Remodeling Magazine’s yearly “Cost versus Value” report, which tracks the impact of standard remodeling projects on resale value. In most cases, improvements earn back about 60-70% of what they cost.

Why? Think of it this way: almost every thing you’ve ever bought has gone down in value since you bought it: cars, computers, pianos, anything. Once it’s “used,” it starts to depreciate. Right?

Well, that doesn’t change just because you took that thing and stuck it inside a house. Even if your house goes up in value, that doesn’t mean that everything in the house goes up in value, too. That refrigerator you put in went down in value. Those cabinets went down in value. The new roof went down in value. They’re all “used” now, just like your car is “used.”

In a good market, houses go up in value. But the stuff in them doesn’t.

Mistake #4: The Price Based on What They “Need” for Their Purchase.

Sometimes, sellers make the mistake of pricing according to the next home they want to buy, not the home they own now.

That is, they don’t even look at the comps. All they care about is what they need on the down payment on their next home, and figure out the price from there: “Let’s see. I still owe $200,000 to the bank, and I need $100,000 as a down payment for my new home, so we’ll price it at $300,000.”

Here’s the problem: no one cares what you need. It’s nothing personal. After all, you do the same thing. You might be buying a home after you sell this one, right? And do you care what the sellers “need” for their next purchase? Not so much.

Markets don’t work like that. Buyers don’t price your home in a vacuum: they make offers based on what other homes have sold and are selling for. Real estate provides an open and transparent market, so you can’t price your home according to your personal needs.

It works both ways. If you get an offer that’s too low, you don’t really care if the buyer says, “but that’s all I can pay!” You don’t give a discount based on need, so you shouldn’t expect a premium, either.

Mistake #5: They Fall in Love with Their AVM.

Finally, sellers make the mistake of relying too much on a “Zestimate.”

At least, they price their home according to the zestimate if it comes in really high. If it comes in low, then it’s obviously just a stupid computer glitch and can be safely ignored.

And it’s not just the Zestimate. Automated Valuation Models, or AVMs, are available everywhere now, including on a lot of broker websites. They’re fun in a “real estate porn” kind of way.

But you need to understand that AVMs were designed to provide quick and easy macro-level valuations for institutional investors who didn’t have the time or ability to do a detailed analysis. No one thinks that they’re as accurate as an actual comparative market analysis from a professional real estate agent or appraiser, not even the people who created them!

After all, Zillow itself admits to a national median error rate of about 8%, which means that half the zestimates are off by more than 8%. So for homes with zestimates of, say, $400,000, only half those homes are going to sell inside a range of about $368,000 to $432,000. The other half is actually worth more or less than that range.

But think about how you’d feel if an agent came to your house and said, “well, my advice would be to price it somewhere between $368,000 and $432,000, and I’m confident that we have a 50% chance of selling it within that range. Yay for me!”

Would you have a lot of confidence in that agent? Well, then, don’t fall in love with that AVM.

And the One Mistake They Make Afterwards….

 

Finally, even if sellers avoid the five big mistakes when they’re pricing their home, they can still make a mistake afterwards – namely, they “set it and forget it.”

Even in the best of circumstances, your initial home price is a guess. Pricing is both an art and a science, and you never quite know exactly how the market is going to react when you list your home.

Indeed, from a pure “Economics 101” perspective, it almost doesn’t matter where you initially price your home, because the market is going to “correct” you. If you price it too high, your home will languish on the market as buyers take a pass until you reduce it. And if you price it too low, you’ll drive intense buyer demand that can drive the price up over asking. Either way, either through reductions or bidding wars, you end up at the “true” market price.

But those economic fundamentals depend on you actually listening to what the market is telling you. What feedback are you getting from agents? What are buyers saying? What kind of traffic is your listing getting online? Is that traffic turning into showings? Into offers? Have other homes on the market sold? What for? And what happened to the buyers who did come to look at your home? Did they buy something else?

In other words, you need to stay engaged and involved in the marketing of your home, and listen to what the market is saying. If the market is telling you something, you’d better listen.

Conclusion

With all that said, you need to remember one thing: you’re the boss. Your agent works for you. Ideally, your agent should give you all the information you need to make an informed decision on price. And, also ideally, you should consider all that information and make a reasonable decision.

But at the end of the day, it’s your home. If you want to price it to the unsolds, or price it to what you need, or get every dollar you put into it – then that’s your call. Just don’t hold it against your agent if you go against her recommendations and you’re still living in a home for sale six months later.

Editor’s Note: This was originally published in Inman Media on April 21, 2016 as “6 Massive Pricing Mistakes Homesellers Need to Evade.”

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