Pricing A Property

This chapter is critical for real estate investors selling properties. Make sure you read this chapter twice; it’s that important. Here is a perfect example on pricing a home. The town I live in had been fairly flat in regards to home prices for a number of years. Maybe we’re talking a 1% to 2% appreciation at best.

I had some neighbors down the street who had purchased a home with an asking price of $279,000, and they were able to negotiate the price down to $259,000. This home had recently been constructed and had been sitting for about eight months, so I’m sure the builder was anxious to get it moved. Let’s just say they got a pretty good deal on the home.

They spent $10,000 on upgrades after they moved into the home, primarily on upgrading existing landscaping and some exterior trim finish, doing the work themselves. Fast forward approximately eight months and they needed to move because of a job transfer. They decided to sell the home themselves as a for sale by owner (FSBO). Guess how much their asking price was? Would you believe $314,900? Remember, this is in a flat market.

I was visiting them one evening and they asked for my opinion. They told me what they had paid for their home and explained the extra work they’d done. When they told me their asking price, I said, “So let me get this correct. You've been in the house for eight months. You spent $10,000 doing some upgrades. Here it is eight months later and you want to make roughly $45,000 in profit (purchase price of $259,000 plus $10,000 in upgrades equals $269,000 subtracted from $314,900 asking price leaves approximately $45,000 in profit) without paying a realtor in a flat market?”

What I wanted to say to them was, “Is there anything else you want?” There was absolutely no way this was going to happen unless they were willing to stay another five to ten years or more and wait for appreciation to catch up to that figure.

I let them know they immediately needed to get this home down under $300,000 right away. They agreed and dropped the price to $289,900, which was still high but that’s what they wanted to do. I explained what might happen if there were a real estate agent in the area working with some clients.

The agent would drive by the home and knock on the door and ask if they were cooperating and paying a sales commission to real estate agents, somtimes known as a one-party listing agreement. This simply means you agree to pay a commission to a specific party who is named on the agreement. In most cases this commission is up to 3% of the sale price of the home. Most sellers are willing to do this. They’ll pay up to 3%; they just don’t want to pay 6%.

It is the job of the real estate agent who is representing the buyer to get the best deal possible for their client. Let’s suppose that agent is out showing homes in the area and not finding anything their client likes. All of a sudden they drive by an FSBO home. The client says, “Hey, what about that one over there?” The agent knocks on the door and you agree to pay them a 3% commission.

Let’s say the client loved the home. As they’re driving back to the agent’s office, they decide to make an offer on the home. I can tell you that the very first thing the agent will do when they get back to the office is to look on the multiple listing service and see what the home previously sold for, if that information is available.

They’ll easily discover the home sold eight months prior for only $259,000. As they were looking at the home, the owners may have mentioned they spent an extra $10,000 on the home in upgrading it.

What do you think the clients of the real estate agent are going to think when he tells them what they recently paid for the home and lets them know the home is grossly overpriced? They’re trying to pocket $45,000 and not pay a full real estate commission.

That’s a little unreasonable, wouldn’t you say? Who would want to make an offer at this point knowing that they’re being taken advantage of? It’s for this very reason a lot of people will use a real estate agent when they purchase a property.

Let’s take a look at why these owners were so unrealistic in their expectations. Many times this happens because of a phenomenon called romancing the home. What do I mean by that? I’m going to be brutally honest here with everyone. Everybody thinks their home is special, that their home is the greatest. There isn’t anything wrong with that. It’s your castle and you’re the royalty, right? After all, your home has tile floors, ceiling fans and knotty alder cabinets in the kitchen.

You are going to care about these things because you live in the home. You have a personal connection. However, these things are not going to matter to someone stepping into the home for the first time. Homes are a lot like children in a way--no one can love a child as much as the parents do.

When you look at a particular subdivision or area, houses are houses, and they're all worth about the same price per square foot in any given area with very few differences. Period! Of course you can have some upper and lower end thrown into the mix, but on average is what we’re talking about here.

When you go inside most people’s homes, they all have their own special features that make them nice, but it’s still just a house until you make it your home. The reality is that most people have a nice house. Do you think you’re the only one in your subdivision with upgraded carpet, Corian countertops and special curtains? Does that really make a big difference? No.

You’ll see a lot of sellers who may have put in a new furnace within the last couple of years, a new dishwasher, or whatever, and they want to try and recoup all that cost. But it doesn’t work that way. You enjoyed the benefits of that furnace and dishwasher for several years. You got your money’s worth. You simply cannot expect to recoup 100% of the cost of these items. You have to be realistic with your bottom-line pricing.

Going back to the scenario I was talking about with my neighbors. Remember, they were relocating to Virginia so they would be purchasing a home when they got there. I asked them, “When you get to Virginia and start looking at houses, are you going to pay whatever someone is asking, or are you going to shop and do your due diligence?” Of course they said, “We’ll be really careful and check things out so we don’t pay too much.” Exactly! What would they do if they saw a home that was priced like theirs is now? “We’d offer them less,” they answered. Aaah, it sure is different when the shoe is on the other foot.

They’d get in their car fast and drive down the road wondering what those sellers were thinking. This is especially true if they were out with an agent. Even though they’re from out of town, the agent would know the area and say that the home is overpriced. You have to expect a buyer to be just as intelligent as you are when they’re out shopping for a home.

Do you want to pay too much? No. Who does? An overpriced property fails to compete with other properties on the market. Buyers look at many different homes in a certain price range and develop a feel for value. An overpriced home, by comparison, will fail to meet the buyer's expectations. This means it is going to sit on the market for some time until the value goes up, the price goes down or, most unlikely, some buyer wants it at any price.

People expect certain things for a certain price and lose interest when a property does not meet their criteria. An overpriced property can remain unsold for a long time, causing buyers to be wary of even making a lowball offer in a lot of cases.

An overpriced property can ultimately cause you to lose money. Consider holding costs for six months to a year or more. The market may come up to your price at that time, but you've already invested a lot of time and money in marketing. What about getting on with your plans in a timely manner? What’s that worth?

Plus, you run the risk of becoming known as a property that is overpriced. This will cause real estate agents and buyers who have been looking for a while in your area to lose their enthusiasm over your home. Real estate agents will simply drive by and tell the clients in their car that your home is way overpriced.

That is the last thing you want to have happen. Why? If your home is priced right it will usually sell rather quickly. A real estate agent gets paid a 3% commission the majority of the time, so if they don’t have the listing on your home, they’re just as excited to show it to their buyers for 3% if it is priced right. But agents don’t want to waste their time showing homes on which clients aren’t likely to make an offer.

Don’t get stuck in the “I can always come down” mentality in overpricing. When you get past a certain limit, the offers that eventually do come in will be so low you won’t be able to get them up to anywhere close to where you need to be. People will ask, “Where did you come up with that figure?”

And that’s my question. How are you going to back it up? How would the above-mentioned couple come up with the justification for a $314,900 asking price? They couldn’t, plain and simple. Therefore a buyer feels like they’re being ripped off and will shoot a lowball offer. This gets you nowhere.

A home that is priced right is good for everyone. You sell your home quickly, the buyer is comfortable and everyone’s happy. You’re now attracting motivated buyers. At this point you may get multiple offers and sell it for more than the asking price. If you are low on equity in your home and need additional money to help cover moving expenses, don’t expect your buyer to pay for that. Would you want to pay for it in the house that you buy?

In the majority of cases, overpricing a home almost always causes you to lose money in the long run. You want to sell your home by pricing it fairly to encourage buyers to come in and make an offer on it. The goal is to sell it quickly and move on with your plans.

I know I’m really going into depth on price, but it’s absolutely critical that you understand how important it really is. Let me put it into perspective another way for you. Let's say you’re the local Ford dealer and there's a Ford Expedition that came in on trade. This Ford Expedition is worth $10,000 fair market value, which means that’s what Ford Expeditions with that kind of mileage and vintage are worth in this market. So let's say that you’re a greedy car dealer and you tack on an extra 15% to 20% to $10,000 and try to get $12,000 for it.

You can do all the advertising in the world--have it on TV, in The Wall Street Journal, everywhere—and it's not going to sell, plain and simple. Why? Because it's priced too high. Sure, some sucker might come along and eventually buy it, but who wants to wait for that to happen? Remember what we said about holding costs?

Most people will pay fair market value for something they want, but they won’t pay more than that. Why should they? The only exception is if they really want it or it is extremely rare. However, this usually doesn’t happen in the housing market unless you’re in a really hot area, and even then that’s the exception, not the rule. If you’re not in a hot market and you’re overpriced, most people will go elsewhere. It’s the good old axiom of supply and demand.

Let’s get back to our car example. If that same Ford Expedition is priced at $8200 to $9200, it will sell right away. Why? Because people will recognize the value in the price. This will happen quite often when you price just a little under market value. There is nothing that price won’t fix when it comes to selling a house.

What you want to create is a win-win situation where you leave something on the table for both people, where it's fair and equitable to you and the buyer, where they can come in and everybody feels good about the deal. That's when you sell a home!

If you lived in Dallas and were going to move to Boston, you could fly there and look at homes in the $250,000 price range. After looking at no more than six homes in one to two days, you would have a feel for the market value in the area. You could then go back to the homes you first looked at and say this home was a better value over another based on your observations.

People are very intelligent. It doesn't take long for them to figure out what is a good deal and what is not a good deal or, better yet, what is fair market value and what is not fair market value. So you need to be priced correctly. If you to try to go overboard on pricing your property, your home will sit there and it will not sell.

Here’s another trap a lot of sellers get caught up in. If they need $200,000 for their home and that’s what it’s worth, for some strange reason they think they need to put it on the market for $220,000. It’s that “I can always come down but not go up mentality.” That might be okay at a garage sale but not when you’re selling your home.

It’s normal to think you need the extra room for price haggling, but here’s how you need to look at it. If $200,000 is your bottom line, would you take $198,000 in cash? Most people probably would. I suggest you price your home at $204,000. This way you leave a little bit of room for dickering on the price. Price it right where it needs to be and then go no more than 2% above that. This way you can reduce the price 2%, the buyer is happy and you get your price.

Another problem when you overprice your home is you run the risk of missing buyers that would have otherwise been at your price point. Most people will buy up to what they can barely afford as a general rule, so if you overprice by 10% to 15% you miss that target. They simply can't afford to make the jump, so you lose that entire group of buyers.

By having the house priced at fair market value or no more than a couple of percentage points above that, you open up the opportunity of having your home seen by a larger group of buyers. Remember, the more people who see your home, the faster you will get an offer. It’s all about traffic, and traffic is numbers.

I don’t care what kind of home it is or where it is, if you have 20 showings on a property to legitimate buyers out to purchase a property and you do not have an offer by then, you have some sort of problem. Either the price is high or some other adverse condition exists.

An adverse condition could be your property is next to a sewage treatment plant or an airport. Even if you do have an adverse condition, though, you can still sell the property. How? Price! Remember, there is absolutely nothing wrong with a property anywhere that price and terms won’t cure.

I’ve had so many people ask me what’s wrong when they have had 20 plus showings or more and their house has not sold yet. They say, “I don’t understand it. It’s not the price.” Well, I have news for you--it is the price! What else can it be? Think about it for a moment and you’ll understand the logic. You simply have to price the home fairly.

Let’s review fair market value. Fair market value is the most probable price that most people will pay in a fair sale. Assuming that buyers and sellers are acting prudently and knowledgeably and there’s a real estate agent involved, every buyer's agent will look at recent sales in the area. You can trust me on this. They will let their client know if the home is overpriced.

In addition, if you have the home overpriced, it may not appraise high enough. What do I mean by that? A bank will not loan money on a home until a licensed appraiser has determined the value of the home. So if you are overpriced, the bank will not lend the money to the buyer to purchase the home. The bank has to protect its interest. It doesn’t make sense to them to loan more money on a home than it’s worth. That’s business! Banks aren’t stupid.

If you get an offer on your home from a real estate agent, you can bet that they have checked into recent sales from the area. This is how they build their case when they present an offer from their client. Convincing the other side you are asking for no more than what’s fair is one of the most powerful arguments you can make in negotiating price.

Remember the scenario earlier where they were asking $314,900 for their home? Let me ask you a question. If you were the seller and a real estate agent came in with an offer justified by recent sales, what could you do to combat against that kind of information? There is nothing you could do because, quite simply, you wouldn’t have a leg to stand on.

Most sellers will pull a figure out of thin air based on what they want or need to get out of the home. I can tell you from experience this does not work. Can you see why now?

Let’s reverse the situation. Let’s say they were asking $279,000 for the home and could show what they recently paid for it and the selling price of a couple of homes down the street. If you made an offer of $229,000, you’d have nothing to justify your offer and they would have everything to justify their asking price.

Never forget this: houses sell houses and people don’t. That simply means you can talk till you’re blue in the face but, if they don’t like it, that’s it. When people want to buy something they like, they get emotionally attached to it. You’ll know when someone is excited about your home because they start to emotionally move in with comments like, “Gee, Honey, we can put the sofa over here, and what do you think about…” That’s when you know you have a hot prospect.

You can create a little desire but that’s all. Let the house sell the house; don’t ever forget that. This is another reason it is imperative to have the home looking absolutely the best it can. You know good old curb appeal! You will not get a second chance to make a first impression to a buyer. When they’re gone, they’re gone. Know what curb appeal is and how it is going to affect the potential buyer.

As a rule, if you’re priced fairly the offer you receive will be close to the asking price. Why? Because everyone knows it’s priced where it needs to be. If they are emotionally committed to the home and they are bona fide buyers, you will have an offer close to your asking price. If the home is overpriced, you’ll probably never get the buyers in there in the first place to look at it.

Once you overprice your home you've lost everybody. They will not come back. Trust me on this one; price it fair and you’ll get it sold fast. Don't play games. It will just cost you in the long run. There is always another property. Yours is not the only one.