As will be shown in this article, overpricing one’s home when going on market almost always have negative repercussions for sellers: Across all Bay Area markets, listings that require even a single price reduction before selling consistently take much slower to sell, and sell for much lower average prices, than homes priced correctly from the get-go. Setting the wrong price for your home when going to market typically proves to be a very expensive mistake for most Bay Area homeowners.
On the other hand, buyers who carefully monitor time on market and price reductions (as well as homes taken off the market without selling) and respond accordingly may find possibilities in for getting a deal on these overpriced homes. Since there is frequently no competition from other buyers, such buyers are virtually always in a position to negotiate the purchase price and terms of the sale with greater vigor. This reduces the need for overbidding, and makes it possible to obtain a steep discount on mis-priced homes.
The Truth about Home Pricing
“Ironically, instead of getting more money… [Overpricing] usually stigmatizes a property and reduces the eventual sale price to less than it would have been with more realistic pricing.” – House Selling for Dummies
Fair market value is the price that a qualified, fairly informed buyer is willing to pay and that a seller, acting freely and without coercion, is willing to accept for the item being sold.
The overwhelming majority of buyers won’t make an offer on homes they feel to be significantly overpriced. Usually they don’t want to waste their time by putting together an offer for a seller who is unlikely to accept what they’re willing to pay. Many are uncomfortable with possibly “offending” the seller. I’ve often advised many clients against writing offers on overpriced homes for these very reasons. But whatever the reason, few buyers are willing to submit an offer on a home where they feel that there’s just too great of a distance between what they feel the home is worth and what the seller is asking for it.
On the other hand, well-priced homes create a sense of urgency for buyers to act quickly with strong, clean offers for fear of someone else snatching up the property before they do. Often times, this is futile – when a well-priced home hits the market, word spreads fast and usually lead to competitive bidding between buyers, resulting in a bidding war – which is the most likely way to increase sale price, often dramatically. Overpricing squanders the very best moment of buyer and broker attention: when a home first hits the market. This moment cannot ever be truly recaptured.
The truth is, by overpricing their homes, sellers help sell competing homes, since it makes them look like comparative bargains. If a home has mistakenly been overpriced (or market conditions suddenly shift, as happened in mid-spring 2022 for example), the sooner this is recognized, and the price reduced, the lesser the negative consequences. Price reductions must be significant enough to capture the attention of buyers. The objective with any price reduction should be to break down into a new tier of buyers, to generate fresh excitement with a new buyer pool, in the hopes of fomenting a bidding war at a new, lower price point.
Buying the Listing
In order to win the listing when competing with other brokers, some REALTORS may suggest an initial asking price considerably higher than what market conditions and recent sales of similar homes warrant — because they know that many sellers will want to list their home for the highest price possible. This is called “buying the listing” – and it is a clear violation of the fiduciary duty of honesty that an agent owes their client and is one of the main reasons Bay Area homeowners end up overpricing their homes.
REALTORS®, in attempting to secure a listing, shall not deliberately mislead the owner as to market value.
-From the REALTOR® Code of Ethics: Standard of Practice 1-3
There is a time-tested and well-proven way to sell any home for the highest price possible. It’s what the most successful sellers have done in North America for at least the last hundred years:
• Price the home right when it first hits the market
• Carefully prepare the home so it has the maximum appeal to buyers in the market
• Maximize the home’s exposure to as many potential buyers as possible
• List with a REALTOR® who is an experienced and savvy negotiator
In the Bay Area, way you chose to market your home – including your initial asking price – can easily mean tens of thousands (and often hundreds of thousands) more money for you at closing.
Using data on 150,000 home sales occurring over 12 to 24 month periods, Compass performed analyses such as this one on 5 Bay Area regions comprising 10 counties. The specific results varied by market region, but large differences in sales-price-to-original-list-price percentages and average days-on-market between homes that sold without price reduction and those selling after price reduction were universal, which is to be expected.
The calculations regarding the value differentials between these sales must be considered approximate: The same home can’t be sold at the same point in time at different list prices, with and without price reductions to compare the results. But in all the regional analyses we performed comparing the 2 types of sale, the change in value – i.e. the average loss in value seen in price reduced homes – ranged from 6% to 8%. Certainly, this differential varies widely amid tens of thousands of individual homes in varying circumstances of sale, but it seems clear that the decline in value is significant. Considering home prices in the Bay Area, even a 3% to 4% decline adds up to a loss of tens of thousands of dollars in seller proceeds, besides the much longer period necessary to realize the sale.