Developing

Steering clear of starting high and reducing later

No matter whether you’re selling real estate or any other offering, pricing must reflect what the market will bear, not what the seller needs to net. Your pricing deliberation should focus only on the value as determined by your
CMA .

I can’t count the number of times I’ve heard a seller start pricing discussions by saying, “I really need to net this amount of money.” The declaration usually goes hand-in-hand with the seller’s instruction to “try this price, I don’t want to give it away,” which is usually followed by the caveat, “We can always come down but we can never go up.”

If you allow yourself to be swayed by a seller’s need to start higher than the property should be priced, you set yourself up for a costly error.

As an example of the situation you want to avoid, review the anecdote in the previous section about my friend’s overpriced home. You can bet his agent didn’t arrive at a price $200,000 above market value based on research or
analysis. He listened to his client’s pricing input, which was based on what my friend wants to net in order to buy another home for cash and avoid a mortgage. Does the prospective buyer of his home care what he needs to net? Absolutely not. Starting high is truly a ridiculous approach, but it’s all too common. Most people who want to start high and reduce later are motivated by the need to net a certain amount. Sadly, the approach is nearly always counterproductive. Aiming too high rarely works.

The only market environment in which you can afford a seller who wants to start high and come down later is when prices are rapidly appreciating and inventory is low. Even then, be sure you’re working with an owner who really
wants to sell; otherwise you’re apt to waste time while your client tests the market’s pricing tolerances.

If you find yourself facing a start-high seller, here are a few script suggestions to help you get the seller on the right track:

  • To figure out why the owner wants to sell and what role price plays in the decision, ask, “Mr. Seller, is your motivation to sell your home greater than your motivation to achieve a certain price?”

This powerful question unlocks the seller’s motivation vault. Going back to the example I share in the “Avoiding overpricing just to please the buyer” section, my friend’s motivation to obtain an inflated price exceeds his motivation to sell. As an agent, I’d categorize him as a home lister or market tester as opposed to a seller.

  • If the seller’s stuck on his own profit motive, work to shift his mindset to a buyer’s point of view by saying, “When we go out looking for a home for you to buy, are you, as the buyer, concerned with what the seller needs to net? Don’t you think that other buyers are going to feel the same way you do?”

If necessary, add, “Then we can all agree that what a seller needs to net truthfully has no real connection to the actual market value of the home.”

This script works well when housing inventory is normal or when an oversupply creates a buyer’s market. It’s less effective in a seller’s market, where housing inventory is in short supply. In that market, the seller’s greed drives everything.

Coming in on-the-button

Even though too few agents use it, I personally believe that on-the-button pricing — that is, pricing a home at market value — is the single best pricing strategy.

Most agents pad listing prices by adding 5 to 10 percent to a home’s current market value. This strategy is detrimental because even though sellers realize the overpricing is meant to provide a negotiating allowance, they begin to hope to receive at least some of the padding in their own pockets. They rarely share that fact with their agents, but it’s a true underlying expectation and a real downside of padding. The upside is that padded listings create a real pricing advantage for homes that come on the market priced at their fair market value.

A home that’s listed at market value stands out from the competition. Compared to all the overpriced options, it strikes buyers as a rare value and leads to traffic and a high number of showings by other agents. On-the-button pricing also leads to a high increase in new business opportunities for the listing agent,who meets numerous prospective clients as a result of to the home’s ads, signage, and online posting.