Setting the sales price is the most important decision you and your client will make during the sales process. Price is one of the biggest issues that appears on showing feedback for REALTORS. Deciding on the right sales price for your listings requires research, analysis, strategy, and client management. If you do those things well, you’ll set the right price every time. Even if you’re setting the price for the home as part of a listing presentation before the owner becomes a client, the approach remains the same.
1. Research
Research the MLS to identify comparable listings and homes that have sold. When you select comparable homes, make sure to consider the criteria that appraisers use. In general, consider the following issues when selecting comparables.
- Appraisers won’t use listings that are more than three months old, and neither should you.
- Try to find comparables within one-quarter to one-half of a mile from your listing. Exceptions to the distance would occur when there aren’t a reasonable number of homes that fall into that distance, and when your listing is in a rural area.
- Choose comparables with similar square footage. If you can stay within 10 percent more or less, that is your best approach.
- Choose comparables with similar ages whenever possible. If your listing is in a neighborhood of homes built in the 1950s, newer homes built adjacent to that neighborhood built in the 1990s will have much different values.
- Use your knowledge of the area to choose homes in similar environments. Your listing may be in an area that is considered “desirable,” but there may be homes a street or two away that are consistently valued much lower due to location.
The goal of your selection process should be to use your local market knowledge to identify comparable listings that make sense, not only on paper, but also in the real world. In addition, identify withdrawn or expired listings that meet your criteria for review during the analysis step.
2. Analysis
The next step is to do look at the listings and sold homes that you’ve identified to draw some conclusions that will help you set your price.
Current Listings
Homes that are currently on the market or under contract are only useful to see trends. For example, if the current listings are priced lower than what other comparable homes sold for, you need to be on the lookout for a dip in the market in that area. As you know, the price a home is listed for can be much different than the price it sells for. Reviewing the days on market for homes under contract will give you a general idea of how long it will be before you get a firm offer.
Sold Homes
For sold homes, you want to know how long they were on the market (DOM) before they sold. Also look at the difference between the original list price and the final sales price. The easiest way to do this is to create a spreadsheet that has five columns: Address, Original List Price, Sales Price, Ratio of List to Sales Price, DOM.
- Determine if any of the sold homes were ever withdrawn from the market and relisted. For those homes, calculate DOM based on both phases of its sales cycle.
- For each comparable, fill in the spreadsheet described above, then calculate a total DOM and Ratio for all the sold homes.
Looking at your spreadsheet, you’ll be able to come to a number of conclusions. For example, assume that one home sold for significantly more than the others, but its DOM was three times any of the others. You’ll probably conclude that you should remove that comparable from your list because it was obviously overpriced.
You’ll also be able to see how the area’s ratio of list to sales price is running. This will give you an idea of how much negotiation was involved in the sales and whether the other homes’ original list price was too high or too low.
Withdrawn and Expired Listings
Your goal in looking at these listings is to see if you can identify patterns that explain the status. Determine if the homes have something in common that you can avoid in selling your listing.
3. Strategy
Based on the information you’ve gathered, and your evaluation of the home’s condition, you can develop a pricing strategy. Here are some things to consider.
Your Client’s Needs
Is your client in a hurry? If so, you may want to price the home at a point that will almost ensure a quick sale. Does your client need a certain profit to buy their next home, and do they have the time to wait? Certainly, you can’t price the home above market value, but getting the most profit may mean pricing the home on the high side of market value and doing some aggressive staging or improvements to warrant a higher price.
The Market
If you’re in a buyer’s market, you’ll probably see that the original list to sales price is less than 100 percent. That means you’ll need to do some tough negotiations, so you may want to price slightly higher, realizing that you’ll settle for a bit less. If you’re in a seller’s market, the price ratio could be over 100 percent. You may end up selling for more than your list price if you get into a bidding war. When setting the price, consider whether you can list a few percent more than the comparables because you’re in a strong negotiating position.
The Listing Number
There’s controversy over how to set the actual sales price. One school of thought is that the list price should be set just below a round number. For example, rather than setting the price at $200,000, you’d set the price at $199,000 or $199,999. Others say that they have more success setting a price that is unique such as $204,000, because people assume that there was some science behind that price.
Another issue to consider is the fact that many homebuyers are using the Internet. If a buyer searches for homes between $200,000 and $225,000, they won’t see the home priced at $199,000.
You’ll need to set your listing number to be most effective in your market area. This is another situation where real estate is local. Before setting your sales price, look at your comparables to review the original prices for other homes in the area and how successful the sales were. In addition, you can get additional information by reviewing showing feedback for REALTORS you’ve received on your own listings.
4. Client Management
It is almost universally true that homeowners think their homes are worth more than market value. Homeowners are often very emotional about setting a price; for example, they may believe:
- that the improvements they’ve made to the home are worth far more than the market will bear.
- that the maintenance they’ve done should be valued like improvements.
- the Zestimate for their home they found on Zillow.
- that they should “test the market” with the original list price.
- that multiple price reductions won’t affect the final sales price of their home.
- the price should be set to provide them with the down payment for their next home.
- that it doesn’t matter how long their home is on the market, they’ll just wait for their price.
You may well be able to add to that list. Your next challenge is to work with your client to dispel any beliefs they have that will hurt their chances of selling their home in a reasonable amount of time for the highest value the market will bear.
Educate Your Client
Educate your client about the importance of setting the right price the first time. Typically, homeowners don’t estimate their home’s worth at less than market value. As a result, your challenge is to educate your client about overpriced homes.
Homes that are overpriced historically end up selling for less than market value. You may be able to illustrate that point with information from your MLS if you find comparables that were originally priced over market value, and then sold for less.
Buyers can be fickle. If a home stays on the market for a long time, and has several price reductions, buyers will usually assume that there is something wrong with the house. They will either stay away, or reflect their feelings in a low offer.
It’s not usually difficult to disprove a Zestimate when you take the time to compare the values listed for other homes with actual sales figures.
Take a Tour
Taking your client on a home tour is an effective way to handle their other misconceptions. Set up showings for the homes you’re using as comparables and/or homes in the price range your client wants to target. When your client walks into a home that looks like a magazine cover, they’ll understand why their home can’t compete with a home that is truly worth more than their own.
If you decide to take a listing that you believe is somewhat overpriced, work with your client to agree on a price-reduction plan up front, and be sure you have a system in place to get showing feedback you can share with your client throughout the sales process.
The original sales price you set can make or break a transaction. With the right preparation, you and your client can be confident in the price you set, and reap the rewards of a smooth transaction.