How to Price My Home: Why It's Important to Get it Right From the Start (Part 1)

There are two forces at war with each other in the process of buying or selling a home.

Even if the transaction is smooth, at any transaction's core you have a buyer, who wants to pay as far below market price as they can, and a seller, who wants to sell for as much as they can, that are negotiating purchase price and terms.

This interaction is usually a civil discourse between Realtors who represent their clients and make a case for their clients' best interest until a fair exchange has been negotiated. So what does that have to do with pricing a home?

News reports are showing that it's safe to sell your home again. And many sellers enter into the efforts of selling their home with the expectation that buyers will be offering less than the list price, and as stated in the paragraph above, they're not wrong in having that expectation. However, these same sellers are often focused on the wrong things in trying to sell their home, and can wind up worse off for not having the full picture.

So what dictates the listing or asking price for a home? What the seller paid for it? What they owe on the home? The new countertops in the kitchen? The new roof? The honest answer is many homes are priced according to those factors, but that's not what dictates a selling price. So why do houses sell for the prices they do?

Said simply: The market dictates sale price.

Regardless of what a seller wants to sell their home for, they can only sell it for what buyers are willing to pay. In any area of the consumer market, whether it's real estate, stock market or fast food, you can only sell for what buyers are willing to pay.

If a value meal in the drive-thru cost you the same as a steak dinner at your favorite restaurant, would your server be asking you if you wanted to super-size or would they be asking if you'd like A-1 sauce with your steak? Seems silly for me to even ask doesn't it?

Price is important. But even more importantly, it's important to get the price right from the very beginning. Here's a few graphs with data from our local Multiple Listing Service for the first quarter of 2012.

Alright, so the first graph, which charts the sale price in relation to its original list price. The yellow bar is the percentage homes sold for in relation to the asking price that never reduced their price, and the red reflects the percentage of asking price that went through one or more price reductions before they sold.

The numbers don't look so hot do they?

It's long been believed that you can just throw out an asking price that's not based on your local market and reduce the price if you don't get any bites. And to an extent, it's true, but it's going to cost you, and it could cost you up to 25% of your asking price according to the first quarter data.

Now of course, the first chart encompasses a MULTITUDE of price points, so here's a breakdown by price point to show how it could affect you in your specific market.

Check out the far left columns with the <$100k price point. Homes that weren't priced right from the get-go, whose sellers thought they could just reduce price little by little ended up having their prices shaved continually (the word SLASHED comes to mind) and ended up selling for just over 60% of asking price.

Best case scenario from the first quarter data shows that pricing it wrong could cost you "only" 15% in the $200-299,000 market. *Quick math note* 15% of 200,00 is $30,000.

Cross check that with sellers who priced it right from the start and netted 95% of their asking price.

So now how important do you think price is? Is it more important than just considering how much you want to pocket? Or how about what you paid for that new roof a few years ago?

As the title indicated, this is part one of why it's important to price your home correctly. Part two drops next week. Check back then or subscribe to get email updates when we post new content.

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