Pricing Too High Can Bring Grief


This is a smart home shopper deciding how much she can afford to spend on a home. Often it's not that she can't pay more or make higher payments, instead she may be thinking about better uses for her money than a larger more expensive home.

Now let's go to the other side, a seller with a home listed. This could be an investor selling in the retail market or just a retail home buyer. They have discussions with multiple real estate agents/brokers and get a recommended list price from each.

When, and this is often, there is some significant price differences between agents advising on the listing price, there can be several reasons.

  • Different Comparables: When real estate professionals value a home for listing on the market, they usually use a process called a CMA, Comparative Market Analysis. This is a little like an appraisal. The take recent sold prices of comparable homes (the comps) and use those to calculate the value of the home to be listed. Choosing different comparables will yield different results, and choosing the highest sold price comps will yield a higher recommended price.
  • Different Adjustments: Adjustments are what they do when comps have somewhat different characteristics than the home to be listed. One comp may have one fewer bathrooms while another may have one more bedroom that our home to be listed. A value adjustment is made to those comps' sold prices to compensate for the differences. This is arbitrary in large part and can skew the list price a bit.
  • Buying a Listing: This is more sinister, but it does happen. Competition for listings is intense, and real estate agents sometimes "buy" a listing by giving the homeowner an inflated selling price recommendation. The seller sees that extra money in their pocket, and they may list with this agent thinking that they can always lower the price later.

Over listing a home can lead to some really bad results. The home that's overpriced against the competition will sit on the market. The days on market (DOM) are shown in listings and buyers take note. Homes on the market longer than average pick up a stigma as having something wrong. This sticks with the home even after the price may be lowered.

Markets can turn on a dime, and thinking that you have the luxury of waiting it out can be a problem. If the market turns significantly, you could end up having to reduce the price more than you wanted to get the home sold.

So, what do you do if you want to sell and set the price right to sell on a timeline shorter than the average for the market? Interview several agents and get CMAs. Ask to see the selected comparable properties. Make sure that those homes:

  • Sold very recently. Sales too far in the past are poor comps.
  • Arein the same neighborhood or as nearby as possible.
  • Characteristics are as close to your home as possible. The fewer the adjustments the better for an accurate value.

As many statisticians may tell you, if you have several data points, throw out the highest and the lowest, especially if they're far from the middle. Having two or more with very close listing price estimates should be close to what you need.