Setting the List Price in a Rising Market
Sellers often ask: Why shouldn’t we list above the expected market price and “leave room to negotiate?” After all, we don’t want to leave money on the table, right?
In fact, to obtain the best price, Houston sellers should strategically list as close to expected market value as possible. Failing to do so could have sellers losing out on profit, though the consequences differ depending on market conditions — which we’ll discuss in this set of posts on strategy. Let’s start with pricing in a rising market.
In a rising market or market segment, the sale price to list price ratio in Houston and its suburbs/exurbs generally clusters around 97%-102% of list value (although that range will vary depending on the neighborhood and price point).
Because buyer interest is always highest in attractive homes that are appropriately priced, most record-setting sale prices result from competing offers on properties that were well-priced at the outset. Although the willingness of buyers to engage in direct competition waxes and wanes, most properties will quickly sell at, near, or above a fair list price in a strong sellers’ market.
So why not add some padding to the expected fair market value, then? sellers wonder. If most houses sell right around list price, why not take the listing agent’s comparative market analysis and recommended list price and add some thousands to it? Won’t it still sell right around list? Some sellers think, If we’re wrong and nobody bites, we’ll just accept a lower offer.
Broadly, there are four reasons why “leaving room to negotiate” is an unsuccessful pricing strategy in Houston:
- In this era of high-definition photography and app-based MLS resources, buyers quickly develop a sense of how far their money should go in a given neighborhood. An overpriced home will compare unfavorably to correctly-priced competition online, so the property may not make buyers’ short lists for showings. This limits the property’s pool of potential buyers, and may leave it without showings altogether.
- Buyers and their agents can see how long a property has been on the market. If a property sits on the market long enough, it can acquire a stigma that persists even after multiple price drops. Buyers may wonder: What’s wrong with it? and Why hasn’t anyone wanted it? This can result in a delayed sale at a lower price than the market average for a comparable property.
- The “anchoring effect” can take hold. Many sellers who start out with the intention to negotiate from an inflated list price will wind up psychologically anchoring on that list price after time passes, viewing all subsequent offers as unacceptably large discounts from what was, in reality, an arbitrary number. This can leave sellers unable to recognize a fair offer, and therefore unable to sell their home.
- Many Houston homebuyers don’t want to be perceived as “lowballers.” It’s too confrontational for comfort, so even if they really like a property, they would sometimes rather not offer at all than offer substantially below list.
In a rapidly rising market, there’s always a chance that the market will climb enough to meet an inflated list price before the property grows stale. It’s a strategy risk-tolerant developers sometimes follow with urban infill homes, particularly if they have overbuilt for the market.
But in general, real estate investors should avoid trying to time the market, and primary home sellers should definitely avoid the temptation. The overpriced seller stands to lose money both in a reduced sale price and in prolonged carrying costs, including monthly costs for taxes, interest, maintenance, and insurance.