The Power of Proper Pricing (and the Perils of Poor)
By David Bediz for the Washington Blade
June 2010

It’s all too common knowledge that the housing market nationwide has suffered tremendously since its peak in 2005. But while home values have plummeted fifty percent and higher in many areas, the blow has undoubtedly been a softer one in our region, and specifically in more established parts of the District like Chevy Chase, Dupont Circle and Georgetown. That said, most sales figures show at least a six percent decline in even these neighborhoods since the peak, which, considering the high median sale prices locally, equates to tens of thousands of dollars in lost equity for most buyers. That, paired with the inherent transaction costs of selling, can mean that many buyers who bought at or near the peak, and most who bought since then as well, stand to lose a lot of money when they sell.

Why, then, do we see properties that were bought in 2005 and 2006 listed now at prices six or seven percent higher than their purchase price just a few years ago? It’s actually a common occurrence, and as a real estate agent, I have to admit we have listed properties such as these. Most of the properties listed higher are not necessarily any bigger or better-renovated than when they were sold last, and the reason they’re listed higher is not indicative of any greater value. The higher list price actually represents not higher value, but higher liabilities on the part of the seller—in the form of home equity loans and lines of credit, and the transaction costs they must incur when they sell. For most sellers pricing their homes in this way, they do so because they simply want to recoup their investment and not feel like they’ve lost—whether that loss is in dollars, in pride or both.

So what’s the problem with just floating a property on the market on the high side, at least to allow for a buffer for negotiation? Perhaps nothing, if the overpricing is a small amount. The buyer who falls in love with your home at the first open house might just exist, and they may agree you bought it on the low side back then. But more often than not that buyer doesn’t exist, or they’re willing to wait for a better deal, or they’ll bid much lower than what you bought it for anyway. In truth, overpricing almost always leads only to Days on Market. DOM is the ticking clock that day, after day, after day… undoubtedly results in price reductions, lowball offers (or worse: no offers), frustration and constant disappointment. It means endless open houses, weeks of dinnertime interruptions from blasé buyers, and constant cleaning.

The alternative is to price your property at what you probably think is on the low side— perhaps even too low in your own opinion—but, ultimately, a realistic one. Doing so brings in the most interested parties in the quickest time, creating a mini-seller’s market. Buyers think to themselves “What do I have to do to get this?” rather than “How low could I get this for?” and the second they smell competition they pounce in at asking price or higher, usually with reduced contingency periods and perhaps fewer or no contingencies at all. Rather than lingering on the market for months on end, perhaps even changing listing agents, and reducing the price to one that is most likely less than the home’s true value, the property sells quickly, sometimes over asking price, and settlement sails in smoothly.

The tough part about proper pricing is that no one can really say what a proper price actually is. Appraisers use fairly scientific methods to calculate value, most of which are also used (along with a little bit of intuition and actual sales experience) by listing agents too. But no two appraisals will come in alike no matter how detailed the report is, because no two homes are truly alike and, more importantly, there is an element of opinion in any appraisal or market valuation. How much more value can you give to a home that has a lot of light in the living room, or one that has an en-suite bathroom in the master bedroom? And if a comparable home sold higher because the open house was on a particularly nice day, does that mean it’s really worth more? The truth is there is really no fool-proof way to perfectly gauge a home’s value under any circumstances, because the market is for homes that are as unique as the buyers that buy them.

That said, the price of housing is at least easy to ball-park, because while each house is unique, each is in many ways just a commodity too. At a certain point, we all need housing, and there is a maximum we will pay for it as a group. As long as there is relatively high selection, there will always be another listing that is priced such that it keeps the price of your home in check. True, we’re not talking about tons of soybeans or the price of gold, which obviously have no form of uniqueness from one ton of soybeans or bar of gold to the other, but the housing market is constrained by parameters of sales that are loosely like any other commodity that is less unique. Your home may have Viking appliances or tulips that come out every spring, but at the end of the day your home is just a house. Count up the bedrooms, the square feet and the number of parking spaces you have, and at least a baseline value will be evident. Add and subtract a little here and there for the pros and cons, and you can fine tune the price the house should fetch.

Armed with the knowledge that your home’s value can be estimated but never pinpointed, and assuming you can afford to sell even if at a loss, you can enter the market at a fair price—or, better yet, an attractively “bargain” price—to help the house sell faster, encourage multiple offers and stop the headaches of a long listing before they start. If you can’t come to the table with money needed to make the transaction happen, or if you can’t afford the wounded pride of losing some equity you bought the home with, perhaps it may be best not to list the home at all.