Overpricing. It happens all the time in real estate – especially in today’s market. I get where sellers are coming from because we’ve had so much glowing real estate news for more than five years. But that doesn’t mean we’re in a market where you can command whatever price you want.
Chasing the unicorn: Many sellers are pricing their properties too high. It’s as if they expect record-breaking prices and multiple offers every time because of how “hot” the market is. Homeowners get so fixated on the idea of a fiery market that they price for that one unicorn buyer who’s going to mysteriously pay more than anyone else. This “unicorn” will ignore all recent sales and listings and magically offer 10% higher than anything. In Sacramento the idea is a Bay Area “unicorn” will swoop in with fat stacks of cash and totally ignore similar comps that are selling for less. It’s nice when sellers get lucky like that, but in today’s market buyers are actually much more finicky about price. Despite a legitimate housing shortage we don’t have a market where buyers are willing to pay crazy prices that are totally disconnected from reality. In other words, we don’t have a market where pricing for the “unicorn” makes good sense (unless you want to sit on the market instead of sell). Take a look at the image below that shows price reductions over the past 24 hours in the Sacramento region. These 78 properties have been priced too high for the market.
My advice? Price for the real market instead of the unicorn. Give the most weight to similar sales and similar listings that are actually getting into contract.
Aspirational pricing: If you aren’t familiar with the term aspirational pricing, Jonathan Miller coined this phrase. It’s a great way to describe the phenomenon of sellers fixating on prices that are simply disconnected from the real market.
10 reasons why sellers overprice:
1) Hot headlines are imposed on the price instead of looking at comps.
2) Dissimilar sales are used as “comps” to price the home.
3) Too much emphasis is put on price per sq ft instead of actual comps.
4) A property is priced like it doesn’t have a busy street or adverse location.
5) Sales from a higher-priced area are “cherry-picked” to price the property.
6) The seller is too subjective and feels “my house is better.”
7) The owner believes the cost of any upgrades should be paid for by buyers.
8) A more aggressive trend from a lower price range is assumed to be present at a higher price range.
9) It’s a tricky property and not easy to come up with a price.
10) What else?
My article in Comstock’s: By the way, I wrote an article in Comstock’s Magazine this month on the value of upgrades. Check it out if you want.
I hope this was interesting or helpful.
Questions: Are you seeing sellers price for “unicorns”? What reasons do you think sellers overprice? Did I miss something?
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Ryan: Above all, in a active market with palpitating dynamics the seller will shoot for the moon. The listing agent wants to please. They agree and reconcile on a sometimes ridiculous asking price. Then they run that price up the flagpole to see who salutes. From such fervor come sold outliers.
Lou, you have a way with words. I love it.
Very timely! Thank you for this topic, Ryan. Our market is slowing some with fewer buyers for flood-rehabs.
Thanks Bill. That’s interesting to hear. Are there still lots of vacant homes that never got rehabbed? I’m curious if the issue is buyers have renovated homes already? Or maybe they moved?
Some sellers in our area of Austin think they can sell to unicorn buyers coming from California. They hope someone will have sold their home for so much money in CA and see how inexpensive our homes are they won’t care about price. Plus they hope for a cash buyer with no appraisal.
Sometimes that works if the home has what I call a “feature stack” where the house has so many features that are attractive to buyers someone will pay over the suggested price based on a CMA. For example in our area the direction a home faces has a significant impact on value. A home facing east on a greenbelt with a 3 car garage and a secondary bedroom downstairs may justify aspirational pricing. That home if marketed correctly may sell for more than what it would if you priced the home based on only having 1 or 2 of those features.
The problem sellers run into is they don’t realize the impact of that “feature stack” and will take the sales price of the home that sold for an aspirational price and say “my home is similar but faces south and isn’t on a greenbelt” so the price should be only $20,000 less. It’s very challenging to sit across the table from someone who’s had their hopes and dreams based on an aspirational price and explain that buyers won’t see their home the same way.
Something else (and you may have written a previous article about this) is the impact a seller’s friends and neighbors have on list price. Especially if those friends and neighbors are planning to sell their home. As brokers we can make a recommendation but all it takes is a few comments from their friends about how nice their home is and the seller will think they are underpricing their home.
I always tell the story of a seller client who had a friend that was putting their home on the market. We had set the price but weren’t coming on the market for another week. My client went to visit her friend’s open house. That agent told my client (and the friend confirmed this later) that they were going to get multiple offers for the home. The home was listed for $400,000. Not only didn’t they get multiple offers but the home was on the market for 5 months and finally sold for $347,000.
However, after hearing they were going to get multiple offers my client wanted to raise their price. Fortunately it was only a small amount. Eventually that home sold for what we originally expected but because the price was increased it caused more anxiety than necessary for a SAHM with 2 kids and whose husband had already moved to the east coast.
Great stuff Eric. Your comment really could be a blog post. You get extra points for using “aspirational pricing” too. It’s fascinating to consider some would view California buyers as unicorns. That makes good sense.
There is definitely a place in some markets for being able to price a little higher if the buyers are there to pay the difference between appraised value and the contract price. But the agent and owner better be in tune with the market to be sure this strategy will really work. Every seller wants this, but it won’t be effective in every market, neighborhood, or price range. I know some agents who have suggested a higher list price than what was reasonable because they knew the climate of the market at the time would end up paying above appraised value. This works well sometimes, but it’s very dangerous too to try to price above what is reasonable. It could end up backfiring.
When it comes to overpricing I find sellers often get stuck on the idea that the house was actually worth the aspirational price. So they think the buyer is getting a good deal at a lower price when in fact the buyer is actually paying market value and not getting any discount at all.
Good thoughts, Zillow also complicates market perception….they think it is accurate!
Thanks Mark. That is certainly an extra layer to consider. Just yesterday on Twitter someone tweeted some Zillow stats and asked for my input. In this case the stats showed the median price for Sacramento was $314K. The only problem is the median price is actually $350K right now as of last month. If we look at the entire year last year in Sacramento County the median price was $340,000. A number that low at $314K is totally out of sync with today’s market and is honestly about where the market was at in 2016. I never mind Zillow stats to be honest because I know they have access to data, but it was a real shame to see stats that were so disconnected from reality.
You can always find an agent that will buy the listing with a high price because they need the money and don’t want to tell the seller the truth. Selling it becomes another story. Besides unicorns do their market homework and know an overpriced house when they see one.
Thanks Vicki. If sellers are not willing to budge, an agent can end up spending a huge amount of money on marketing and never actually earn an income on the listing. I know an agent who spent multiple thousands on marketing a high-end home, but the deal fell apart ultimately because the seller would not budge from his perception of pricing reality. If a seller is highly unrealistic it begs the question whether the seller actually wants to sell or not. I imagine it’s not easy to walk away from listings like that as an agent, but maybe that’s the best thing to do sometimes…
It is really hard to walk away. I’ve done it and then watched the house stay on the market for months with repeated price reductions. It never sold. By the end of that, the seller and the agent probably hated each other.
“Aspirational” pricing – great term!
For sure.
A terrific post explaining reasons for overpricing! Great use of Jonathan Miller’s term- “Aspirational Pricing”. Thanks for your blog!
Thanks Shannon. Yeah, Jonathan is the man. This is a fantastic term. For any onlookers, Jonathan has a weekly “Housing Notes” post every Friday. I always look forward to it and I really appreciate the creative way Jonathan thinks about real estate and explains it. Anyway, here here is a link to his blog and a subscription sidebar for his weekly notes too. http://www.millersamuel.com/blog/
Real Estate Unicorns. I love it. Since a unicorn can only be captured by a virgin, does that mean that a real estate unicorn can only be purchased by a first time buyer?
Too good Gary. Yes, I think you’re right. 🙂
LOL too clever
Reason #10 Sellers Overprice Their Home: The listing agent told them he could get them a higher price so he could win the listing vs the other agent who told them a realistic price. Happens ALL the time.
It is always better to underprice than to overprice. ALWAYS. Heck, in the Bay Area it’s the go-to strategy. Underprice something by 10% and watch the offers roll-in way above what you were expecting anyways.
I guarantee if you put some property on the market tomorrow at 70% of it’s realistic worth the offers will come flying in left and right. Most will be crap, but it helps get the serious buyers into a higher-price frame of mind. Just made an offer on one like this last week that went for $50k above ask.
Overpricing hurts… people won’t even make an offer if you’re too unrealistic. They figure what’s the point. You see it all the time where some overpriced property finally comes down $30k and sells 4 days later.
So if there is an ultimate price the property will sell for, better to get it now rather than to wait 6 months.
Thank you Wes. You hit the nail on the head. It’s easy to tell a seller what he/she wants to hear, but if a seller is serious about selling a property needs to be priced reasonably. I tend to agree with you about pricing lower is much better than higher. If a property is priced too low though there are bound to be so many offers, and that’s going to create an insane amount of work for the real estate agent (and many more offers for the seller to sift through too). I imagine it’s very stressful for an agent to communicate well with 30 offers on the table. 🙂
Thanks Ryan! Great reminder. Your Comstock article was right on too!
You are so welcome. Thank you so much for the kind words DeeDee.
Great article, Ryan. I appreciate the information. This is a real problem. I even wonder if it is REAL ESTATE PROFESSIONAL problem. I’ll explain:
I recently ran a story quoting a study from KNOX that over 66% of homes in MSAs were over-priced in 2018. They expect it to be around 75% in 2019. Unfortunately, this becomes an appraiser problem when the REAL value is provided and it is then coined as a “low appraisal” rather than an over-priced home.
One of the reasons that this is happening is that there are so many real estate agents, and they often compete by pitching the listing at a higher price. Of course, it doesn’t work because in most cases, as you note, the price has to be reduced to reality, or it gets appraised and the contract has to be adjusted or the buyer has to bring money to the table.
Our GOOD real estate agents need to stand up and set the pace and not push the market beyond reality into pipe dreams.
Thank you. I appreciate your thoughts. This definitely happens and it’s frustrating for agents. There is always that temptation for someone to talk about a potential price that is much higher than the market in order to get a listing. It’s a real struggle and I know agent friends lose out on listings all the time for this reason.
Part of the issue here is sellers being out of touch with buyers though and how finicky buyers are about price. Sellers have been lagging the trend of a slowing market too. That’s a big deal. I suspect sellers take a good 12-18 months or so to catch up to the trend, so hopefully they’ll be catching on a little more in 2019 since price momentum has been slowing and we’ve seen volume slough.
Overpriced homes today are like a sore thumb. They stand out and do nothing but sit. It’s glaring and unfortunate for some sellers who really do need to sell.