When preparing to sell, it’s not uncommon for a homeowner to be tempted to price their property higher than the market implies it’s worth. What’s important to remember is that the price range your home fits into should not be determined by personal factors.
Much like the stock market, home values change based upon the basics of supply and demand. The total sum of human behavior driving the market is what determines the value.
When a Realtor conducts a comparative market analysis (CMA) on a home, the goal is to establish the fair market value of the home and then price it accordingly.
It is good practice to price a home around the fair market value to avoid the consequences of overpricing.
The most damaging outcome of overpricing a home is monetary. Oftentimes, homes that are grossly overpriced sell below their fair market value. How can that be? A few reasons…
Agents
We have to note that nearly all qualified buyers are represented by an agent. The agent should be able to determine when a home is overpriced and as a fiduciary representative is obligated to instruct those buyers accordingly. The agent would inform the clients that they should offer less or find another home.
Competing Listings
The buyers have likely toured many homes and take notice when one doesn’t compare to others in the same price range. Are they likely to buy less of a house for more money? Maybe, but not at the asking price. You’re more likely to receive a low ball offer or end up promoting the other homes competing in that same price range as they have more bang for the buck.
Qualified Buyers Won’t See It
If the home is priced out of its appropriate bracket, the likely buyers who are qualified to purchase may not even see it. When a buyer is financing property, their lender approves them up to a specific purchase price. Why would they search for homes they know they cannot afford? The would-be new homeowner doesn’t even know the home exists and doesn’t have the opportunity to offer a fair price.
More Days on Market
Have you ever noticed a home that doesn’t seem to sell? This tends to change a buyer's impression. They begin to wonder why it hasn’t sold, if there’s something wrong with the house, and if it’s overpriced. Their agent will see how long it’s been on the market and know the seller either isn’t receiving offers or won’t accept a reasonable one. If they are to move forward with an offer, it's likely to be lower than anticipated. This is generally when we start to see sellers lower the asking price.
Appraisal
A home priced above its comparable's is not likely to appraise if the sale makes it this far. Unless the market indicates the home is worth the agreed upon purchase price, the lender is not going to assume the risk of investing in a home that isn’t worth the loan amount. This issue is remedied by lowering the sales price, the buyer bringing in even more cash, or the transaction falling through.
Perceived Value
The conjunction of all of these effects of overpricing ultimately diminish the perceived value of the home. When qualified buyers see a home that has struggled to sell, dropped its price, and has lost its buzz from being fresh on the market, they may begin to view it in a negative light. At this point, when perceived value is low, the seller could have a hard time getting even a fair price for the home.
In markets like the one we have today, where there is lower supply and higher demand, a home is more likely to sell higher if priced at fair value. Pricing at fair market value creates demand for the home in and of itself by bringing in qualified buyers willing to bid against each other. The risk of overpricing rarely seems worth the trouble when you can price based on real activity and see positive results.