What It Can Really Cost You by Overpricing Your Home

June 30, 2010 - PRLog -- A lot of home sellers may think it is a wise strategy to price their home higher than the market can support because in the end they will solicit offers and begin negotiations form a higher price point.  They often feel this will give them advantage during the negotiation process.  Unfortunately the most common and costly mistake that a seller can make is setting an unrealistically high asking price.  Every seller wants to receive the highest price possible for their home, but pricing your home outside of a reasonable market value will only end up costing the seller money, time and grief.

In many cases overpricing can come from a lack of objectivity.  Some sellers may believe in the theory that pricing high to start will leave room to negotiate lower later on.  In the end I have just about always found that overpricing from the start will actually force the seller to end up settling for a lower price than they would have received by pricing the home correctly to start.  When pricing a home correctly you need to look at active sales and recently sold comparable properties.  Active listings cannot be used without recent sales because often times they may be overpriced as well.  So you need to closely look at recently sold properties and see how long they took to sell and how they compare to your home.  

As a REALTOR & Consultant to my clients this is the most important part of my job and I take it very seriously.  I would rather walk away or have another agent get a listing than not be honest about what a home is worth with my client.  In the end it is the seller’s home and the seller’s equity so my job is to give them the information necessary to make an educated decision.  Always remember the market determines the price, not the Realtor or the Seller.  Once you decide to sell your home it becomes a commodity of sorts and it is best to try to detach yourself emotionally and look at the home as a potential buyer would.

What Typically Happens with Overpricing?

Fewer Potential Buyers – By pricing your home outside the market a seller will actually prevent it from even being seen by a certain percent of potential buyers who may have been interested the home.  Most of the more savvy buyers today will do extensive research on the local market before even contacting an agent to represent them.  Buyers will search for available homes on my website sometimes for months before contacting me to buy a home.  While doing this they will most often set a price range to limit the number of listings they are looking at.  If the home priced outside of those ranges by as much as a few thousand dollars, those potential buyers will never even know the home is available.
When I meet with my buyer clients we will typically develop a strategy to evaluate and review homes that match their needs within their price range.  When a client tells me their maximum price they want to spend I will stay within those parameters unless I see something that may be an incredible value.  Of course an overpriced home does not fall into that category.

Lack of Showings – Because my team and I work with homebuyers and sellers in the Austin Real Estate market we are very familiar with the market conditions and listing prices of comparable homes.  When I see a home that is overpriced I will often times not even show those homes because I do not want to waste my client’s time or mine for that matter.
Helping Sell Competing Listings – Although this may not cross the mind of a home seller, overpricing your home within its market can actually help the competition.  The overpriced homes higher asking price will make other nearby homes of similar size and condition look like much better values when compared to yours.  I have even used overpriced competition to help sell my own listings by showing how well they are priced.
Stagnation & Stigmatization – If a home is priced higher than what potential buyers are willing to pay, it runs the risk of just sitting on the market for a long period of time.  As the home sits on the market for months and months it gains a reputation for being “overpriced” within the real estate agents in the area.  Once this happens, it is very difficult to remove that stigma and create interest in the home again.  When the inevitable price drops eventually come it will not have the same effect and typically it will be necessary to drop the price further than if the home was priced correctly within the market to begin with.
Negotiations – A high listing price can often be a warning sign for buyers that they will use for leverage during the negotiation process.  When a home has a high asking price without home improvements or features to justify the difference buyers may assume the following.

1.   Seller or his Agent is not informed about the market
2.   Seller is not highly motivated
3.   May have a need for money and need to move
4.   Simply creating some bargaining room for negotiations

If the buyer believes any of these they will want to start “fishing” to determine how low of a price you will accept.  On the other hand, if a home has sit on the market for months as a result of overpricing, buyers may believe the seller may be becoming desperate.  This can cause interested buyers to make lower offers as a result.  These offers will typically be considered “low ball” offers by the seller.

Appraisal Problems -  Even if you are fortunate enough to find a motivated buyer who is willing to pay the overestimated asking price you will now run the risk of having to deal fall apart before closing if the home does not appraise out.  Most buyers in today’s market are using financing to pay for their home purchase and every lender will require an appraisal of the home’s value.

An appraiser will look at the home in person to determine a value based on similar homes that have sold (ideally in the last 3 to 6 months or less).  If the appraised value is below the agreed selling price, the lender will only approve the loan for the lower amount.  The seller will most likely be forced to reduce the selling price or risk losing the buyer and returning the home to the market once again.

Overpricing in Today’s Market – Many sellers today will fall to the temptation of overpricing their home.  Home prices have dropped over the past few years and many sellers who have bought in the past 3-5 years are in a state of denial about the current market value of their homes.  Homeowners who have purchased in the past 3-5 years may be influenced by the purchase price they paid for their homes in relation to the true market value the home holds today.

Unfortunately this is the worst time to consider an overpricing strategy.  There are currently a smaller number of motivated buyers and these buyers are also well educated about the Austin Real Estate Market.  Without the assumption of price appreciation, few buyers are willing to gamble and overpay for a home.  Also, credit tightening among lenders has reduced both the number of buyers who can qualify for a mortgage as well as the amount of financing  options available.

This article had to be cut short due to size limitations.  You can read the entire blog article at my website via the link: http://austinrealestatescene.com/blog.php?view=item&id=886

About the Author
Don Groff is a licensed REALTOR & Mortgage Broker in Austin, Texas.  He has over 10 years of experience consulting his clients to make the best possible choices in any real estate transaction. You can contact Don at 512.669.5599 to discuss this article or any other real estate or mortgage questions you may have. You can visit http://www.AustinRealEstateScene.com to search the Austin MLS and read about the ever changing Austin Real Estate Market. Don can also be reached via email at listings@dongroff.com

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Austin Real Estate Scene.com consists of a team of professional REALTORS led by Don Groff that will help you get the best deal on your next home purchase. We will also help you sell your current home for the best price available in Austin, Texas. We are educators to our clients because knowledge empowers you to make the best possible choices.