Why overpricing a home is not a good idea

March 6

(Daniel Acker/BLOOMBERG)

Djana Morris, an agent with Keller Williams Capital Properties and a real estate investor, writes an occasional column about conditions in the Washington-area real estate market. This is the second of two parts.

In my post Wednesday, I established that the demand for homes in the Washington area is very strong.

Buyers are out in force with their real estate agents during the week and Sunday open houses are jammed. Multiple offers on well-priced properties are commonplace. The only problem is that there is not enough inventory to satisfy demand and many of the properties on the market are overpriced.

How do I know this? The number of days a property has been on the market is the major determinate of whether the home is priced correctly. In the current Washington-area real estate market, the vast majority of properties have been on the market for at least 30 days. In fact, many have been listed from 60 to 365 days with no price reduction. No offers within a 30-day period means the price is too high. Every day the home sits on the market makes it less valuable in the minds of buyers, and today’s buyers are completely value driven.

Here’s a real estate fact that every home seller should know: Buyers determine the right price for a property, not sellers. The market price for a home is determined by what an able and willing buyer ultimately pays for it. There are certainly things that homeowners can do to influence buyers’ perceptions of their home’s value and hence increase the price buyers are willing to pay for it. But, ultimately, the buyers will set the price.

So in this current real estate market of extreme scarcity alongside lots of stale listings, what can be done to fix the situation to the benefit of all parties?

An increase in inventory would certainly end this stalemate. Homeowners who may have been underwater on their mortgages at one time should evaluate whether their situation has changed. Washington-area real estate values have largely recovered and many of those properties are now in a positive equity situation. In other words, now is a good time to find out what your home is currently worth and perhaps cash out to downsize for retirement or buy a larger home. Interest rates are projected to be more than  5 percent by year’s end, which will make homes more expensive for buyers and will make their replacement home purchase more costly in the future. To homeowners who have considered selling but are sitting on the sidelines: It  is hard to imagine a better time to attract a buyer than right now.

For sellers with homes currently on the market, the first 30 days will provide more than adequate feedback on your home’s pricing. Offers or a lack thereof during that period provides crucial information that you can use to maximize the proceeds from your sale. I once had a listing where the home was priced very well for the neighborhood, but had not received an offer in more than 30 days, while other similar homes around it went under contract. The owner had declined to paint the interior of her home prior to listing it because she liked the variety of colors that were well-suited to her taste. But after receiving visitor feedback, she agreed to repaint the home, which then went under contract within days.

Overpricing a home to allow for negotiating room is also a tactic that can backfire on sellers. It sounds like a sensible strategy for getting your desired price, but it assumes that buyers will make an offer that can then be negotiated.

Here’s the reality — most buyers today have little patience for making low-ball offers on overpriced properties. They will wait until the seller lowers the price to the level they believe it is worth, before making an offer. The first days of a new listing are the property’s best shot at attracting its highest offer. Buyers and real estate agents rush over to see the property and they crowd the first open house, ready to make an offer if the house and the price are right. Don’t waste this opportunity. Price it properly and you may not need to negotiate — full price offers in this market are not uncommon.

Here’s a good rule of thumb regarding pricing once the property is listed: If the property has had very few showings at the current price and no offers, the home is priced too high. If there have been lots of showings and no offers, feedback from buyer’s agents will be key to figuring out if there is an issue that can be resolved or whether a price reduction is warranted, or both. When a property is priced correctly for the market and its condition, it will receive offers. If the property is priced below market, it will likely receive multiple offers which may bring you a higher price than if you had priced the property there from the start.

Statistics have shown that the first offer received for a home is almost always the highest. I’m not saying sellers have to accept the first offer they get; but too many sellers reject offers they don’t like and then find themselves waiting months for another one.

Work with it and negotiate, rather than reject it out of hand. Keep in mind that the longer the property is on the market, the less desirable it is in the minds of buyers, especially in a market where they see the frenzy for other properties. “What’s wrong with it?” is one of the first questions my buyer clients usually ask about a property that has been sitting unsold in a hot market. Today’s buyers are not expecting a bargain, as they understand the realities of the market; but they are also not willing to overpay for a home, even when they love it.

I would encourage every seller to think strategically. Think like a buyer. I know you might not be in a rush and are willing to wait for the right offer. But would you offer full price for a home that has been on the market for 100 days? Even 45 days? If you are selling your home you will most likely be purchasing a new place to live. Put yourself in your own future shoes and use that to your advantage when selling.

Sellers, you are in the midst of a golden real estate opportunity. If you have been thinking about selling your home, it doesn’t get much better than having more buyers looking for homes than there are homes available.

Being realistic, pricing your home in line with similar properties that have sold in your neighborhood, monitoring feedback and then making any needed adjustments will position you to receive the highest return on your home in the long and short run.

Djana Morris can be reached at www.WhereToLiveInDC.com.

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