When Cutting the Price, Take a Big Bite, Not a Bunch of Nibbles

Cutting the price to get your home sold isn't quite as simple as it seems.

When to cut? How much to cut? One big reduction or gradual discounts? Price high and negotiate down? Price low to draw competitive bids?

To get some fresh ideas on the subject, I spoke with two professors at the University of Pennsylvania's Wharton School. Z. John Zhang is a marketing professor who teaches a class on pricing, and Todd Sinai is an associate professor of real estate.

Zhang offered some insights about how retailers, who live and die by the proper use of markdowns, use them to make buyers open their wallets.

Zhang explained that people look for two things when shopping. They value the product itself, but they also want to feel good about the transaction. If you're buying the same product as your friend, for example, but you pay $100 less than she did, you're going to feel like you scored. It's not just about the quality of the product or the amount of money you spent, it's about the thrill of the deal. "It makes you feel good about it, makes you feel smart about it," he said.

So the price cut on a home will be most effective if it makes buyers feel as if they're outsmarting the pack.

And make sure your price cut gets noticed. "When retailers move up prices, it's camouflaged," Zhang said. "They change prices slowly, a little today, a little tomorrow." But it's the opposite with a price cut. "They never lower the price by a small amount," he said. "What you want to do is come down quickly."

That's easier to do if you're talking about a sweater that was marked up 100 percent to begin with. With homes, even a small percentage cut in price amounts to tens of thousands of dollars. That's why you see sellers taking baby steps down in price. It hurts.

I did some random searching of homes on the market now, and noticed that many sellers lower their prices slowly, almost as if they don't want it to be noticed. One three-bedroom Victorian-style house in Berwyn Heights in Prince George's County went on the market in April for $489,900 and has been reduced by just 2.94 percent, or $14,400. That hardly screams, "Honey, stop the car!"

Its current asking price, $475,500, also reflects poor strategy on the part of the seller and real estate agent. It misses the closest cutoff for price ranges on many online search tools by just $500. Someone looking for a house priced up to $475,000 might never see it.

Here's another example of timid price cutting: A three-bedroom townhouse in Old Town Alexandria went on the market in April at $759,000. It's had two price cuts, 2.64 percent ($20,000) and 1.35 percent ($10,000.) One big bite would have had more effect than two nibbles.

Most of the homes that actually sold in July had deeper discounts off their original list price than reflected in these examples, according to data from Metropolitan Regional Information Systems, the local multiple-listing service.