By Elizabeth Razzi
Sunday, August 24, 2008
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.
In the District, sold prices were 7.15 percent lower than original list prices. In Fairfax, Arlington, Alexandria and Falls Church, they were 7.4 percent below list. In Prince William County, they were down 9.94 percent; Prince George's County, down 9.96 percent; and Montgomery County, down 8.4 percent.
Declining home prices overall are working against sellers, of course, giving buyers an incentive to wait. "You want to make sure consumers don't really want to wait," Zhang said. "Offer incentives right away. A big chunk. Make it a once-in-a-lifetime opportunity."
Sinai, the real estate professor, offered an approach geared more toward sellers who are willing and able to wait for the one buyer most likely to pay top dollar (at least today's top dollar) for a specific home.
"The number one most important thing to sell your home is to get a lot of people through the door to see it," he said. "You have to find the person for whom this is the most ideally suited house. They have the highest willingness to pay for it."
I asked him about a statement that I often hear from real estate agents: If an asking price is too low, competing bids will bring the price up to the proper level.
He said the trouble with that strategy is you might cheat yourself out of enough time on the market to attract the buyer who will fall in love with your specific home. "You don't want to set the initial price so low that someone who isn't the one with the highest willingness to pay places an offer," Sinai said. "You should be willing to wait a bit for that."
Homes that sold in July had been on the market quite a while. In the District, they had been on the market a relatively short 74 day. In Fairfax, Arlington, Alexandria and Falls Church, it was 91 days; Prince William County, 112 days; Prince George's County, 127 days; and Montgomery County, 92 days.
If you have a home that genuinely is different from six others being marketed in your neighborhood, you might want to start out with a high-ish price. But make sure it's a 2008 price -- not an inflated 2006 price. Nobody falls that crazy in love these days. And if they did, the appraiser and mortgage lender would be much more likely to shake them out of their reverie than they were during the boom.
"In a lot of markets, the sellers have not caught up to where house prices are," Sinai said.
How do you know when to cut the price? Do it when potential buyers stop coming through the door. That could be only a couple of weeks after listing. A lack of traffic is how the market tells you the price is too high.
If you have to drop the price to get buyers looking again, just make sure you get the biggest splash out of it.
E-mail Elizabeth Razzi atrazzie@washpost.com.
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