There are three schools of thought when strategizing on the initial asking price of a home: 1) overprice it thinking that a higher asking price will draw in higher initial offers from potential buyers; or 2) underprice it in order to start a bidding war and drive up the final sales price; or 3) price it correctly for the market.
According to a recent study by Prof. Grace Bucchianeri of the Wharton School at the University of Pennsylvania, and co-author Julia Minson, who was a lecturer at UPenn at the time, the higher a home is priced at the outset, the more likely it is that the sellers will get a higher offer from a buyer.
Many real estate agents, however, prefer to underprice a home in order to ignite a bidding war. But is that realy effective? Researchers say no because there is seldom enough buyers in a market to create what they call a "herding effect" to increase the price. They found that underpricing a home could actually lead to a lower sales price.
The researchers analyzed 14,616 real estate transactions with an average sales price of $234,000 that occured between January 2005 and April 2009 in Pennsylvania, New Jersey, and Delaware.
In their study, researchers found that sellers who listed their homes 10% to 20% higher than comparable homes in the neighborhood saw an average increase of 0.05% to 0.07% in the final sales price.
They also found that sellers who listed their homes 10% to 20% lower than comparable homes in the neighborhood saw an average decrease of 0.05% to 0.08% in the final sales price.
Critics point out that the study's findings are too inconclusive to determine the best pricing strategy. They go on to say that researchers evaluated transactions that had an average sales price of $234,000. And, the up or down change in the amounts of the final sales prices is miniscule ─ it ranged from just $117 to $187.
I have to agree with the critics on this one. The amount you stand to gain from overpricing a home is too insignifcant to even want to try the strategy. You stand to lose far more if you don’t get any offers initially and the house sits on the market for 4-5 months. The only time overpricing a home really works is when there is a shortage of homes on the market in a given price range, and the demand is high. That is simple Economics 101: supply and demand.
Underpricing a home may speed up a sale. However, unless the sellers are in need of a quick sale, that only serves the real estate agent. When homes are underpriced for the market, the sellers are being short-changed as they are not getting the full fair market value for the sale of their home. And the agents will spend less time, money, and effort in trying to sell a home that is underpriced. True, the agents will get a lower commission, but that difference too is usually negligible.
In the final analysis, you’d be better off by pricing your house correctly for the market to begin with. Be sure to take into account the overall condition of the home, any amenities and/or improvements it has, as well as its location. And take that $117 - $187 and make some needed repairs to your home. You’ll stand a far better chance of selling your home in a fairly short amount of time, and sell it for price that is closer to if not at full market value.
