Is picking the perfect price the work of a crystal ball or of a seasoned professional? I’ll go with the seasoned professional. But it is still important as an investor that you understand the process a professional will use and that you have the final say.
The first part of the process is getting a professional or several to look at your property. As an investor it will be a little different than as a homeowner. You should have the property ready for the retail market, whereas a homeowner might be looking to a professional for input as to the needs to be fixed on the home to make it retail market ready.
Once a professional has looked at the property most of them will go run a series of reports. These include market trends for the area and comparable sales. Once that is done they will see how your property measures up to the comps and will usually give you a price range which they feel it’s best to list your property. A good professional will also take into consideration how quickly you want to sell and what you need to get out of the property. This process is much more involved than these few sentences would indicate.
Now that you have a price range the decision will be yours as to where the price is set. So now the question arises – if listed for higher than market value will I get more? Or if listed for less than market value will I get more offers, which will result in a bidding war?
Every professional will have their opinion as to which way to play it and market trends will also have an effect. I have often wondered if there was evidence that supported one of these strategies over the other. When I say evidence I mean hard data that is based in research, not professional experience.
Sanette Tanaka of the Wall Street Journal in her article titled “Should Home Sellers Overprice or Underprice Real Estate Listing” quoted a study published in the May issue of the Journal of Economic Behavior and Organization by research professor Grace Bucchianeri (former assistant professor at the Wharton School of Business – University of Pennsylvania) and Julia Minson (lecturer at the University of Pennsylvania). Bucchianeri and Minson found that sellers who set the listed price between 10% to 20% higher than comps in the area saw a slight increase of $117 to $163 on average. Whereas pricing a property 10% to 20% lower than homes in the area lead to a decrease of $117 to $187 on average.
Minson analyzed 14,616 real-estate transactions in Delaware, New Jersey and Pennsylvania between January 2005 and April 2009, with an average sale price of $234,000.
Their research also refers to the phenomenon of “anchoring.” We often rely on the first piece of information we get when making a decision. Daniel Ariely in his book Predictably Irrational summed it up by “first impressions last.” That first exposure lasts “…price tags by themselves are not necessarily anchors. They become anchors when we contemplate buying a product or service at that particular price. That’s when the imprint is set from then on, we are willing to accept a range of prices – but as with the pull of a bungee cord, we always refer back to the original anchor. Thus, the first anchor influences not only the immediate buying decision, but many others that follow.”
One of the other concerns I have about anchoring is that there is so much bad information on the web, that we can all fall victim to getting a price in our head that isn’t close to reality. In the Professional Real Estate Investor class, we also analyze how to separate emotion from this decision. You can see where this is an important decision that should not be taken lightly.