The most important thing to do when selling your home is to determine how best to price your home accurately. Even more so than commissions, poor decisions by an owner around pricing their home can cost substantial amounts of money and these outcomes are to be avoided at all costs.
The most common method for generating accurate prices is called the price per square foot (PPSF) method and involves reviewing photos of similar sold homes and making comparisons to the subject property being priced. This data can be used to formulate a price that is likely to be achieved if listed in the multiple listing service (MLS). When this review goes wrong or gets skipped, and the price for a new listing is not accurate, sellers lose money, time, and leverage that impacts their net proceeds from a home sale.
In the diagram below, homes which sell at their just right price in the MLS usually receive offers at the list price before the average numbers of days on market (DOM) have elapsed. Often a seller in this situation will get one offer from the one buyer in the market who is willing to pay the most for their specific home and has had some time consider their options and (barely) get comfortable with the price. A seller's first offer is nearly always the best offer, as long as they stay far away from intentionally creating a multiple offer situation by underpricing. When this first offer is at or quite near to the market price prior prior to the average DOM, a seller has done an excellent job pricing and set the stage for a favorable net proceeds following escrow.
In contrast, homes which are priced too high, have an above average DOM and will most likely not sell until prices drop. If the home listing exceeds twice the average DOM or longer, that signifies to buyers that there is an opportunity for them to put in lowball offers and that things are (likely) to sell at lower prices. However, sellers are always better off making a public price cut, instead of taking a private lowball offer, since more buyers know about the sellers' true reservation price when they update the listing.
Overpricing can occur when owners are not objective in pricing their home, wishing for a better deal than the MLS can deliver. This situation can become acute when owners like what they see with an AVM price that is not accurate and then proceeds to try and frame the rest of reality around it-- emotional turmoil often results, and the overpriced listings NEVER sell. Newer brokers or those eager to get a listing will often go along with an artificially high valuation to get a deal signed for a new listing. Prices later get dropped, usually with some drama. The other way overpricing can occur is when brokers convince owners that they can sell the home for a higher price than other brokers, using proprietary marketing or salesmanship. However, these assertions are never true because American MLS’s are monopolies and there are no better prices than the ones to be had in the MLS. Time is lost when over-pricing occurs, and it may be more likely that the seller has to make unnecessary concessions such as paying for a buyers agent commission.
Underpricing occurs most frequently when brokers talk owners down on price so they can save time and money by skipping detailed pricing work and compressing the listing timeline with an ‘offer review date.’ Often a low-priced listing strategy is sold to an owner under the guise that it will be good to get “multiple offers” or that sellers benefit when buyers compete to bid up the price. However, buyers already compete and creating an underpriced fire drill with a short timeline will only turn off potential buyers who don’t want to be in a rush. These lost buyers have a material impact on price.
Don’t believe it? Then spend a bit of time with the ‘Stanford Study,’ a peer-reviewed piece of academic research that analyzes a unique chunk of homes that could not be listed in the local MLS. Remarkably the researchers found that brokers talked owners down on price by as much as 5.9 to 7.5% below the market price.
Another way to view the underpricing and multiple offer topic is to examine how brokers act when they sell their own homes instead of their clients. It has been shown that brokers take longer and also achieve higher prices when they sell their own homes. Research by Levitt and Syverson on the topic found that agent owned homes sold for 3.7% more and stayed on the market 9.5 days longer when compared to client-owned homes they sold. In other words they skipped the multiple offer strategy so they could get a better price.
These sobering percentages of the sale price add up to tens of thousands of dollars. Sellers can make a lot of money in a short amount of time if they understand and avoid these mistakes on the way to securing the greatest net proceeds at closing.