Bernice Ross

Due to persistent high interest rates and lack of inventory, buyers are still sitting on the sidelines. As a result, it’s more important than ever to price your listings correctly right from the start.

Failure to do so results in more days on the market, frustrated sellers – and can even cause your listing to expire.

If you’re ready to sharpen your pricing skills, here are some proven approaches that have withstood the test of time.

Follow the 10 Percent Rule

Accurately pricing your listings begins with choosing the right comparable sales. Using a price-per-square foot analysis usually yields accurate results for most properties, provided that you follow what is known as the “10 Percent Rule.”

The approach is simple. Only select comparable sales where both the lot size and the square footage are within 10 percent of those numbers for the subject property.

For example, when pricing a 2,000-square-foot house on a 6,000-square-foot lot, look at properties where the square footage of the improvements is between 1,800 and 2,200 square feet and the range in size from 5,400 to 6,600 square feet.

Selecting comparable sales that are outside the 10 percent guidelines will result in pricing the property too high or too low.

And remember some sage advice: Upgrades can make a home more attractive, but they don’t always translate to higher market value. While structural upgrades such as adding a bedroom or bath almost always result in a higher value, most other upgrades only make the house more saleable – they don’t increase its value.

The Power of Absorption Rates

Commercial real estate agents rely on absorption rates to estimate market demand and set prices. What many agents don’t realize, however, is that absorption rates are equally important in residential sales as well.

The “absorption rate” measures how many months of inventory are on the market. This in turn allows you to determine what type of market you’re in as well as your strategy for pricing and marketing your listing.

Five or less months of inventory: This is a seller’s market, where there are too few listings (low supply) and too many buyers (high demand.) As the months are inventory decline, multiple offers increase, which in turn results in higher prices as buyers often bid properties up over the asking price.

Six months of inventory: At six months of inventory, the supply and demand are in balance. On the other hand, the market may be moving from seller’s market to a buyer’s market, or vice versa. The biggest tell-tale sign that the market is transitioning into a buyer’s market is a major increase in the number of listings with price reductions.

Seven or more months of inventory: This is a buyer’s market where there are too many listings (high supply) and too few buyers (low demand). As the number of months of inventory increases, the probability of prices going down also increases. Sellers who overprice their property often end up “chasing the market down” as prices decline below what the market value was 60 to 90 days ago.

Don’t forget: Absorption rates can vary widely seasonally, especially in unique markets like vacation destinations, so advising sellers on timing can make a significant difference as to the best time to list their property.

Three-Tier Pricing

Based upon my experience, properties typically fall into three primary tiers based upon their location, condition and amenities.

Top tier: These properties are either new or recently remodeled, and are in excellent condition. Usually they’re also located in the most desirable areas.

Middle tier: These are average homes, in average locations, and in average condition. Here’s the catch – you never want to tell a seller that their home is average. A better way of describing this situation is to tell the seller the following: “Your home has amenities similar to many of the homes found in this area.”

Bottom tier: In this case, there is either something wrong with the location, the condition, or both. In many cases, the issues related to these properties (traffic or airport noise, geological issues, tendency to flood, etc.) cannot be corrected and must be factored into your pricing equation.

When your sellers want to price their property at the higher end of the market without having the necessary upgrades that drive premium pricing in your market, here’s what to say:

“Mr. and Mrs. Seller, homes in the highest price range for this area have either been newly updated or are brand new. Properties like yours with similar amenities are currently selling in a slightly lower price range. To obtain a higher price you would have to update the kitchen, bathrooms, and fixtures. If you don’t want to do the updates, we can list at a competitive price now and attract motivated buyers.”

This approach allows sellers to decide between investing in upgrades or adjusting expectations about the price. If they decide on upgrades, make sure your buyers know what features the data says are in demand in your market, and what aren’t.

Bernice Ross is a nationally syndicated columnist, author, trainer and speaker on real estate topics. She can be reached at bernice@realestatecoach.com.

Price It Right from the Start: Three Strategies to Avoid Costly Listing Pitfalls

by Bernice Ross time to read: 3 min
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