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The Art of the Price Adjustment

Since the inventory of homes for sale has increased on a weekly basis over the last few months the market is finally beginning to slow down and not be so much of a sellers’ market.

We are in that time of year that homes are sitting on the market longer than they did even a month ago.  This is completely normal. Given this change in the market, price adjustments will increase in the weeks and months to come.  May is typically the biggest month of the year for price adjustments as was the case over the last two years.Capture

Making a price adjustment on a home is always a dreaded task for every homeowner.  No homeowner says, “I am so excited to lower my price, let’s do it as soon as possible!”house money

Correctly setting a price for your home when it is originally listed is the most effective way to sell a home but it can be difficult. Even the best Realtors and most realistic home owners can price their home too high.  And in some cases the price was right when it was originally set but the market changes quickly.  So let’s assume that you went a little too high on your opening list price, how do you know for sure?  There are a few simple ways to tell if your house is priced too high.

How do you know your house is overpriced?

1. Your home is priced much higher than neighboring properties

In most neighborhoods, home values will be relatively close and consistent.  If your home is listed even $25,000 more than other homes for sale in your neighborhood, then it is most likely overpriced.  A very common real estate method is completing a comparative market analysis.  A comparative market analysis (CMA) is a detailed analysis of homes sold in the past six months in your neighborhood.  If your home is priced much higher than others in your area and it is not selling leaving it at that price won’t get it sold.

2. You’ve had very few or no showings

Over the past few months immediately after a home is put on the market, it should receive at least a few appointments for showings.  If not, this could be an indication that buyers think the home is overpriced.  If homeowners decide to have an open house, but no one walks through the door during a 2-hour period, then the price could be an issue.  Most buyers will not waste their time at an open house if they feel that the home is overpriced.

3. After a month, you still haven’t received an offer

In most real estate markets like the one we are in, if the home is priced correctly, a homeowner should receive at least one offer within the first two or three weeks. Of course there are different types of properties that may take longer than a couple of weeks to receive an offer, such as a luxury home or a waterfront property, but if you haven’t received an offer after a few months, your home is mostly likely overpriced.

4. You hired the agent who recommended the highest price

When you are interviewing prospective Realtors to sell your home, it is important that you know what questions you should ask during the interview.  One of the most important questions relates to pricing.  If four out of five agents suggest a similar price, and the 5th offers a much higher price, you need to ask how the 5th agent came up with this number.  The agent who offers the highest price for your home may not always be able to follow through, and your house may sit on the market for a long time.

When should you adjust the price?

Once a few weeks or a month goes by sellers tend to begin to wonder if and when they should make an adjustment.   In addition by this time a good and experienced Realtor will likely begin to mention that a price adjustment may be needed. At this point many sellers ask, “When is a good time to lower the price?”  There is no time like the present. If you wait you are only delaying the inevitable and as the days on market build up it will only get harder to sell which will cause the home to sell for less.

How much do you adjust the price?

The fact is the lower you go the more buyers you will attract.  If you attract enough buyers they will compete. This is exactly how bidding wars happen.

As far as the adjustment amount typically anything less than a 5% price adjustment doesn’t work but there are exceptions.  There are also many other variables to consider when adjusting the price.

Here at Lamacchia, we have been selling homes since 2005 and since that time have also been accumulating data on just about everything you could think of in regards to selling homes. A large chunk of the data that we have collected is related to pricing adjustments. Since 2007 throughout all markets both strong and weak, we have been following this “Target Pricing Model”.  We have found this to be extremely accurate and helpful.

Based on the image below, you can see that if you accurately priced your home you will be in the bullseye.  If not the areas around the bullseye will tell you roughly how much of an adjustment is needed.

Get Your Price on Target

Target-Pricing

 If your home is receiving showings but no offers somewhere between a 3-5% adjustment should be made.

  • Receiving a small amount of showings and maybe only getting some drive bye’s then you probably need somewhere between a 6-11% adjustment.
  • Not getting any showings at all and are maybe only getting some drive by’s then you probably need at least a 12% adjustment. When this happens sellers are usually the most hesitant to adjust because they just cannot believe no one has even come out to see the house.

There are exceptions to each of these adjustments and the cases can vary but the bull’s eye is a great framework to plan the adjustment.

Consider the Price Brackets

If you follow the above Target Pricing Model it will almost always get your price into the correct range.  But another big factor when lowering the price of your home, is to take into consideration how real estate sites and automatic email services set up their pricing brackets.  Most real estate search sites like Zillow and Trulia use $50,000 brackets, which means that a buyer could choose a category of $350,000 – $400,000 as a price range for buying a home.

The limitation with only following the Target Pricing Model is if you are on the market at $429,000 and you adjust your price by say 5% you will end up at a price of $407,550.  If that is what the target pricing model calls for you can do it but in this case it would be a lot smarter to drop down to $400,000 so that you can reach new buyers.  Remember if you go from $429,000 to $407,550 every one that has already seen the home will be pleased to see that it is being offered for a lower price but you won’t reach many NEW buyers.  For an additional $7,550 you are much better off just going to $400,000 and picking up both of the brackets meaning those looking from $350,000 to $400,000 and $400,000 to $450,000.

 
To illustrate this scenario we went into MLS and utilized the “Marketing Overview” feature which tells you how many additional matches you will receive from lowering the price.

Market Price Example

As you can see lowering the price from $429,000 to $407,550 brought in an additional 82 New Contacts, but when we went all the way down to $400,000 it brought in an additional 219 new contacts! 

Final Thoughts

In the book Zillow Talk by Spencer Rascoff and Stan Humphries Chapter 15 talks about Pricing.  One of the points they make is about price adjustments.  They say “If you overprice it’s better to admit your mistake and cut the price all the way down to the true market value in one fell swoop.”  They are right.

When a home isn’t selling adjusting the price can be a daunting task.  It is natural to be proud of your home and not want to adjust it but adjusting the price is often needed to get a home sold.  As Anthony explained at the end of his Boston Globe column in June 2015, it is tempting for sellers to blame their Realtors if their home is not selling. In some cases, it may be the Realtors fault but in many cases it isn’t.  As Realtors, we tend to get more credit than we deserve when a home sells quickly and more blame than we deserve when it does not.  It is the nature of the business.

 

Related links:

Anthony Lamacchia Market Report Video June 13, 2016.

Spike in Housing Inventory This Fall Means More Competition and Lower Prices for Home Sellers