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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 expired listings. If you’re ready to sharpen your pricing skills, here’s a proven approach that has withstood the test of time.
Follow the 10% Rule for selecting comparable sales
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 1,800-2,200 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.
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.
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 fewer months of inventory: This is a seller’s market with too few listings (low supply) and too many buyers (high demand). As the months of 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 a 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 60-90 days ago.
How quickly are homes in different locations and price ranges selling?
A tried-and-true approach for addressing this situation is to use the rate of absorption (how much inventory is on the market and how quickly it is selling).
To illustrate this point, assume that there are five months of inventory currently on the market. (Most MLSs track this data for you.)
- Divide 100 percent by five (the number of months of inventory)
- The number that yields (in this example) is 20 percent.
- What this means is that in any given month, the probability that a property will sell is 20 percent, and the probability that it will still be on the market next month is 80 percent.
Here’s how to close the sellers using this approach:
Agent: “Seller, you have an important decision to make. Will you position your property where it will be in the top 20 percent of listings that will sell next month, or will you position your property where it will be in the 80 percent that will still be listed next month? It’s your choice; what would you like to do?”
3-tier pricing
Based on my experience, properties typically fall into three primary tiers based on 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:
Agent: “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, here’s what to say:
Agent: “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.
Show sellers the competition
If the sellers are still reluctant to price their property realistically, here’s a strategy that usually works. Begin by gathering as many interior photos of closed sales as possible. Next, ask the seller to select which houses most resemble their house. This removes the idea of competition and, instead, has them looking for similarities.
Once the seller makes their selection, you can then use the price-per-square-foot sales numbers to generate an accurate list price.
Know your local market dynamics
Absorption rates are a great place to start, but local market knowledge allows you to price even more accurately.
Key factors include:
- Which types of features and properties command premium pricing? Pricing premiums can vary greatly based on neighborhood specifics. For example, a north-facing property in an area where they have a hot climate may command a higher price because it will be cooler than south- or west-facing properties. In suburban neighborhoods, proximity to top-rated schools or easy access to public transit can also command higher prices.
- Buyer preferences by property type: In urban areas, properties near a dog park, a hike and bike trail, or those located close to public transportation typically merit higher prices. The same is true for the higher floors in high-rise condos. Agents who understand these finer nuances of pricing and can explain them to their sellers are much more likely to price their listings correctly.
- Location-specific premiums: Certain locations within neighborhoods may command a higher price while others have issues that will put their price lower than most of the other properties. For example, a home located near the pool may be less desirable because of the noise. A property in a hillside area may be sunny and bright during the summer but so dark the rest of the year you need to turn on the lights. Adjusting for these details makes your pricing advice more accurate.
- Seasonal shifts in demand: Absorption rates can vary widely seasonally, so advising sellers on timing can make a significant difference as to the best time to list their property. For example, in cold climates, summertime may be the peak time for sales. In contrast, desert properties normally see peak sales around the holidays through early spring.
Upgrades increase salability, but not necessarily price
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.
Here’s how to explain this to your seller:
Agent: “Seller, your beautiful upgrades will make your home more salable, but in most cases will NOT result in a higher price. Here’s why. How much are all your beautiful dark wood custom cabinets worth if the buyer is going to tear them out and replace them with an all-white, contemporary look?”
In today’s market, focusing on absorption rates, tier pricing and specific neighborhood trends allows you to price your listings more accurately. Moreover, when you price your listings right from the start, you’ll have more happy sellers who have moved rather than languishing on the market.
Bernice Ross, president and CEO of BrokerageUP and RealEstateCoach.com, and the founder of RealEstateWealthForWomen.com is a national speaker, author and trainer with over 1,500 published articles.
