Sometimes, asking for less nets you more.
I recently had a conversation with a young mother about to give birth to her fourth child. She and her husband are eager to get out of their much-too-small home and have been house hunting for months. She tells me that each time they make an offer, they are outbid. Just that day, the couple toured an "okay" house, made an offer for $25,000 over the asking price, and dropped the contingency for a home inspection -- but were still outbid.
If you are about to put your home on the market, you may be tempted to believe that the sky’s the limit and you can command any price you desire for your home. No matter how hot the market is, though, there are at least five good reasons not to overprice your property.
1. You attract "sign agents"
Unless you already have one, you'll need to find a real estate agent who won't just tell you what you want to hear. A "sign agent" is someone who either tells you that your home is worth more than it's actually worth or agrees to list it for more than it's worth in order to get your business.
Let's say that homes comparable to yours are selling for $300,000 but you are determined to get $375,000 for your house. You interview several agents and the first two are honest with you and advise you to list at a more realistic price. The third agent, understanding that you won't sign with them unless they tell you what you want to hear, agrees to list the property for $375,000.
When you're entering into a business transaction as important as selling your home, you don't want a sign agent. For reasons we will cover below, overpricing your home can cause more of a headache than you anticipate.
2. You make the competition look good
If the majority of homes in your neighborhood sell for around the same price, listing yours at a higher price point will make other houses on the market more attractive by comparison. That's because most home buyers -- despite today's mortgage interest rates -- have a price in mind. Even if their lender has indicated that they qualify for more, home buyers go into the house hunting process with a sense of how much they're comfortable spending. When you set the price too high, you reduce the number of people who could have found you if you listed your property in their desired price range.
3. You scare off potential buyers
By the time they tour your house, potential buyers may have already visited dozens of properties. They (and their real estate agents) have a strong sense of what homes like yours are worth. A high price tag gives a buyer the impression that you have an unrealistic view of the home's value. If a buyer is on the fence about making an offer, the idea of trying to negotiate with an unrealistic seller may be enough to scare them off.
4. Buyers don't want to offend you
Rather than offend you with a low offer, a potential home buyer may walk away, even if your property feels like "the one." Just as some people don't enjoy haggling for a better deal at flea markets, some dislike the back and forth associated with real estate counter offers.
5. You may need an all-cash buyer
In the fourth quarter of 2020, roughly one in five home sales involved all-cash buyers. Even if that percentage holds up through 2021 (which is unlikely), that means that 80% of home buyers need a mortgage to make a purchase. And that's where overpricing your property can send a deal off the rails. Here's an illustration of how:
- You price your home at $375,000.
- You receive a full price offer for $375,000.
- The buyer plans to put $20,000 down and borrow $355,000.
- The lender requires a home appraisal (all lenders do).
- The home appraisal comes in at $340,000.
- The bank will provide the borrower with up to 95% of the appraised value -- in this case, $323,000.
- The buyer must either come up with $52,000 down instead of $20,000 to make up the difference, negotiate with you to lower the price to better reflect the appraised value, or walk away from the deal.
Note: We used a maximum loan amount of 95% of the appraised value for this illustration, but that loan-to-value (LTV) limit depends on the lender and type of home loan used by the borrower. In any case, a home that is overpriced is more likely to run into a low appraised value than a reasonably priced home. It's not an issue if you have a cash buyer who plans to skip the mortgage. But with 80% of buyers taking out a mortgage, it's worth keeping in mind.
If your reason for overpricing your home is a fear of leaving money on the table, you may be surprised by how today's buyers respond. With so little inventory available, many homes receive multiple offers. As long as you don't scare buyers off with a high asking price, it's possible that you'll end up with a higher-than-expected offer anyway.
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