iowahomeloans

Should You Overprice Your Home When Inventory is Low?

Posted on: September 26, 2013

Selecting the right price point to list your home is one of the biggest decisions of selling a home. You’ll find conflicting opinions depending on where you turn: some say to price low, while others say to price high. The reality is generally somewhere in between, although new research supports the power of appropriate price “anchoring” depending on the state of the market and the overall economy.

 

The Power of Overpricing When Inventory is Low

When inventory is low, some real estate agents feel that overpricing is the best strategy. When homebuyers don’t have a lot of choice, they’ll pay more for a good home – which means sellers can get the higher asking price.

 

Set Low for a Bidding War

Other real estate agents advise that sellers price their homes low during a high-demand market, with the hopes of sparking a bidding war. There’s no question that multiple offers are back with today’s market demand, and some agents want to take advantage of this pent-up demand.

 

Agents who advise the price low strategy tend to under price homes by 5% to 10% to drive interest, with the expectation that sellers can potentially add 10% to 15% to the sale price – thus getting more than if they’d priced the home roughly at its value. Unfortunately, sellers are less likely to agree to this strategy because they don’t want to risk getting less in a sale.

 

Research Answers the Question Once and For All

A study published in the Journal of Economic Behavior & Organization found that pricing a home 10% to 20% higher than similar homes in the neighborhood see a slight increase in their sale price. Pricing a home at 20% or more when compared to similar houses creates an impact that’s three or four times as big.

 

In contrast, pricing a home 10% to 20% lower than other comparable homes in the neighborhood led to a slight decrease in the home’s sale price.

 

The behavioral trait behind this phenomenon is “anchoring.” Buyers have a common tendency to rely on the first piece of information offered when making a decision. Buyers will turn to positive attributes to justify a higher price, but when the price is lower, buyers want to keep it low or walk away.

 

Ultimately, the research found that pricing low can speed up a sale, but overpricing in a high-demand market can lead to a higher sale price. In other words, anchoring in real estate transactions is a strategy that works.

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