There is perhaps no other industry that is more adept at catering to such a wide variety of individuals than that of real estate investing. There are countless ways in which one can approach even the simplest of deals. Are you looking to wholesale? Go for it. Perhaps the property is best suited for a rehab and flip. Regardless of your exit strategy, there are seemingly limitless ways in which it can be accomplished. However, having said that, the same freedom of choice that makes investing in real estate so appealing can make it equally troublesome. Sometimes differentiating between two or more options can be difficult. In particular, determining a price point to sell a property can leave many with a headache. What is the perfect price range when selling your home? Truthfully – nobody knows. List too low and your investment may slip away, along with any hopes of making a profit. List too high and you may drive potential buyers away. It is easy to see why someone can lose sleep over such an important decision. Thankfully, there are ways to help you determine the perfect price point for your investment property.
Setting the perfect price point for your investment property is not as easy as you may think. In the world of residential real estate, the asking price is often as much about psychology as it is reality. Michael Seiler, professor of real estate and finance at The College of William & Mary in Williamsburg, Va., said that most home buyers don’t realize that setting an asking price is primarily a negotiating tactic. “When you set a list price, you’re sending a signal to the market,” he says.
At the very least, pricing a home requires a delicate balance. It is not uncommon for a seller to overestimate the actual value of their property. Investors, in particular, generate a lot of sweat equity in the properties they rehab. The hard work that is put into a property has more value to those that actually facilitate the transformation. Conversely, others believe that pricing a home below its market value is the best approach. In theory, a low price should induce a bidding war. With any luck, competition could push the price over market value. So where should you price your property?
Regardless of where you end up pricing your home, it is not very common to witness a significant gap between the asking price and the subsequent sale price. As recently as May, the average home was selling for three percent lower than its asking prices in 35 metro areas across the U.S., according to a Zillow analysis. Conversely, a survey conducted by the National Association of Realtors (NAR) confirms that only three percent of homes sold for less than 23 percent below the asking price in 2013. Moreover, only two percent of homes sold at 12 percent or more above the asking price.
Not surprisingly, homes with fewer comparables witnessed the largest disparity in price gaps. Essentially, without comparables, it is more difficult to settle on a price. In today’s market, comparables are the starting point in which sellers set a price. Without them, not even an appraiser can set a standard price. Of particular concern, however, are unique properties void of nearby comparables. There is really no universal starting point. These homes are particularly hard to price, but there are general guidelines to follow.
It goes without saying, but comparables are important in setting a price. However, they are less relevant in desirable neighborhoods with uncharacteristically low inventory levels. Neighborhoods garnering a lot of attention tend to generate a sense of competition. The lack of inventory only fuels the fire. Perspective buyers are willing to pay more for a home if they know other people want the property. Essentially, it is a fabricated feeding frenzy. People setting prices in these neighborhoods know they can demand more.
In all honesty, nobody can claim to fully comprehend the psychology of pricing a home to sell. There are too many moving parts and influencing factors that change from market to market. However, common practices have begun to emerge. For example, research has found that an exact asking price, such as $737,485, often indicates that the price is less negotiable than a round number, such as $800,000. Announcing a precise price demonstrates confidence in the numbers.
Again, pricing a property requires a delicate balance. There is a strong psychological aspect at play, especially on a subconscious level. Pricing at $999,900 rather than $1 million influences buying decisions. The price is visually appealing to potential buyers. Even when a home sells above its asking price, the initial lower asking price can make buyers feel like they are getting a great deal. A simple change can make a dramatic difference when setting a price point.