How much negotiating room should I leave when pricing my home?

Setting the listing price when you sell a home isn’t an exact science. Many sellers have a number in their head of what they want to receive from the sale and correctly recognize that they may have to negotiate with a buyer. Naturally a seller is going to want to price the home a bit higher to give themselves room to negotiate. If you add in too much negotiation room, you’ll be stuck waiting for offers that never materialize.

Don’t ignore market data

When setting the list price for your home, the most important piece of data to analyze is similar homes that have sold nearby. Not only do these homes need to be similar and in your neighborhood, they should really have sold in the last 3-6 months. Any sale older than that, and you are comparing to market conditions that are potentially quite different than they are today. For example, the current strong seller’s market in 2013 could not be more different than just a couple of years ago when it was a struggle to get a home sold.

Taking a look at recent similar sales and making adjustments for different characteristics of each property, you’ll come up with a price range of what your home is potentially worth to buyers. Let’s say the recent sales show a potential price range for your home of $500k-$525k. If you list at $475k, buyers are going to see the home as under-priced and will likely compete for the home and drive the price back up. Price it at $550k and buyers will see it as over-priced and possibly ignore the home. While they may come and visit, no one is going to write you an offer if the price feels too far out of whack.

The Striking Range

Red dart bull's eye success conceptEvery home, in every market at every point in time has a “striking range” of prices where potential buyers will make an offer. While these prices change constantly, if you are outside of that range by pricing the home too high, offers will not come in and selling your house will become a slog.

How big that striking range is depends on market conditions. In a hot seller’s market like today, buyers have a tolerance for offering more than asking price as they are desperate to get their hands on a property. A couple of years ago, the striking range was very small and buyers wouldn’t put forth offers without thinking they were getting a fair deal.

Buyers and their agents know they might need to negotiate. If it takes a 2% discount off of list price to get a fair price, buyers will certainly write offers. If it needs to come down 10-20%, no one is going to write an offer, no matter how great your property looks. Buyers will simply see the distance between their price and your price as too great to waste their time with an offer.

In our market, the vast majority of successful sales take place within 0-3% of the current list price. Even in the depths of the bad housing market of 2008-2010, we were only seeing discounts off of list price of 2-4%. If a home was priced 10% too high, buyers would simply wait until the list price was brought down before placing an offer.

Giving in to greed

Dollar amounts for a home sale are large and enticing for a seller. Who wouldn’t want $10,000 more in their pocket, right? Greed is part of human nature and every home owner is going to want the most they can get from a sale. The key is to not let it get in the way of selling your home.

“I don’t want to leave money on the table. I’ll just try $50k higher and see if I can get it. I’ll negotiate down if I need to.” These are the words that lead you down the path to a painful home sale. If the objective sales data are telling you otherwise, this is a recipe for a lengthy home listing. Even in the hottest of seller’s markets, buyers will be brutal with their unwillingness to make an offer when they perceive a home is priced way too high.

Getting the price wrong at the beginning results in lots of frustrating thoughts, many centered on your agent. “Why isn’t my agent doing more to market the home? Can’t we have more open houses? What about placing ads in the local paper?” When you’ve gotten the price wrong, the market is sending you a clear message and the home isn’t going to sell until the price gets in line with current buyer expectations.

Gauge your motivation

Every home seller has a different motivation to sell. Sometimes the need to sell is urgent, such as when relocating for a job, accommodating family changes or dealing with financial issues. Other times a seller may have more flexibility and willingness to market the home for a longer period of time. The urgency of your particular situation needs to be gauged when setting your price.

If you urgently need to get a home sold, don’t price it at the top of the range of comparable sales. Stick to the bottom of the range to drum up quick buyer interest. You may not get the absolute maximum price for the home, but achieving your timing goals may be worth it.

If you are able to allow a little more marketing time, you can try to maximize your sale price. However, you need to recognize that there is a limit to what buyers will be willing to pay and simply by allowing time to pass isn’t going to magically get you the price that you want. If homes are selling in a month or less in your market and you’ve been on the market for two months, the market has spoken loud and clear. You are not going to get your asking price at this point in time. If you do get an offer, the buyer will negotiate aggressively when you’ve been on the market for a long time.

Listen to what the market is telling you

A successful home sale balances the need for a reasonably quick sale with the desire to maximize the sale price. Your agent needs to make sure the home looks great in-person and online and also needs to maximize the marketing exposure of the home, but price is often the most important driver of getting a home sold. Offers aren’t going to magically appear when the asking price is off by a significant amount.

When you’ve been on the market for awhile without any offers, the market is sending you a message. Are you getting showings? If not, are your neighbors getting showings? If no one is getting showings, there may be no buyers out there and you simply need to wait. If you are getting plenty of showings, but no offers, chances are they don’t like your price.This is even more clear if your neighbors are selling and you’re not.

Try to stay objective and listen to outside advice when your home isn’t selling. Reaching for “just a little more” to leave room to negotiate can be a recipe for a lengthy and painful sale.