The 5 levels of home pricing hell

Pricing a home for sale is an imperfect science. There is hard sales data to look at, but every home is different, so you have to make subjective comparisons. More importantly, no seller or real estate agent is all-knowing about the market. Is that perfect buyer out there for your house? Or maybe no one is interested at your price? Impossible to tell without putting it on the market to see what happens.

home chartWhen pricing a home for sale, we try to be systematic in our recommendations. Having done this for hundreds of homes over the past years and watching even hundreds more as they go on the market and sell (or don’t sell), I’ve come up with pricing categories that help you determine how buyers will behave.

Level 1 – So overpriced that no one comes to look

If no one is coming to view the home, it means one of two things. It could be that there are simply no buyers in the market right now. If your competitors and/or neighbors are getting views and accepting offers, this isn’t true for your home. The more likely answer is that buyers perceive the home as so overpriced that it is a waste of their time to even see it.

Level 2 – Priced low enough to get showings but priced too high to get an offer

Buyers are quite flexible when touring homes for sale. They’ll look at a wide variety of homes on the market, but for homes they perceive as really overpriced, they will not write offers. Most buyers and their agents need the home to be within “striking distance” on price to bother writing an offer. If they like the home but feel that they need to get $100k off the price, they are going to sit tight and wait for you to drop your price. Any real estate agent can tell you the likelihood of negotiating a gigantic discount is slim-to-none, so they too will discourage offers when the pricing gap is big.

Level 3 – Priced low enough to get showings and eventually get an offer

Once you’re in the range where buyers will write an offer, but still on the higher end of what buyers perceive as fair market value, it can take a few weeks or months to get an offer. Sometimes it is waiting for the right buyer to show up. Other times buyers will want to wait a few weeks until they can negotiate with you more. There is not a lot of buyer urgency in this price range.

Level 4 – Priced for a quick sale

When you hit this magic price, you are guaranteed to generate some excitement and urgency. You may even get competing bids in the first few days. A quick sale is likely, though most buyers will compete right around your list price. They may have appraisal or value concerns if the price goes too much higher, but also recognize that the home won’t be on the market very long.

Level 5 – Under-priced

Homes that come on the market at a below market asking price are sure to generate competition, even in the slowest of real estate markets. Price the home low enough and the market will correct the pricing and bring the price back up to what buyers perceive is the fair market value. Bidding wars are not uncommon, and if overall inventory is low enough, it can turn into a bidding frenzy.

Every house has a price range for each of these categories, and it is up to the savvy home seller and their agent to figure out where to price a particular home. If you find yourself in Level 1, it will become apparent pretty quickly that you’ve priced it wrong when your neighbors keep selling and you can’t get anyone in the door. Level 2 is the most frustrating price range, as buyers come to visit, but no one ever writes an offer, no matter how much they are coaxed. To successfully sell a home, you need to be priced in Levels 3-5. Pricing any higher is a colossal waste of time and will inevitably lead to a worse final outcome as buyers watch you chase the market down with successive price drops.

To get a home sold, you need the home to be priced within “striking range” of what buyers are willing to pay. To keep the marketing time reasonable, this usually means within 5%-7% of what the market perceives as fair market value. If buyers think they need to negotiate a 10%, 15% or 20% discount to get a fair price, they are not going to bother.

Where you price your home is ultimately driven by your goals as a seller. Folks who are moving out of town or are trying to buy another home may be highly motivated for a quick sale, so home pricing needs to reflect that. Sellers who can take a more measured approach can afford to price it a bit higher and wait for that right offer to come along. Just remember, if the wait for an offer is getting too long, the market is sending you a clear message that you should adjust your pricing lower.