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Buyers remain on the sidelines due to persistently high interest rates and a lack of inventory. As a result, it’s more important than ever to price your products correctly from the beginning.
Otherwise, your listing will stay on the market longer, sellers will become frustrated, and your listing will expire. If you’re ready to sharpen your pricing skills, here are proven approaches that have stood the test of time.
Follow the 10% rule to select comparable sales
Accurately pricing your listings starts with selecting the right comparable sales. Using a price per square foot analysis usually yields accurate results for most properties as long as you follow the so-called 10 percent rule.
The approach is simple. Select only comparable sales where both lot size and square footage are within 10% of the subject property’s numbers.
For example, if you’re pricing a 2,000-square-foot home on a 6,000-square-foot lot, consider properties that range in size from 5,400 to 6,600 square feet with 1,800 to 2,200 square feet of improvement.
Choosing comparable sales that exceed the 10% guideline can result in your property being priced too high or too low.
power of absorption rate
Commercial real estate agents estimate market demand and set prices based on absorption rates. But what many agents don’t realize is that absorption rates are just as important in home sales.
“Absorption rate” measures how many months inventory is on the market. This will help you determine what type of market you’re in, as well as pricing and marketing strategies for your listing.
5 months or less of inventory: This is a seller’s market with too few listings (low supply) and too many buyers (high demand). After a month of low inventory, multiple offers increase and buyers bid more on properties than the asking price, resulting in higher prices. Six months of inventory: Six months of inventory balances supply and demand. On the other hand, the market may be moving from a seller’s market to a buyer’s market or vice versa. The biggest sign that the market is turning into a buyer’s market is a significant increase in the number of listings with discounts. 7+ months of inventory: This is a buyer’s market where there are too many listings (high supply) and too few buyers (low demand). The more months you have in stock, the more likely the price will drop. Sellers who price their properties too high often end up “beating the market” as the price falls below the market price 60 to 90 days ago.
How fast are homes selling in different locations and price ranges?
A proven approach to dealing with this situation is to use absorption rates (how much inventory is on the market and how quickly it sells).
To illustrate this point, let’s assume there is currently five months’ worth of inventory on the market. (Most MLSs track this data.)
Divide 100 percent by 5 (months of inventory) to get 20 percent (in this example). What this means is that there is a 20% chance that the property will sell in a given month, and an 80% chance that it will still be on the market next month.
Here’s how to close a seller using this approach:
Agent: “Seller, you have an important decision to make. Do you want your property listed in the top 20 percent of properties sold next month, or do you want your property listed in the top 80 percent of properties listed next month? It’s your choice. What do you want?”
3 tier pricing
Based on my experience, properties typically fall into three main tiers based on location, condition, and amenities.
top layer
These properties are newly built or recently renovated and are in good condition. Usually they are also located in the most desirable areas.
middle class
These are average homes in average locations and in average condition. Here’s the problem. Never tell a seller that their home is average. A better way to explain this situation is to tell the seller:
Agent: “Your home has the same amenities as many homes in the area.”
bottom row
In this case, there is a problem with location, condition, or both. In many cases, issues associated with these properties (such as traffic or airport noise, geological issues, or flooding tendencies) cannot be fixed and must be factored into pricing.
If the seller wants to price the property at the top of the market without making any necessary upgrades, he should say:
Agent: “Seller, the highest priced homes in this area are newly updated or new construction. Properties like yours with similar amenities are currently selling at a slightly lower price point.” To get a higher price, you’ll need to update your kitchen, bathrooms, and fixtures. If you don’t want to update, you can list your home now at a competitive price to attract willing buyers. .”
This approach allows sellers to decide whether to invest in upgrades or adjust their expectations about price.
Show sellers the competition
If the seller is still reluctant to realistically price the property, here are strategies that usually work. First, start by collecting as many interior photos of discontinued stores as possible. Then let the seller choose which home most resembles theirs. This eliminates the concept of competition and instead forces you to look for similarities.
Once the seller has made their selection, the sales price per square foot can be used to generate an accurate list price.
Know local market trends
Absorption rates are a great place to start, but local market knowledge can help you price more accurately.
The main factors include:
What types of features and properties command premium prices? Insurance premium pricing can vary widely depending on neighborhood specifics. For example, a north-facing property in an area with a hot climate may be cooler than a south- or west-facing property and therefore more expensive. Prices may also be higher in suburban areas due to their proximity to top schools or easy access to public transportation. Buyer preferences by property type: In urban areas, properties located near dog parks, hiking and biking trails, or near public transportation typically command higher prices. The same applies to the upper floors of high-rise apartment buildings. Agents who understand and can explain these nuances of pricing to sellers are more likely to price their products correctly. Location-Specific Premiums: Prices may be higher in certain parts of the neighborhood, while other locations may experience problems and be priced lower than most other properties. For example, a house near a pool may be less desirable due to noise. Hillside properties are sunny and bright during the summer months, but can be dark enough to require lighting during other seasons. Adjusting these details will make your pricing advice more accurate. Seasonal fluctuations in demand: Demand absorption rates can vary significantly depending on the season, so advising sellers on timing can make a big difference in determining the best time to list a property. For example, in cold regions, sales may peak during the summer. In contrast, desert real estate typically sees peak sales during the holiday season and early spring.
Upgrades improve salability, but not necessarily price
Upgrades can make your home more desirable, but they don’t necessarily lead to increased market value. Structural upgrades, such as adding a bedroom or bathroom, will almost always result in a higher value, but most other upgrades only make your home more sellable, not worth more.
Here’s how to explain this to the seller:
Agent: “Seller, your beautiful upgrades will make your home more sellable, but in most cases they won’t increase the price. Here’s why. Buyers want to buy your beautiful dark wood custom cabinets. How much would it be worth to rip it out and replace it with an all-white, contemporary look?”
In today’s market, you can more accurately price your listings by focusing on absorption rates, tier pricing, and specific neighborhood trends. Additionally, if you price your products from the beginning, you’ll have more satisfied sellers who will move on instead of languishing in the market.
Bernice Ross, President and CEO of BrokerageUP and RealEstateCoach.com and founder of RealEstateWealthForWomen.com, is a national speaker, author, and trainer who has published more than 1,500 articles.
