Andrew Wetzel's Musings

May 26, 2017

Targeted Pricing Strategy

Filed under: Uncategorized — awetzel @ 4:13 PM

Pricing Real Estate is an art and not a science. Certain numbers influence buyers more than others and there are a variety of reasons why sellers and agents recommend the prices they do but there is no EXACT price that is guaranteed to work. We use terms like “fair market value” but what does that mean? I submit that the meaning depends on the buyer and the seller. In fact, I would respectfully say that the “gold standard” of Real Estate, the APPRAISED value, is somewhat arbitrary. How relevant is a price when it is solely driven but similar sales (often many weeks old) rather than how a buyer views a product?

Sellers price property according to a number of factors. Some want a quick sale which equates with a lower price. Some just want to pay off their debt and move on. Some need a certain amount of proceeds to take the next step in their lives. All should compare and contrast what they are selling with their competition. While past sales need to be considered, in the short term any seller must be able to attract potential buyers if they are to succeed. Properly “positioning” any product will increase the likelihood of attracting the interest needed to generate a sale.

Real Estate should be priced according to location, features and condition. The ultimate questions for any seller of any product are (1) can a buyer acquire what you have for less and (2) can a buyer acquire more for what you are asking?

In Real Estate we measure activity in a number of ways. Chief among them are actual “showings” and Internet “hits”. Generally speaking, we have ways to know how many came to view a house. If not, why not? Admittedly trying to count visitors at an “open house” can be problematic and, frankly, how many people came for a “private showing” leaves much to the interpretation. Internet “hits” are like clouds of smoke: make of them what you will. In either case, the best measure and, in many cases, the rarest, is the offer.

If a house is being effectively “marketed”, you either generate interest or you do not. By marketing I simply mean that prospective buyers will find what you are selling in their searches. If they do not, the activity will be minimal which could result in unnecessary price reductions. If they can find it, you may have tremendous activity without any offers.

The Internet has changed pricing strategy in two direct ways. First, it has made identifying houses for buyers to consider so much easier and, at least in the early stages of house shopping, separated the agent from the process. In the past we could be the filter cutting through good or bad pricing to match buyers and sellers. Not so true today. Second, buyers overwhelmingly use the Internet to search for houses (even after hiring an agent to represent them) and selecting a price range to look at becomes a major factor. The Internet offers four options for searching by price: you can leave the data field blank, you can specify a price range (minimum and maximum), you can select from their “drop down” boxes or you, some offer a combination.

Two points to mention. One is that whether the consumer has the option of entering their own range or selecting from “drop down” boxes, your price must fit with their perception of what your house should cost or it will not appear in their search results for them to consider. The other is that the seller and agent must understand at least how a price range might affect a specific house from both a “perception” standpoint and from a financing standpoint.

For example, if someone is pre-qualified and comfortable with purchasing a house for $340,000, they would most likely look between $325,000 and $350,000 or they could look beyond $350,000 if their market suggests pricing flexibility. Further, suppose they identify two houses with each having 4 bedrooms where one has 2 full baths and the other has 2.5 baths and the price difference is $10,000. Hmm. They may focus on the lower price unless the extra bathroom has value to them. If it does, is it worth the difference in price?

Of course, they can make an offer on either in any amount but I would respectfully ask my buyer-client to really evaluate their needs and wants and I would start by explaining the difference in monthly payments rather than focusing on the $10,000 (if they are a cash buyer this might turn out differently). Generally speaking, it costs about $5 per month for every $1000 borrowed, depending of course on the interest rate. In this case, rather than focusing on the price difference, focus on the $50 per month difference in payment. I encourage my buyer-clients to look at houses as a home to “grow into and NOT out of”. There is also the matter of “appreciation” and considering how easy it will be to sell the house in the future. While I appreciate “repeat business”, I like seeing my clients be happy in the long run.

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