The Importance of Pricing Your Home Correctly – By the Numbers

by Darrell Martin

Soon after starting my real estate career, I was told that it was virtually impossible to underprice a home as an auction dynamic world would bring the price up to fair market value or higher. Conversely, overpricing a home can be disastrous because once the price of a home is reduced, it would end up selling for about 10% less than its original list price. Since then, I have seen strong evidence to support these claims. However, being a numbers person, I have always been curious if these assertions could be substantiated by numbers. In an effort to explore the validity of these assertions, I downloaded the 2008-2018 home sales statistics for Palo Alto and its surrounding cities and analyzed the numbers. I am pleased to share with you what I’ve learned from this endeavor.

Days on Market (DOM)

Homes with price reductions take three times as long to sell as homes with no price reductions. For example, during the lean recession years of 2008-2012, Palo Alto homes with price reductions sold an average of 86 days after being listed vs. an average of 23 days for homes that sold with no price reductions. During the years since (2013-2018), Palo Alto homes with price reductions have sold an average of 43 days after being listed vs. an average of 13 days for homes with no price reductions.  This ratio of more than 3x the market time for homes with price reductions is consistent for the surrounding cities as well.

Sales Price to Original List Price Ratio (SP/OLP Ratio)

Homes with price reductions sell at an average of 91% of, or 9% below, their original list price vs. 107% for homes with no price reductions. This difference of 16% was the average difference from 2008 to 2018. During the lean years of 2008-2012, the average difference was about 13% (89% vs 102%), and during the good years since (2013-2018), the difference has been closer to 20% (93% vs 114%).

Price per Square Foot ($/SF)

In the event that you happen to be thinking that the Sale Price to Original List Price (SP/OLP %) ratio is meaningless, since a list price can be artificially low, please consider the following data regarding the difference in the price per square foot for homes with price reductions. Homes with price reductions sell at an average of 10% less per square foot than homes with no price reductions. For example, Palo Alto homes with price reductions sold for an average of 4% less per square foot during the lean years of 2008-2012, and an average of 12% less per square foot in the years since (2013-2018), when compared to homes sold with no price reductions.

When you decide to sell your home, it is absolutely critical to price it competitively if your intention is to sell it quickly and for the best possible price. If your home is overpriced, it will simply help competing homes sell quicker, and for a better price, because buyers will compare the homes and most likely purchase the one that appears to be the best overall value. This results in overpriced homes sitting on the market for longer than necessary, thus the extended days on market (DOM). Once a home has been listed for an extended period of time, it becomes stale and buyers automatically assume there is a reason it hasn’t sold. Offers submitted for stale homes are typically below the list price because buyers assume that the seller is motivated and the home is worth less than the list price, since it has not yet sold at that price, hence a lower SP/OLP ratio. The lower sales price results in a lower price per square foot ratio for the home.

Given that the statistics so clearly demonstrate that it is imprudent to overprice a home, one may wonder why so many people do it.  Certainly some of the blame falls on the sellers’ strong bias towards their particular home.  However, from the listings that Michael takes over from other agents who could not sell them, he is told that the artificially high price often came from the listing agent themselves.  While initially perplexing, there is actually a very logical, albeit sinister reason, that some agents recommend prices that are too high—it makes it easier for them to get the listing. Promising unrealistically high prices, coupled with listing agreements that are way too long (often 3 months or sometimes even 6 months), gives the listing agent months to get the seller to reduce their price.

When agreeing to any price reduction, the Seller should demand that the addendum include a clause giving the Seller the unilateral right to cancel the agreement after 14 days if the price reduction does not result in a sale.  Under this clause, the Seller should have no commission obligation to the listing agent if they are unable to sell the property in that amount of time.