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Sunday, February 18, 2007

The psychology of pricing & achieving critical mass

inkblot.jpgmarketingThe New York Times Real Estate section's cover this week is on The Psychology of Pricing. It follows on the heals of last week's cover about presenting properties for sale on the Web titled Making Evey Pixel Count, they are both must reads for buyer's and sellers. The pricing article is about what may be running through the minds of buyers, sellers and brokers when thinking about the price of a property and how to approach it. Permit me to use it as a jumping point to add some greater depth about how the psychology of pricing connects with the timing of the best opportunity to sell a home.

"While comparables may be a starting point,
the price at which a seller offers a property is often also based on wishful thinking, propaganda and ploy"
We sometimes hear that after extensively researching comparable sales, looking at the current market landscape, and advising a potential client about the value of their home, that an owner has signed an exclusive with another agency because the agent "quoted a much better target price for the property". The seller based the decision on the somewhat misguided impression that the agent might work harder on their overpriced listing and somehow find that one buyer that absolutely has to buy their home. Could the agent be appealing to the vanities of the seller about their palace— overpricing it to list it. Then moving the seller through a series of price reductions when offers are scarce in the first couple of months? A plan that is not just ineffective, it could hurt also.

timing maximum buyer exposure

The real danger is in the missed opportunity to bring the right buyer to the deal early in the process. The accompanying chart shows buyer interest over the first16 weeks in a listings life. Corcoran Group research shows that the greatest number of potential buyers will come knocking during the first four weeks, and that buyer activity hits a peak around the second week of a listing's life. This is a critical opportunity to sell, and there is no better way to subvert it than by highlighting how great a deal more correctly priced homes look when compared with yours— just as you have the the greatest number of buyers being shown your listing.

‘activity’ is defined as the number of showings; ‘weeks’ is defined as the length of time a property is on the market. data based on Corcoran Group exclusive sales activity.

My job early in the process is to get as many people as possible to see your home and bring offers. Overpricing only helps homeowners to miss the moment. This can have a particularly disruptive effect on people who are trying to coordinate a sale and new purchase. It may invoke additional financing costs to bridge the time gap between sale and purchase— effectively causing the seller to carry two mortgages until the sale closes; or even worse, causing them to loose the deal or deposit on the next home they've set their hearts on. It depends on the terms they've agreed to. Whatever the inconvenience, it's a flawed strategy.

If an apartment is on market for a bit and people say they like it, but don't make offers, it is probably overpriced. If someone doesn't like the home, they won't buy it at any price. There is no worse signal to buyers than a property that's been sitting on the market for too long. People may assume that there are issues other than price alone, and it may actually have the opposite effect— becoming an sign-post for low-ball offers. Right pricing upfront, taps into activity from the maximum number of truly interested parties. Shouldn't you leave some wiggle room for negotiation? Yes, if you have a good broker, they will price correctly and wiggle it up. Why go into any negotiation with the preconceived notion that you'll move down? That's not a smart direction for a seller. Buyer's brokers will notice value in correctly priced listings, and will encourage their customers to bid at, very near, or even above asking price. They have a vested interest in closing a deal, know that the rest of the market will recognize proper value and respond in kind. Their advice to a customer will be to sign a contract quickly.

how to find a qualified co-op candidate

In New York City, cooperative apartments comprise the majority of available homes. Since the co-op's Board of Directors has the power to turn down any application for membership, having a financially well vetted candidate is crucial. A listing broker should recommend a pricing strategy that is more likely to bring multiple offers, as some of them might not get through the Board's approval process. The best way to assure the success of my clients, is to be able to present several qualified candidates to them and discuss their merits. A co-op board turn-down is something that puts a seller back at square one, and since the apartment is now listed as 'back on the market', it gives buyers the impression that the seller may be under pressure to strike a deal. That's a negotiating position which has been compromised.

reaching critical mass

Achieving critical mass, defined as a significant number of interested parties, is done by marketing, open co-brokerage, and a pricing strategy that creates bidding momentum for sellers. Different brokerages provide various levels of effectiveness. My personal sales record is that over 93% of my exclusives sell at or above asking prices. I'd suggest that rather than focusing so much, on "how much", sellers assess the tools and sales performance of the brokerage firms, as well as the individual agents they are interviewing. Having a Web site that draws huge numbers of visitors (corcoran.com is top ranked), and the creative services to produce memorable property advertising & promotion, are capabilities that a broker brings which are truly critical to the success of the "how much" conversation.