Fearful of Pricing Your Home Too Low?

There is so much information out there about pricing a home – and most of it talks about overpricing a home and the effects of overpricing. But what if you under price a home and what are the effects of under pricing? As a seller, the effects can be plentiful and positive!

You will receive an offer

The first effect of under pricing is that as long as there are buyers in the market, you will receive an offer – and often times – multiple offers! Not only does this feel good but the low list price creates competition among buyers in the market. It will force the buyer who wants your home the most to offer the most. Their offer will need to come in at least at market value if not over. Usually you’ll see offers at or over list price and without as many contingencies as a standard offer.

It will sell quickly

The second effect of under pricing is a quick sale. If you really want to move – or have to move – why keep your house on the market for a long time? Homes get stale after being on the market too long. Buyers begin to wonder what is wrong with it. One of the first questions I get from buyers is “how long has it been for sale?” A study published in the Journal of Economic Behavior & Organization found that homeowners who set the initial asking price 10% – 20% higher than similar homes in the neighborhood see a slight increase of $117 – $163, on average, in their sale price. It found that pricing a home 10% – 20% lower than homes in the neighborhood leads to a decrease of $117 to $187, on average, in the home’s sale price. When I read this I realized they did not take time into effect. If you have the time and don’t have to move, then you have the luxury of pricing your home above market value. However, if you have to move or want to move quickly under pricing your home will speed up the sale. What I found was interesting about this study is how low of a return you get by overpricing your home – and how insignificant a loss you take by under pricing it. When you factor in time, especially if you have already moved on and your home is now vacant, you will be saving money by under pricing. It doesn’t sound right, but take this for example. You are selling your home for $210,000 and you’ve already moved to your new home. Every month that your home sits on the market is another month of mortgage payments, utility bills and maintenance. If you’re paying $1,300/month for the costs associated with owning the home then if your home sits on the market for three months, you’re out $3,900. $3,900 of mortgage, utility and maintenance costs minus $187 average decrease of under pricing your home equals a savings of $3,713. If you signed a 12 month listing contract you could be out as much as $15,600 for the potential upside of $187.

Your house will be found on the web

Another effect of under pricing is that your house shows up in people’s search results. It’s so important to be found on the web these days when selling a home. If you under price it, even slightly, you’re going to get more traffic. Let’s say that you want to price your home at $410,000 and your agent has provided comparable sales between $380,000 – $395,000. An agent would want to price your home no higher than $400,000 with the belief that there may be some negotiation involved.  If you price it at $410,000 believing that it will lead to a higher sale price you’ll be missing all of the buyers with a max budget of $200,000.

It will appraise

One more positive effect is that your house will appraise. A survey by the National Association of REALTORS® found that 11 percent of REALTORS® had a contract cancel because of a low appraisal, another 9 percent reported a delayed contract and 15 percent said a contract was renegotiated at a lower price due to a low appraisal. By being under priced, you will have a smooth transaction and will not have to renegotiate the price or worse, start all over trying to find another buyer. Appraisals are very important. A bank will not lend someone more than what they believe the home is worth. That means if your contract price is over the appraised price, the buyer will have to come up with the difference in cash for you to obtain the sale price you agreed to. Typically buyers buy at the top of their budget meaning there is not another dime that they have to go over the contract price. They were counting on putting 5% down not 5% plus the difference in the sale price. Many times this is a complete deal breaker. Most times sellers at the last minute have to reduce the contract price to make the sale go through.

In summary, if you choose to list your home under market value, it certainly does not mean that you will receive low offers for your home. Under pricing your home is a great strategy to gain buyer’s interest, create competition, receive market value or over market value offers and sell your home quickly.

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