Pricing in Today’s Market

Reduced price of a home

by Jay on November 10, 2009

Pricing of certain homes is trickier than in what might be called the “commodity home” market.

The more unique a home is the more pricing becomes an art than a science. As a ridiculous example take the estate in Lake Tahoe pictured below that was on the market for $100,000,000. Believe me, that nice round number is not the result of a careful appraisal. Traditionally,residential pricing analysis, whether by an appraiser or a real estate agent, is based on “comps” or comparable properties that have recently sold. For properties such as this there are no good comps. The most expensive home on the market in the Triangle in 2008 was a home in north Raleigh that originally listed for $23,000,000, a price that was quickly dropped by $12,000,000. The listing has since expired with no sale.

Unique homes are not limited to the luxury market.

There are a number of other categories where you may find unique homes. Ironically, really rough property may fall into that category. In most markets, historical or architectural significance may muddy the pricing waters.  In markets where traditional homes dominate, a rare contemporary home will be hard to evaluate.

There is now software available to agents that can construct an analysis based not just on a few sold comps but that also extend the analysis to demonstrate the penalty of pricing too high. In most situations, the market will find the right price. Homes that are priced too high stay on the market longer and when they do sell, sell at a price that they would probably have quickly sold for if priced that way initially.

Heresy

At the risk of being drummed out of the real estate fraternity, I’d suggest that the pricing in these cases is the least important factor in the marketing mix or the marketing plan.  As the Lake Tahoe example suggests, unique homes must be priced at a point to begin negotiation.  The buyers seeking these unique properties are rarely spending their last dollar to acquire a property.

In the luxury market there is some truth to the axiom that if you have to ask the price, you can’t afford it. Buyers in these segments are looking for something more than a bargain or simple shelter. They will instead be concerned about something else, maybe a fabulous golf course, maybe a mountain vista, maybe history, or in some cases buyers just want to show-off.

It was not an oversight that the marketers of the Tahoe estate did not price it at $99,000,000. Read Robert Frank’s new book, Richistan, A Journey through America’s Wealth Boom and the Lives of the New Rich and you could easily imagine buyers who would brag their latest estate purchase cost 9 figures. In other words, that extra million dollars gave them some bragging rights.

Much more important than the price in marketing a unique property is being able to position  it to appeal to a specific segment. Do all the analysis to strengthen your bargaining position but concentrate preparation on establishing and demonstrating the value that makes whatever price you set appropriate.

The Commodity Market

Homes in large subdivisions  with similar homes built by the same builders in many communities are a large proportion of the homes on the market at any one time.  They are usually relatively easy to price well. It is here were the value of the new pricing tools may be especially useful because they document long term trends.

The problem now is that in the midst of the real estate bust trends have reversed in many areas and prices are being pushed down by the lack of qualified buyers. In some communities it is even worse because the qualified buyers are determined to get bargains and have many opportunities with foreclosure, short sales and desperate sellers.

This makes the online valuations being promoted by some real estate websites even less reliable than before but it also makes it much more difficult for sellers and their listing agents to avoid pricing mistakes.

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