How Do Realtors Set the Asking Price of a Home?
When listing their homes on the market, homeowners often miscalculate the proper asking price. Sellers might bump up the asking price of their home based on their own emotional attachment rather than the value of comparable properties. They might overvalue updates and improvements made to the interior or exterior of their home. Sellers might also react badly to lowball offers, refusing to negotiate even if they have placed the asking price too high. Working with a realtor instead of listing a home FSBO better positions homeowners in the current market. Realtors utilize a number of pricing strategies -- from conducting CMAs to price banding -- to make the home competitive in its price range and local market. Follow below to learn how realtors set the asking price for a home and how to avoid common mistakes sellers make when pricing their homes.
Mistakes Sellers Make When Pricing Their Homes
#1 Overvaluing Updates
In his article “6 massive pricing mistakes home sellers need to evade" for Inman, Joseph Rand identifies overvaluing amenities and improvements as a common error committed by sellers. Rand writes that homeowners often “put too much faith in the value of unique amenities — granite counters, bathroom finishes, high-end appliances and so on.” According to Rand, there is a term for overvaluing amenities in a home due to emotional attachment. Joseph Rand notes that “the ‘endowment effect’ is our tendency to overvalue things just because we own them.”
While amenities do of course have value, they rarely “make a big difference in price” when listing or selling a home. Similarly, trying to “get full value for improvements” can be fruitless, turning away potential buyers. This is due in part to the depreciation in value each improvement experiences as it ages. The type and age of amenities and improvements “can change where you are in [your current price] range, but they don’t move you up to a new one.”
#2 Setting an Asking Price Based on Emotional Attachment
As mentioned above, basing the asking price of a home on your emotional attachment to it is a common mistake. In her article “Avoid These Mistakes When Selling Your Home” for Investopedia, Amy Fontinelle points to emotional investment as a detractor. She writes that “it’s easy to get emotional about selling your home, especially your first one.” Homeowners often “have trouble keeping their emotions in check when it comes time to say goodbye” to their house. Unfortunately, basing the asking price for your home on your memories and feelings can mean a protracted period on the market or even failed negotiations. Instead, homeowners should think of themselves as “a businessperson and salesperson rather than just the homeowner.”
#3 Basing the Price on Current Listings Rather than Recently Sold Homes
Current listings provide little information about the potential sale price of your home. In her article “Home Pricing Mistakes and How to Avoid Them” for HGTV, Shannon Petrie elaborates. Quoting Leslie Sellers, Petrie writes that sellers who fail to properly price their homes “tend to base their prices on hearsay or on the list price of the house down the street” instead of “investigating past sales in the local market.”
Some knowledge of current listing prices is important because this helps a seller understand his or her competition. However, “in many markets, listing prices are not a good indicator of what your home will actually sell for.” Rather, they provide a snapshot of how sellers perceive the current housing market in your area. Homes sold during the last quarter offer a better picture of how much you might expect to sell a comparable property for.
#4 Overpricing in any Type of Market
Though homeowners can price their properties higher during a seller’s market than during a buyer’s market, they should avoid overpricing in any type of market. Katie Warren explains in her article “The 9 biggest mistakes people make when they try to sell their homes, according to real-estate agents” for Business Insider. According to Warren, “the biggest mistake a seller can make is overpricing their home.” To support this claim, Warren quotes luxury NYC real estate agents Spencer Cutler and Michael Hahn. According to Cutler, “‘when you overprice a property you miss out on all of the buyers who see it during the first month on the market and then over time you reduce the price until it sells.’” All in all, it is typically “‘better to price at the market level or even slightly under to yield the most profit in the end’" according to Hahn.
#5 Hiring an Appraiser to Price Your Home Instead of Working with a Realtor
Another common mistake homeowners make when pricing their home is opting for an appraisal instead of working with a realtor. In her article “Should Home Sellers Get an Appraisal Before Listing? Here’s Why It’ll Cost You” for Realtor.com, Larissa Runkle explains why appraising your home might be a bad idea. According to Runkle, “getting an appraisal done too early is way more likely to end up costing you money than making you money.” Quoting National Association of Realtors realtor Julie Upton, Runkle writes that appraisal value and market value are rarely comparable.
Upton explains that “‘the market value is what someone is willing to pay for a property—often influenced by emotion and how competitive the area is.’” During a bidding war, buyers will drive up the price of the home because they have become emotionally invested. In such cases, the home will often sell above the appraisal value. In short, Upton notes that “‘getting an appraisal before putting your property on the market may actually cause you to get less for your property.’” This is because “‘the appraised value could very likely be lower than what you believe is the property’s market value.’”
#6 Basing the Price on Other FSBO Homes
Lastly, homeowners often base the asking price of their home on those of other for sale by owner properties. Amy Fontinelle explains in her article “10 Tips for Getting a Fair Price on a Home” for Investopedia that FSBO properties are often priced too high. This is because they rarely discount the home to “reflect the fact that there is no 2.5% to 3% (on average) seller’s agent’s commission.” Because homeowners rarely consider the fact that realtor commission is included in most listing and sold prices, they inflate the asking price when listing their own home.
Another issue with FSBO properties Fontinelle identifies is “that the seller may not have had an agent’s guidance in setting a reasonable price in the first place.” On the other hand, the seller might “have been so unhappy with an agent’s suggestion as to decide to go it alone.” In any of these FSBO scenarios, “the property may be overpriced” and other sellers should not base their asking price on such listings.
Five Ways A Real Estate Agent Sets the Asking Price for a Home
#1 Realtors Consider the Whole Neighborhood, Not Just Your Block
One mistake homeowners listing their FSBO houses on the market often make is choosing an asking price that is identical or very close to their neighbor’s asking price. Realtors, however, consider the location as a whole rather than considering home values solely on your block. In her article “How to Set Your Home’s List Price – The Only 4 Factors that Matter” for Homelight, Christine Bartsch explains. Bartsch writes that “there’s more than one way to look at location when it comes to assessing its impact on house value.”
Amenities, crime and recent changes to the culture, density and demographics of your neighborhood also affect value. For instance, “your home’s proximity to amenities like schools, entertainment and even Starbucks can make it more desirable to buyers.” Traffic surrounding the home, noise levels and concentrations of like homeowners -- e.g. young families or recent retirees -- can also affect marketability. Additionally, Bartsch notes that elements that impact “your neighborhood’s reputation, like economic and crime statistics, also need to be factored into your home’s value.” Homeowners often neglect to consider such elements when pricing their homes for sale, focusing instead on their specific property and its perceived value.
#2 Realtors Consider Recent Comparable Sales
In order to properly price a home for sale, real estate agents examine recent comparable sales in the target area -- typically within the last three to six months of market activity. Rather than assessing the current list prices or those of homes that were taken off the market, real estate agents solely consider sold listings. To determine which sold properties are comparable to their client’s home, real estate agents will conduct a comparative market analysis or CMA.
In her article “Comparative Market Analysis” for Investopedia, Jean Folger explains how real estate agents use CMAs to price homes for sale. Folger writes that “a comparative market analysis (CMA) is an estimate of a home's value based on recently sold, similar properties in the immediate area.” When working with homeowners on the sale of their property, realtors will typically “create CMA reports to help sellers set listing prices for their homes.” CMAs compare properties based on shared features -- e.g. age, condition, location, square footage and more -- to assess current market value of a home. Realtors frequently use CMA software to compare “recently sold homes from the same subdivision as the subject property.”
#3 Realtors Consider Your Home’s Condition and Updates
Another mistake frequently made by homeowners is overestimating the value of the home’s current condition, updates and improvements. In her post “Top Agents Reveal the 7 Biggest Myths About Pricing Your Home to Sell” for Homelight, Corinne Rivera explains why not all remodels up the market value of a home. According to Rivera, one common pricing myth is that homeowners should “include the cost of renovations or updates they’ve made in the home’s list price, dollar for dollar.” Sadly, “not all home renovations have a positive ROI,” meaning that they might not actually increase the value of the house.
Referencing a recent report from Remodeling Magazine, Rivera notes that “the average payback for 20 common professional remodeling projects in 100 major U.S. markets was only 63.8% in 2020.” When pricing a home for sale, realtors take recent surveys of home buyer preferences into account. Buyer preferences -- e.g. preferring an updated kitchen but not an updated bathroom -- affect how much improvements can reasonably add to the asking price. While homeowners might not have this type of context, their real estate agent will take it into consideration when settling on a pricing strategy.
#4 Realtors Consider the Type of Market
A real estate agent hired to sell a home will consider the current housing market. He or she will flesh out whether the local market is a seller’s market or a buyer’s market. The type of market will determine how high or low the listing price should be set compared to other homes in the area and recent sales prices. The Zillow.com guide “How to Price Your Home to Sell” explains how to price a home for the current supply and demand of a real estate market. According to Zillow, one should not only consider how hot the market is locally but also how seasonality could affect sale prices. Market conditions are affected by a number of factors.
Real estate agents typically identify spring as “the best time to sell a home” in the United States. This is because the “weather is improving and families want to move during the summer break from school.” As such, spring and summer are usually seller’s markets while winter often shifts into a buyer’s market. In a buyer’s market, homeowners looking to sell their home should set the asking price “slightly lower than the competition, because there are more homes for sale than there are potential buyers in the market.” However, in a seller’s market, homeowners might be able to “add about 10 percent to a comparable sale, since inventory is limited and buyers are competing for fewer homes.” On the other hand, pricing slightly lower in a seller's market could start a bidding war. Seller's markets offer homeowners more flexibility when pricing your home. When listing in a neutral market, homeowners should closely follow the prices of recently sold homes “to make sure your pricing is similar.”
#5 Realtors Consider Competition in Certain List Price Ranges
Another effective pricing strategy real estate agents employ is price banding. In their guide “How to Price Your Home to Sell,” Zillow.com defines price banding as “the practice of looking over current inventory in your neighborhood and finding a less crowded price point.” No matter the market conditions, “prices tend to get bunched up as sellers try to price their homes competitively.” Realtors might place your home in a different price band to take advantage of those that are less crowded, limiting competition.
Trulia.com’s “How to Price Your Home to Get the Highest Offer” notes that real estate agents use strategic price points in other ways as well. According to the post, a realtor might alter the target price range slightly to make it more attractive to potential buyers. This is a common marketing ploy across industries, similar to pricing “a gallon of milk at the grocery store for $4.99 rather than $5.00.”