What Happens When You Over-Price Real Estate?

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Short answer: It almost certainly won't sell!

If it does sell, it will take longer, and sell for a lower price than you could have gotten.

The first thing that happens is that when it goes onto the Multiple Listing Service, all the agents who see it know that it's overpriced. Even on the public part of MLS, the members of the public who see it wonder, "Are the walls gold-plated or something?"

The first thing you want when you put a property on the market is for everybody who is looking for a property of that nature to come and see it. Overpricing it is the best way I know of to cut down drastically on the level of interest. If they don't come see it, people are not going to make offers. Most particularly, they will not make good offers if they don't come see it. If they do come see it, they are going to be expecting something better, and disappointed people don't make good offers, if they make one at all. That high asking price communicates that this property has something above and beyond the reality of what it really does have. When prospective buyers find that it doesn't, they're going to wonder what in the heck you and your agent were thinking. They're going to go away shaking their heads at the waste of their time. If they make an offer, it will be a desperation check tens of thousands below what you could have gotten by pricing it correctly.

The agents in the area are going to avoid the property, also. They know what similar properties are going for. Why should they try to sell yours for $10,000, $25,000, $50,000 above market comparables? Yes, they'll make a little more if they do sell it, but it's much easier to sell a property that is a real bargain. I'd rather sell sell a real bargain at $400,000 than an over-priced turkey for $450,000. The difference in compensation isn't that much, and I'll work much harder, and I'll lose most prospects by trying to sell the over-priced turkey - buyers are neither stupid nor blind. I try to sell them an over-priced turkey looking for the sucker of the year, and a large proportion of clients won't want to work with me any more. I can make the commission by finding the $450,000 property we can get for $400,000 and have happy clients refer their friends and family, or I can lose the client by trying for $450,000. If they can afford $450,000 and want to spend that much, I'll end up happier by finding them the property really worth $500,000 that we can get for $450,000. Happy clients bring me more clients for free, and as any real estate agent or loan officer can tell you, getting potential clients in the door is the hardest and most expensive part of the business. I assure you that every real estate agent who has been in the business more than about three hours knows this. If you were priced right, I might have shown that client your property, but you weren't, and so I didn't. When you over-priced the property, you either placed yourself beyond their budget, or where I can find something better for the same price.

Furthermore, overpriced real estate tells me that not only does the listing agent not know what they are doing and does not know what appropriate pricing is, but also that the seller likely does not have their head in the right place as to what the property is worth. Six months or a year down the line, it's time to make a low-ball offer and see if you're desperate yet. And if you needed to sell in ninety days, you will be. Right now, if I bring in a client who offers what the property is really worth, that's so much wasted time on my part and that of my buyer prospect, because I'm fighting two people with their heads stuck in the Land of Wishful Thinking, and I cannot force either one of you to listen to reason. Six or twelve months down the line, the seller usually has to listen, as carrying costs have killed their bank account.

If people do come see your over-priced property, most of them won't make an offer. Most people don't look at just one property, even if they like yours. They may not look at enough properties, but they will look at more than one before they write an offer for anything. And since they have seen at least one other property, unless it's as overpriced as yours is, they're not going to make a good offer on yours. Many times, it may falsely communicate to them that the other property is a heck of a good bargain, and you just sold that other property, for which that other property's owner and listing agent surely thank you.

By over-pricing the property, not only do you set yourself up for all of this, but you miss the period of highest interest in your property, which is right after it hits the market, tapering off after about a month. One of the two hardest, most pernicious ideas for a good agent to fight is the idea of putting it on the market over-priced "just to see" if they can get thousands of dollars more than comparable properties are selling for. The other is the concept of "bargaining room." Not only are you unlikely to get more than the market comps, but by over-pricing the property during the period of initial interest, the owners have almost certainly frightened away potential buyers who might well have offered market value if the property was priced correctly. Nor do these people come back later. They're looking at the stuff that hit the market this week, not four, six, or ten months ago. The agents in the area remember that it sat on the market for six months even if you somehow manage to get the days on market counter reset. Result: You have to lower the price further than the price you could have gotten in the first place to attract interest, and you paid carrying costs for those months as well. Foot. Bullet. No assembly required, because you did it to yourself. If you had a need to sell by a certain time, or for the best price, it's not going to happen.

Indeed, several months out, you'll start getting those low-ballers I talked about earlier. They really do want to buy your property, but they won't offer anything like what you might have gotten earlier, because your property isn't worth that much to them. It's no secret that just waiting a little while on over-priced property is one of the best ways to get a bargain that there is. Most people put the property up for sale because they have a reason they want it sold. Most of those reasons are time-sensitive, and many are time critical. Wait until the deadline looms, or has passed, and the seller has no bargaining strength. I don't care how much "bargaining room" you gave yourself. Bargaining room is nothing. Bargaining strength is everything. When your best alternative is losing the property to foreclosure, you have no strength. If you won't deal, these folks will wait until the lender owns it. It's all the same to them, but it isn't to you.

Until recently, with prices falling, the appraisal wasn't quite the problem it usually is for over-priced real estate. But usually, if you actually do win the lottery - and the odds you are facing when you over-price a property really are in that league - and your listing agent sells it to the Sucker of the Year for more than the comparables, the appraisal isn't going to support the sales price. This means they can't finance the full sales price, and the Suckers of the Year are even less likely than other people to have the money for an increased down payment. I've said this more than once, but I it is rare for a first time buyer to have a significant down payment, or more than they planned on needing. Even people who aren't first time buyers usually want to buy with as little down as possible, and you've just boosted the amount they have to come up with out of their pocket if they want your property - not to mention that most purchase contracts these days have appraisal contingencies built in. Appraisals falling short is a major problem right now. With HVCC, most of them fall short of what they should be, let alone fevered dreams of over-pricing. When I originally wrote this, a couple of nitwits had recently put the house I grew up in on the market for 630,000! I took a look for grins and giggles. The owners had gussied up the back yard a little, but other than that it's the same as I remember. No way is that appraisal coming in even if they do find the Sucker of the Year to make an offer, so the Suckers of the Year have to front all those thousands of dollars to make the transaction work, and Suckers of the Year are just that - suckers. The chances of them having that kind of money sitting around where nobody else has conned them out of it are miniscule, to say the least. The only alternative I'm aware of is a seller carryback, and there are some real issues and problems with those. Meanwhile, of course, you are stuck in escrow with them and the clock is ticking and they may have grounds for a lawsuit if you are not careful. Even if they don't, they may sue you anyway, and tie up the title until the court gets around to ruling, or until the arbitration hearing and all of the appeals are over.

In short, over-pricing your property is the best way I know of to get yourself very frustrated, waste time, and end up forced to accept an offer that's less than you could have gotten if you had simply priced the property correctly in the first place.

Caveat Emptor

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2 Comments

Joy said:

Dan, loved your blog on over priced real-estate. Was hoping that maybe you can assist me with my home purchase. We are first time home buyers and planning to use our VA loan for this purchase. After 4 years of searhing and saving, we finally found a home that we liked. However, the realtor is hard balling us on the price. The home in question was an REO with Countrywide and was sold to an LLC company. The loan with Countrywide was for $665 and it was sold to this LLC company for $580K in Sept 2008. I am thinking the LLC company belongs to these realtors. They placed this home in the market in Jan for $780K and dropped the price in Feb for $680K and now in March $650K. I couldn't believe how they priced this home, considering there were no upgrades what so ever. Thinking that the home was still an REO, I bid $540 and the realtor countered me at $640. I countered at $560 but never heard back. The realtor then held the showing of this home and decided to do upgrades so it was off of the market for 2 weeks. He painted the home, changed the kitchen appliances and fixed things here and there and then priced the home again at $649K. I was satisfied with the improvements and this time decided to bid at $600K and he countered me at $649K, he dropped the price only $900.00 as his selling price is $649,900. With all the fluctuating prices in this economy how do I know that I am bidding for the right price. I want the home but not sure what my counter should be now. Should I hold off and see if he gets anymore offers? Or should I counter and if so at what price? The home is in Fullerton, CA which is Orange County.

Dan Melson Author Profile Page said:

I don't know the market in Orange County well enough to work there (at least not in real estate. You might contact me about the loan). Anything specific I told you about the market outside of San Diego County would be far too likely to be incorrect. With that said, however, you might want to read When The Buyer And Seller Can't Agree On A Price For Real Estate

Please be civil. Avoid profanity - I will delete the vast majority of it, usually by deleting the entire comment. To avoid comment spam, a comments account is required. They are freely available, and you can post comments immediately. Alternatively, you may use your Type Key registration, or sign up for one (They work at most Movable Type sites) All comments made are licensed to the site, but the fact that a comment has been allowed to remain should not be taken as an endorsement from me or the site. There is no point in attempting to foster discussion if only my own viewpoint is to be permitted. If you believe you see something damaging to you or some third party, I will most likely delete it upon request.
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About this Entry

This page contains a single entry by Dan Melson published on November 15, 2020 7:00 AM.

Pre-Qualification was the previous entry in this blog.

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