If you want to get the best price for your home, should you:
A. Ask for more than you think it’s worth?
B. Ask for exactly what you think it’s worth?
C. Ask for less and count on a bidding war to push you over the top?
A study in the Journal of Economic Behavior & Organization this year argues that the answer – despite what you’ve probably heard – is A: overprice. Underpricing doesn’t work for the average seller, the authors say.
They suggest that pricing high pays off in an extremely modest way, a boost of about $100 to $200 on average over similar homes. Underpricing in the hope of setting off a bidding war, the study says, nets average sellers a bit less than they otherwise would have received.
“The key idea, really, is not necessarily how much more money you will make if you overprice, because that depends on a whole lot of factors,” said study co-author Julia A. Minson, an assistant professor of public policy at Harvard University’s Kennedy School of Government.
“We had 14,000 houses we were looking at, so for any particular house, that number is meaningless.” she said. “The main takeaway for all sellers is to not buy into the story that you will make more money if you underprice.”
Whether overpricing is a smart strategy – as opposed to right-on-the-nose pricing – might depend on how quickly you want to sell.
Chris Benedetti watched his next-door neighbors in Baltimore’s Upper Fells Point wait a couple of months to sell this year and drop their asking price several times. He didn’t want his rowhouse to sit around, particularly since he’d bought a new place. So he took his agent’s advice to ask for $275,000, close to the neighbors’ sale price.
Result: He got two offers within a week and a half, gave the would-be buyers a chance to modify their bids, and ended up with a contract for $500 more than his asking price. He’s scheduled to close on the deal shortly.
What’s harder to measure is whether sellers are always better off if they set a price that attracts an immediate offer or offers. Could they have done better if they went higher and waited?
The downside to data showing how asking prices fall the longer a home sits on the market is that you can’t know for certain the cause. Did it take months to get a deal because the original asking price was too high, or did the seller drop a reasonable price because he got tired of waiting? Or was something else at work?
“You can’t run experiments in the housing market,” Minson said. “Basically, what you want to do is have the same house be underpriced or overpriced and see what happens.”
She and a colleague, then both at the University of Pennsylvania’s Wharton School, did what struck them as the next best thing: analyzing thousands of single-family home sales in Pennsylvania, Delaware and New Jersey between 2005 and 2009, catching some of the housing bubble and bust. They looked at the characteristics of each home to try to determine whether it was underpriced or overpriced.
According to their study, an asking price of 10 percent to 20 percent more than other properties in the neighborhood equaled a sales-price bump of $117 to $163 for the average home. Overpricing by more than 20 percent produced added gains, though modest ones, they said. That’s for homes that took an average amount of time to sell.
Underpricing takes an equally modest amount of money away from average sellers, Minson said.
She knows this goes against what many homeowners have heard from real estate agents and others in the industry. But “psychologically, it’s not a very counterintuitive story,” she said. Buyers are subconsciously taking a cue from the asking price.
“We just assume that expensive things are nicer,” she said.