The price is right . . . or is it?
Does it make you feel better buying a pair of Christian Louboutin shoes for $800 even though you know you’re really paying mostly for the status of owning a pair of luxury shoes? Can paying more for a piece of property than it may really be worth give you the same high? Some people think so.
What’s the right price to ask for your home? Should you price it high and hope for higher offers or price it low and hope for more offers? Ask 10 realtors and you’ll get 10 different answers. But a 2013 study from researchers at The Wharton School have put an interesting twist on real estate pricing.
Grace Bucchianeri and Julia Minson analyzed 14,000 single family homes in the Northeast over a period of four years. Their data shows that although most real estate professionals advise underpricing, overpricing actually results in a higher sale price. The researchers find that a home that is listed 10 to 20 percent higher than other homes in the neighborhood will command an additional increase of 0.05 to 0.07 percent in the sale price for each 10 percent increase in the price. For homes listed 20 percent higher than other homes the additional increase from overpricing for each 10 percent increase is 0.16 to 0.22 percent of the sale price.
The researchers conclude that the cognitive theory of “anchoring” may have something to do with buyers willing to pay more. The theory holds that people are often somewhat irrationally influenced by the original information they are given. They take their cues from initial starting points including higher home listing prices and then attempt to justify the value based on the special attributes of the property. A house on the beach has a certain intrinsic value that can’t really be measured. The first impression of the waves crashing on the sand becomes an emotional moment that is never erased every time that buyer thinks about the house.
The study further concluded that underpricing is not effective in hot markets, a strategy sometimes used to promote a bidding war on properties. What they call the “herding behavior” can be beneficial in very specific markets resulting in multiple and higher offers when buyers try to outbid each other. However, generally the study did not find this to be the case and advises sellers against the practice of underpricing for this reason.
If you really want to experiment in the real estate market place, try placing your home on Zillow’s “Make Me Move” website. According to Zillow, Make Me Move is a free and easy way to tell potential buyers the price you would be willing to sell your home for without actually putting it on the market. You simply post as much of the property details as you’re comfortable with and price you are willing to accept along with your e-mail address. Buyers who are interested can contact you via e-mail so you remain anonymous. Unfortunately Zillow admits that their success rate is relative low with roughly 2 percent of homes listed on Make Me Move last year actually sold. Nevertheless, it could be a painless way to feel out the market before you actually list.
I don’t care if they’re worth it or not, some day I want to own a pair of Christian Louboutin shoes. Of course I have no idea where I would wear them since I would be afraid to walk out of the house but just knowing those red soles are lined up in my closed right next to my Nike flip flops will make me happy.