John M. Lee: The Magic of Pricing

The real estate market, as you know, has been red hot. Prices have appreciated this year and with the lack of listing inventory on the market, multiple offers are the norm rather than the exception.

Statistics show that 80 to 85 percent of the properties are selling for above the asking price - and some substantially over.

The most common question I get from sellers in the current market is, "How should I price the property in order to obtain the highest possible bid?"

Pricing strategy differs in various markets. Typically, in a normal real estate market, the sales price is about five percent below the asking or listed price and sellers price homes with the thought of leaving some room for negotiation. However, with the information highway that is the Internet, that gap has narrowed and with the current sizzling real estate market, it has actually gone the other way - pricing the property below its market price to create a marketing frenzy and bidding war.

Currently, the trend is to set the price low as multiple offers bid the selling price up, with market price (defined as the highest price a willing, ready and able buyer is willing to pay).

However, I do not advocate substantially under-pricing a property as this strategy wastes many people's precious time.

I recommend setting the price according to comparable sales, knowing that in an upward trending market, the final sales price will surpass the comparable sales price.

I would not at this time recommend overpricing a property, as it is the kiss of death. In this type of market, buyers are viewing properties with the expectation of offering more than the asking price. So if the home is overpriced, and buyers think they will need to bid higher to get the property, it will scare them away, resulting in no offers for the property.

Another tip is to price homes slightly under "mental price points" to make sure that it appears in a home search.

In the past, agents used hard copies of multiple listing books to flip a page and see listings more than the price range they were researching. However, with the elimination of the hard copies, a home priced at $705,000 will be invisible to people who search with a criteria of under $700,000. So even if the seller is willing to sell the property for $700,000, people who might be interested at that price will not know the listing is available. So, I recommend they stay under the mental barriers.

It is also extremely interesting to note how offers are coming in at this point in time. More often than not in multiple offer situations, offers are bunched together at a certain price point with one or two offers way above this price. When this happens, a new comparative sales price is born for the next similar property.

Will pricing ultimately affect the final sales price? The answer is most definitely.

If the property is priced too low, you might attract many offers, but might scare off the person who could offer the highest price because they do not want to compete with so many offers. And if priced too high, it can also scare off the best potential buyer because he or she might think that there is no chance to obtain the property. The best solution is to review market conditions and pricing trends and list the property accordingly.

We are currently living through an incredibly unique time in the real estate market, one that we might never experience to this magnitude again in our lifetime. If we want to utilize information to our advantage in this marketplace, we need to know and understand the magic of pricing.

John M. Lee is a top-selling real estate broker at Pacific Union, specializing in the Richmond and Sunset districts. If you have questions, call him at (415) 447-6231 or e-mail johnlee@isellsf.com.