Homeowners are often excited by recent real estate transactions in their neighborhoods. When a neighbor's house sells, it can be a reflection of the value of your home. So, of course, sellers are aiming for those large profits in a sellers' market! Some homeowners decide to shoot for the stars in hopes that the big-city buyer is willing to dig deep into their Armani pockets and pull out a boatload of cash. Others might want to start a bidding war, price their home low, let buyers know they are only accepting offers for a short period, and sit back to watch as the bidding war ignites!
But before you spend the profits you have not received yet, there are some things to consider. First, the current market is strong, but with increasing interest rates and less cash in the market, investors have more places to put their money. When rates are low, investors have lots of free cash that is better invested in real estate than other investment vehicles like bonds. Therefore, they look for places to park their money until rates increase. Real estate has been a relatively safe place with decent returns. But with rates rising, those with cash might be better-served parking it somewhere other than your front yard. However, inventory is still very low. If a buyer wants a home in this area, they will likely have to pay more than they would have last year.
There are three basic strategies for pricing a home: Listing at market value, listing below market value, and listing above market value. Let's start with the first, pricing a home at market value. First, understand that Zillow and other sites use an algorithm, a mathematical process, for valuing your home. These values are based on local, regional, and national trends. Sometimes they are relatively accurate, and others…not so much. The best way to find your home's current market value is to research the selling price of homes in your area, with neighborhoods similar to yours and similar square footage and lot sizes. It's crucial to use sold prices, not listed. Listed prices might not reflect the home's value and are instead a reflection of the seller's pricing strategy.
Working with a real estate agent, they will identify "comps" comparable home prices to determine market value. This is important because most sales require an appraisal. The appraisal will be based on this information, and lenders will not lend more than a home appraises for. They can't; lending laws protect you and the money you put in the bank. A bank can't use your money for unsafe investments. When homes are correctly priced at the market, they tend to sell relatively fast in a sellers' market and sell for close to or above asking. Bottom line: Pricing your home at market is a relatively safe way to sell your home quickly for a fair price.
Pricing a home below the market is generally done to create a bidding war. Pricing a home 5-10% below market can spark a lot of interest fast! You are likely to get multiple offers quickly. A good rule of thumb is restricting how long you will accept bids. This can create a frenzy, and buyers will know they have to come with their highest and best price right out of the gate. This is an excellent sellers’ market strategy but can prove dangerous. If your house doesn't generate the above asking price bids you were hoping for, it could mean a lower sales price.
Finally, shooting for the stars and pricing your home high has been on trend this real estate season. First, remember that unless a buyer is paying cash, and sometimes even then, they can't or won't pay more than it appraises for. Put yourself in the buyers' shoes for a moment. Suppose you know you are entering into a financial arrangement "underwater," meaning the home is worth less than what you're paying. In that case, you must be willing to stay for an extended period or lose money.
Further, a high price will shut out some buyers limiting the pool of lookers. The ones you get will have high expectations; after all, they are looking at similarly priced homes in the area. The combination of high expectations and a smaller pool of buyers might mean your house will sit on the market for a while. If you can wait, that might not be a bad thing. However, suppose a home sits on the market for an extended period of time. In that case, buyers start to think something is wrong with it, and the pool of buyers will continue to shrink. Lastly, your agent may not want to spend valuable advertising dollars on a home they know they can't sell for the listed price. In the end, you could get far less than you hoped and incur more costs.
So, what is the right strategy? It depends on your tolerance for risk! If you cannot afford or don't want to risk it, price at market. If you can wait a while, maybe shoot for the stars. If you're in a hurry, price low and try to initiate a bidding war. Either way, discuss all these strategies with a qualified real estate agent. Develop a marketing and pricing strategy that fits your risk tolerance and the local market.