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Avoid This Common Mistake When Selling Your Home and save Thousands of Dollars
Plus how to take advantage if you're looking to buy a house
Where you choose to live is the second most important financial decision in life.
This is not a post about whether you should buy or rent your home (my thoughts on that topic are here). This post is about getting good value when buying or selling a house.
Read to the end of this post to learn how choosing the wrong listing price can be catastrophic for anyone selling a home—and provide a potential bargain for homebuyers.
Homeowners that get greedy with the listing price pay a huge price
A 2017 research paper explores the relationship between listing price changes and the selling price of single-family residential properties—To be clear, we are talking about detached houses, not condos or townhomes.
Homeowners selling their house typically have two goals.
Sell for the highest possible price
Sell as quickly as possible
The problem is that often these goals are at odds with each other.
When setting a listing price, sellers should consider factors that drive home prices.
The property's square footage
Number of bedrooms
Current mortgage rates—the higher the rates, the more difficult it will be for homebuyers to afford to pay a high price.
But, many people don’t consider these factors when selecting a listing price. They fall victim to their emotions and cognitive biases and, in their attempt to get top dollar for their home, end up leaving huge sums of money on the table.
For many people, their home is both the single largest asset they own and something they have an intense emotional attachment to. Think of the empty nesters who spent the last 20 years raising their family in the same house; to them, it’s not a house—It’s their home. It will mean more to them than it would to anyone else.
One of the most relevant cognitive biases homeowners need to worry about is the “Endowment Effect,” which causes a person to place a higher value on something when they own it than when someone else owns it. You think your house is worth more than an identical house owned by your neighbor. As I wrote in this post, one of the theories of the cause of the endowment effect is that people want to feel like they got a good deal when they sell something.
These factors can contribute to a homeowner wanting an aggressively high listing price when selling their home. However, if they set too high a price, it could backfire on them.
Anyone obsessed with browsing house prices in real estate apps knows that buyers will pay the most attention to a house in the first few days after it’s listed on the market. If your property is overpriced when it hits the market, you’ll get no offers. The longer it sits on the market, the more likely the homeowner will have to reduce the price—which is where the pain begins.
The researchers found that when homeowners are forced to reduce their listing price, the final selling price falls by two to three times the amount they had to reduce. If you’re house worth $475,000 and you listed it for $500,000, got no offers, and were forced to drop you're asking down to $475,000, there’s a decent chance you’d end up selling the house between $425,000-$450,000. In that case, you would have left as much as $50,000 on the table due to the endowment effect causing you to list the house too high.
This quote from the paper explains why reducing the list price is so disastrous:
“Properties with excessively high listing prices usually take longer to sell, and when sellers decide to decrease the listing price, a signal is sent that these sellers may be willing to drop their reservation prices.”
Translation: Price reductions send a signal that you are desperate, and buyers will try and lowball you.
Recently, a new strategy has emerged in hot real estate markets where the listing price is set below the actual value to generate multiple offers and start a bidding war. Where I live in Waterloo, Ontario, buyers submit blind bids to sellers—you don’t know what price other bidders offered. It’s commonplace to see a house listed for $600,000, receive upwards of 20 bids, and sell for close to $900,000. It’s absolute insanity.
So, what does this mean for you as a seller or a buyer?
As a seller, it is important to set the right listing price from the start and avoid overpricing your home. Overpricing can lead to your house sitting on the market too long, forcing you to decrease the list price, which usually results in a lower selling price. Find a realtor who will give you a much-needed reality check when you tell them you want to set your price too high.
Stick to the factors that drive house prices, and don’t let your emotions and biases drive your decision.
As a buyer, you have to do your research and have your financing locked down before getting serious about house hunting. Getting a mortgage pre-approval can allow you to act fast when you see a house has reduced its price and you want to swoop in with a lowball offer.
Whatever you do, make sure you negotiate to have the deal be contingent on a home inspection. Another reason a seller may reduce the price is if they find a defect in the house, like faulty wiring or a crack in the foundation. If your home inspector finds issues with the home, you can ask the seller to pay for the cost to make the needed repairs or just walk away from the deal.
Never forget this quote from Warren Buffett:
"Price is what you pay, value is what you get.”
With home prices as high as they are, it’s never been more important to make sure you are getting maximum value for every dollar you spend on buying a house.
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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.