Why do properties get overpriced?
The value of a property is based on a series of factors that can be fairly well identified. Quantifying them is more difficult. The experience and knowledge of the agent doing the valuation is invaluable. The agent will consider such criteria as location, features and condition of property, number of comparable properties that are now for sale AND that have sold, economic climate and trends.
A pricing decision that is made either because the seller needs or wants more money by-passes the solid pricing factors and cannot be justified to a buyer. Trying to convince a buyer to pay a premium on a home because the seller wants extra money to go on holidays simply will not work!
Another reason properties get overpriced is that the Real Estate Agent made unrealistic claims in order to win the listing. Either the agent hopes to sell it after a longer period and a price reduction, or simply wants the advantage of having a listing and his name up on a sign.
Some out of area agents simply do not understand the market in a neighbourhood outside their area and overprice a property because of this.
Underpricing a property is far less serious than overpricing it. If the offer date is delayed, then potential buyers have a chance to look at the property and several might decide to put in offers. Multiple offers will drive the price up more successfully than overpricing. Underpricing is a valid strategy to attract multiple offers. In order to work the property MUST BE ENERGETICALLY AND INTELLIGENTLY MARKETED
Any renovations made to prepare a property for sale need to be carefully considered. The return is rarely 100% of investment. See our Article on Renovation Return on Investment for more details.
What happens when a property is overpriced
- The wrong buyers will be attracted. Buyers looking in a certain range will look at your property, compare it to others they have seen and walk away because yours offers less than a more competitively priced home.
- Fewer buyers will be attrated initially and interest will be lower. MLS searches are often based on price and your property will not come up for buyers who are looking but might not have set the upper limit high enough.
Real Estate Agents who have done their homework will not recommend your property because their research tells them it is an overpriced property and a bad deal for their clients.
- Buyers are more sophisticated AND have access to much more information than before. If you overprice a property buyers will know and will stay away. What a buyer is willing to pay is based on what other properties comparable to yours are being advertised and have sold for.
- Lenders will do a valuation and will not approve a mortgage on an overpriced property. This means that any potential buyer has to have a larger downpayment, or will not be able to get financing as easily.
- Property will not sell and become STALE. Buyers often think there is something wrong with a property that has been on the market too long. When the price gets dropped the offers will be lower than if the price had been correct in the first place.
What are the costs of Overpricing a Property?
- Stress levels Increase It is stressfull to keep a property in "showing shape". It is also difficult to be in limbo and not be able to get on with plans and moves.
- It can be expensive. If you are downsizing then you are paying mortgage and utilities cost on a bigger home while you wait. You might miss out on a good deal for your next house. If you have bought another property your cost can be doubled as you maintain 2 properties. Bridge financing is more expensive than a regular mortgage.
- Over pricing often results in a LOWER SALE PRICE It often happens that a property that has sat on the market goes for a lower price because it is stale or the market conditions have changed.
- If the property sold then the sale fell through because of financing there will be delays and the property might get a bad reputation, again people will wonder what is wrong. Is it only financing or is there something else...
- Your overpriced property will help sell other better priced homes. Buyers will come look at both and offer on the better priced property and yours will sit.
It is very rare that a buyer will buy an overpriced home because they "fell in love with it" and want it at all cost.
What can you do to Protect Yourself?
Be informed! Know the value of homes in your neighbourhood. Use a Trusted Real Estate Agent and arrive at a price based on fact not emotion. Carefully consider the comparables, that's what buyers will be looking at.