Nothing new on the Cook Squared Enterprises front, so yet another rant from me. As I have been looking at pricing in real estate it struck me that a lot of people do not really have a pricing strategy. Most people seem to just price their properties high and expect to drop it as offers come in. While this strategy tends to work well in very hot real estate market, I have found that it really does not work well in other situations.
Let’s look at a quick example. During our renovations of a house in Gross Pointe Woods, Michigan we experience a rehabbers nightmare. In a matter of months the market literally tanked. Much of this was due to layoffs in the Big Three Automakers and the exodus of Kmart to Chicago. Unfortunately for us, what we expected to be a sale of maybe $250,000 turned into a far flung hope for $205,000 (eventually sold for $197,000). Lucky for us we bought the house really cheap. Our neighbors were not so fortunate. They had recently refinanced their home for $250,000 and used the money for very nice renovation. In a stroke of very bad luck he was being forced to relocate and had to list his property right away. Due to all the renovations and the refinancing, he really needed to get $250,000 to break even on his home, so he listed it as such. He placed his property on the market about six months before we sold ours. Eventually, he sold his house for about $220,000 after it had been on the market for almost 2 years. This was one of many cases in that area of people chasing the market with their pricing.
During this same market we were able to sell our house in a little less than two months because we priced our house with the market. First, we took weekly tours of the market. My wife and I enjoy attending open houses. Kind of a weird hobby, but we really have a passion for real estate. We knew what our competition was offering as far as upgrades and we knew their pricing. Additionally, we tried to emotionally detach ourselves from the pricing. This was the hardest thing to do. Thinking about how much time and money we put into the property, we really wanted to get a good return. Fortunately, we priced smart. We chose to price our property just under houses with similar upgrades. Since we had the same school system and the exact same neighborhood we felt like we had an edge. We got good traffic and eventually were able to get a good price. People often don’t figure carrying cost into their pricing strategy. Consider the average mortgage on a $200,000 house. Let’s say that it is a $1,200 monthly payment. If you hold a property for an additional 6 months, which amounts to roughly $6,000 in interest payments that you would not have to pay if your property was sold. Additionally, the longer the property is on the market, the more concessions the buyer will ask for and the more desperate you will get. The stress of this situation is certainly an additional price you have to be willing to pay. Consider the situation above where the person made $30,000 of concessions and held the property for two years. Adding in interest payments, that is almost $50,000 off the purchase price. That would be the same price we sold our house for and it had fewer big upgrades.
To investors and first time sellers I recommend discussing a strategy with your agent. First, go out and look at all of the properties in your 3 mile radius that are for sale. Don’t just get the MLS report because it won’t show you what the upgrades look like and how the property truly compares to yours. Once you get that information, think about your timing and what is happening in your market. If the market seems to be strong, consider pricing right at or slightly above houses that currently have the same or few upgrades. Make sure you are honest with yourself about your property. Do not consider the amount of money you put into the house. As economist say, that is a SUNK cost and should never be factored into your decision. Finally, be proactive. If you see houses are sitting on the market for a long time, lower your price slightly. It brings people back to your property and gives you an advantage. Always remember, money is made on the purchase of the property, not the sale.