The Dangers of Pricing Your Home Too High
Selling a home is a big decision, and one of the most important aspects of the process is determining the right price. Unfortunately, some sellers make the mistake of pricing their homes too high, which can lead to a host of problems down the line. In this blog post, we’ll explore some of the reasons why people price their homes too high when they sell them, and the potential consequences of doing so.
1. Testing the Market
One of the most common reasons why people price their homes too high is because they want to “test the market.” In other words, they want to see if there are any buyers out there who are willing to pay more than what they think their home is worth. While this may seem like a logical strategy, it can backfire in a big way. Overpricing your home can make it less appealing to buyers who are looking in your price range, and it can also turn off potential buyers who might be willing to pay more for a home that is priced appropriately. For example, a home that is worth $600K and the list price was $600K, it would be more likely to get that amount. However, if you listed a home that was only worth $575K for $600K, price reductions might eventually lead to a sale price of only $540K.
2. Leaving Room for Negotiations
Another reason why people may overprice their homes is that they want to leave room for negotiations. They may assume that buyers will try to negotiate the price down, so they start with a higher price in order to end up at the price they really want. However, this strategy can also be counterproductive. If your home is significantly overpriced, buyers may not even bother making an offer, or they may assume that you’re not serious about selling.
3. Believing a Higher List Price Will Result in a Higher Sale Price
Some sellers mistakenly believe that if they list their home at a higher price, they will end up selling it for more money. However, this is not necessarily the case. Buyers are savvy, and they will typically do their research to determine what a home is really worth. If your home is priced much higher than other similar homes in the area, buyers may simply choose to look elsewhere.
4. Misinformed About the Market
Finally, some sellers may overprice their homes because they are misinformed about the market. They may have received bad advice from a friend, neighbor, or another realtor who is not familiar with the local market conditions. It’s important to work with a realtor who has experience selling homes in your area and who can provide you with accurate information about pricing and market trends.
So, what are the consequences of overpricing your home? The most obvious consequence is that your home may sit on the market for longer than it should. This can lead to a variety of problems, including:
• Reduced interest from buyers
• Fewer showings
• Lowball offers
• A lower eventual sales price
In addition, if your home sits on the market for too long, it can start to develop a stigma. Buyers may assume that there is something wrong with the home, or they may wonder why it hasn’t sold yet. This can make it even more difficult to sell the home in the future.
In conclusion, pricing your home appropriately is crucial if you want to sell it quickly and for a fair price. While it may be tempting to overprice your home for any of the reasons mentioned above, it’s important to resist the urge and work with a realtor who can provide you with accurate information about pricing and market conditions. By doing so, you can avoid the pitfalls of overpricing and increase your chances of a successful sale.
The Real Cost of Waiting
If you’re considering continuing to rent, maybe you think it’s best to wait until prices come down, or maybe you’re waiting for interest rates to come down. Or maybe you just don’t see the value in taking on the responsibility of owning a home. But did you know home ownership is one of the largest factors in building wealth? It is the differentiator between those that bought and those that continue to rent. How big of a difference can it really make, you ask? Let’s look at the tale of two friends, Harry and Randy, and really dive into the numbers to see what a difference buying a home now and continuing to rent will make in a 7-year period.
Harry Homeowner just purchased his new home for $400,000. He used FHA financing and put 3.5% down, or $14,000. His loan would be $392,755 because of the up-front 1.75% mortgage insurance that gets rolled into the loan on FHA loans. His monthly payment would be:
Principal & Interest – $2,613
PMI – $273.42
Estimated Taxes & Insurance – $474
Total payment = $3,360.76
After 7 years, Harry will have paid $181,546.66 in interest and $34,171.22 in principal, leaving a loan balance of $351,829.02. Harry has gained $34,171.22 in principal paydown, which can also be looked at as a forced savings. But wait – it gets better. Harry will also gain equity. The average equity increase annually is 4% (in metro Atlanta, it’s been 5% average.) After 7 years at an average of 4% annual appreciation, Harry’s home is now worth $526,327. That’s a gain of $126,327. Adding in the principal paydown of $34,171, Harry is sitting on a nice $160,498 gain. Harry could access some of this equity through a Home Equity Line of Credit and perhaps purchase an investment property (smart choice Harry!) or decide it’s time to upgrade and roll those gains into a new home and start the process over.
Another scenario that would likely have occurred for Harry is that because of the gain in the property value and equity, the PMI would drop off – most likely Harry would have refinanced his house and the payment would have reduced by $300-$400, so Harry’s payment in year 7 would be estimated to be around $2,900.
Randy Renter is renting a cool two-bedroom apartment in a hip, walkable location for just $2,000/mo. Instead of making a mortgage payment, Randy is a disciplined dude and he is saving the difference in his rent payment and what his friend Harry is making in a mortgage payment. So he’s saving $1,360 per month.
Randy is smart with his money, and he’s invested it in a mutual fund and was able to obtain an average annual return of 12%. Randy would now be sitting on a cool $167,000.
Aha you say: “So buying is not the right move! I’d actually have more money by saving money by renting (assuming you’re as disciplined as Randy) and not buying.”
However, we didn’t factor in that rent continues to increase every year. So in reality, Randy’s fixed cost of living continues to increase, while Harry’s fixed housing cost is locked in (and likely reduced when he refinances). Let’s rerun this scenario factoring the rent increases and consequently the savings decreases for Randy.
Average rents increase by 6% per year in our area. Randy’s two bedroom apartment rent looks like this over 7 years:
Year 1 $2,000
Year 2 $2,120
Year 3 $2,247
Year 4 $2,382
Year 5 $2,525
Year 6 $2,676
Year 7 $2,837
At the end of 7 years, again Randy is super disciplined and did not touch any of his savings, he now has $138,855 saved.
Harry has $160,498 in equity/net worth.
Randy has $138,855 in equity/net worth.
Harry has a fixed monthly housing payment.
Randy also has a monthly payment that will continue to rise and is beyond his control.
Randy can buy too, but the same house Harry bought 7 years ago will cost Randy a lot more.
It has been said “the best time to plant a tree was 30 years ago, the second-best time is today.” The same can be said of real estate. Don’t wait to buy real estate, buy real estate and wait!
Tom and Christy Discuss First Time Home Buyers
The Curtin Team’s CEO, Tom Curtin and Director of Sales, Christy Smith explain the benefits for first time home buyers in today’s market. One of the biggest advantages of buying a home today is the stability and equity you get. Waiting a year or two can cost you tens of thousands of dollars in equity loss. And as rental rates continue to rise, a fixed rate mortgage payment stays the same. Also, many sellers and lenders are now offering to pay closing costs and buy downs on rates. Large down payments often scare off first time homebuyers, but some loans require as little as 3.5% down. As an example, the down payment on a $400,000 house can be as low as $14,000. And there are many ways to get that down payment including finding places in your budget to cut back and save, loans from family, or loans against a 401K to cover some or all it. The news of interest rate hikes shouldn’t scare off potential home buyers either. If rates go down, refinancing is available and if rates go up, you’ll be glad you locked in a lower rate.