Real Estate Pricing Strategies That Work!
The right real estate pricing strategies are critical when you’re placing a property on the market. Once you have analyzed the deal as an investor, or run a Comparative Market Analysis (CMA) as a real estate agent, the dilemma is: at what price level should you market the property?
There are definitely a wide variety of strategies and justifications on this topic, most of which play on the psychology of getting attention from plenty of potential buyers, while boosting interest and curiosity.
Here are my 3 key elements for a successful pricing strategy:
Property vs. Property
The Comparative Market Analysis (CMA) is usually prepared by a real estate agent who has access to the Multiple Listing Service (MLS). It’s an evaluation of similar recently sold homes (aka comparables) that are in close proximity to the subject property. Unfortunately, there are no other tools or resources more reliable than the MLS for this type of research, so investors have to rely on working with real estate agents if they want to access this information.
A CMA also provides other important data and information, and allows you to filter the results and narrow down your search. Examples of these additional statistics are: supply and demand in the area, volume of cash sales (which indicates whether this is a high demand investors’ area) and much more.
Analyze the Deal
As an investor, you’ll want to look at area properties which are comparable to the subject property and have sold in the last 3-6 months. Look for those similar in size, age and amenities or special features. Disregard any distressed sales (foreclosures) and auctions.
Now, take the average sold price (value) of your comparables and multiply it by 70% to 85% – which gives you the price you are willing to offer for the property. If you are wholesaling the deal, expect to add 10-15% to your offer price (which will become your profit at closing). Note that the sliding scale of 70%-85% of the average value will depend upon location, supply, demand and other factors like condition.
If I’m flipping a property, I will work with a reverse formula; I calculate the price the property should sell for after repairs, then I back out all costs and potential profit for me as an investor – and this will yield my best offer price.
Pick a Winning Price
The common practice in real estate is to set the price just below a round number; i.e. if you think the right price is $100,000, price it at $99,900 to better influence buying psychology. Another reason to do this is that people specifically target their online searches within certain price brackets; for instance, a buyer might be looking for houses priced $100,000 or below.
According to the National Association of Realtors, “researchers found that such a just below pricing strategy yields a selling price that is about 2.5 to 3 percent higher (or $5,000 to $6,000 more on a $200,000 house) compared with a rounded pricing listing strategy.”
I have run across real estate agents and investors with their own techniques and “signature” real estate pricing strategies. One Realtor in Hawaii used to price his properties with really odd numbers. For instance, if he thought that a property should be listed at $499,000, he would price it at $499,186. The last 3 numbers were used merely to attract attention – he knew that in the end the buyer would determine their own offer anyway.
Personally, I do believe in and use the “just below” pricing strategy, since I personally research using price range brackets. And psychologically speaking, a number looks much smaller if it does not cross over the next hundred – so $299,000 sounds better than $300,000, and $995,000 sounds much better than $1,000,000!
As an investor, wholesaler or flipper, you always want to give people the idea that you are offering them a good deal, and odd price numbers “just below” give that impression over round numbers!