Prior to starting Home Bay, our co-founder Tom was a real estate broker who helped sell over 1,000 homes. Today, he’s sharing a home pricing trick of the trade that agents often use to land new clients. It’s a crazy practice that often costs sellers a lot of money. Keep reading to learn how to avoid falling into this money trap!
Pricing with an Agent – How it Works:
- You’re thinking about listing your home and are considering which agent to hire.
- You invite an agent to your home to “take a look” and to give you an idea on price. Even though you feel like you have a pretty good idea of what it’s worth, you’re looking for an expert opinion.
- The agent comes armed with some recent sales data that they’ve selected.
- After discussing marketing and price, you agree to hire the agent to list your home and you sign a 6-12 month listing agreement. That all seems innocent, right? It’s not! It’s been proven that by allowing an agent to price your home and by entering into a listing agreement, California homeowners end up costing themselves a significant amount of money.
What’s the Problem?
While you may have a “pretty good idea” of your home’s value, your assessment is probably wrong. In fact, annual stats show homeowners generally think their home is worth about 8% more than it actually is. But why? You have an inflated sense of your home’s value because:
- You love your home’s features – that’s why you bought it in the first place.
- You’re emotionally attached to your home. Maybe you planned a wedding or had your first child there. Whatever the case, emotions impact your perception of your home’s value.
- You have a cognitive bias of needing to get a certain price for the home.
- You generally see list prices for other homes in your neighborhood – not sold prices – and the higher list prices are anchored in your mind.
But Agents are Unbiased Experts, Right?
Now enter the real estate agent. Agents are supposed to be unbiased when it comes to price, but unfortunately, that’s not usually the case. Why? When an agent comes to your house, they know that you likely have an inflated sense of your home’s value. While your goal is to get the most money possible for your house, their goal is to get you to like them so you sign their listing agreement.
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Ask yourself, are you more inclined to like them if they quote a lower price or a higher price? Are you more likely to sign the listing agreement if they confirm your opinion on your home’s value or if they argue it? Most agents will agree with your opinion on price, or suggest a price on the high side of reasonable (or a little beyond it), to get you locked into a listing agreement. This “process” then traps you in a way that costs you a lot of money…
Once You Sign, You’re Locked In:
Listing agreements commonly lock you into working with your agent for six to twelve months. Over that time, your agent will typically start you listed at the higher asking price. If you do overprice, the market will let you know that your price is too high, even if your agent didn’t. You may get low or no offers, or buyers may submit proof that your list price is not accurate. If that happens, you’re in a really bad spot, and it’s going to cost you.
Here’s How You Lose Money:
- Zillow has an incredible amount of US real estate data. Their CEO, Spencer Raskoff, used their stats to show that sellers who price their home over fair market value consistently end up with a final sale price that’s approximately 4% lower than those who price at or below value.
- The median sales price in California is $510,000. That means most California home sellers are losing approximately $20,000 on their sale when they overprice.
- If you live in California and sell three homes over your lifetime at the median price, you’ve lost $60,000 through bad pricing decisions. Assuming a 5% compounded return on your $60,000 over 30 years, that means you’ve lost more than $250,000. Ouch! The bottom line is, agents have a different incentive aligned with their self-interest when they talk price with you. So beware! When they allow you to start off at the wrong, high price, it costs them some added marketing time. But for you, it will cost you a lot of money.
Trust the data! Whether you are listing without an agent or with one, price your home at or below value to get the most amount of money upon sale.
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