Why Sellers Overprice Their Homes (and Why They Shouldn’t)
Deciding on a list price is hands down one of the most crucial steps of selling a home. And the final decision rests with the owner, who must agree to a number after working with a real estate agent. It’s all too tempting for a seller list high, hoping to get the most they can out of the transaction. Unfortunately, that’s not always the best strategy, even in Portland’s hot seller’s market.
Yet the fact remains that many sellers continue to list their homes over or at the high end of the market value. In 2019, the Journal of Housing Economics reported that the average homeowner overvalues their home by 8%. And Americans aren’t alone. For example, a 2020 JHE study found that Israeli homeowners “self-reported estimates of dwelling values are, on average, 20% higher” than market value. Now that’s a huge number!
So it seems that having a hopeful view of your home’s value is a common human tendency. And you might be thinking, why not try and get the highest price for your home that you can? Before you come this conclusion, let’s take a deeper look at how home prices are determined and why overpricing can harm more than it helps.
How Is a List Price Decided?
First, some basics. When a seller decides to put their home on the market, the first thing they’ll do is search for an agent. (Unless they’re going to for-sale-by-owner route.) The agent likely uses the homeowner’s valuation – what the seller feels the home is worth – as a jumping off point. Then, the agent conducts a comparative market analysis. A CMA takes into account “comps,” or comparable homes that have sold in the area in the past 90 days. Keep in mind, this is not the same thing as an appraisal. Rather, think of it more as your agent doing market research with their specialized knowledge and data sets.
Once the CMA is complete, the seller agrees on a list price with the agent. In the end, it’s the homeowner’s call, so they can go against an agent’s advice and list the home at a higher price point if they wish. But remember that a list price isn’t a true price; it’s an estimated value. The number that matters for the real estate market is the sale price. When money actually changes hands, the home’s perceived value acquires a dollar amount to back it up. You might call this the market’s version of the expression “put your money where your mouth is.”
Reasons Sellers Overestimate Home Values
A number of factors can cause a seller to feel that their home is worth more than it is. At the most basic level, anyone open to selling hopes to get a nice return on their investment. But the psychology becomes more complicated than that. Some of the top reasons sellers overestimate home values include:
- “Other Homes in My Area Sold for This Much.” Say a seller looked online to find out their neighbor sold for $650,000. This seller might start thinking, “well I should be able to get at least that much.” Not necessarily, if the homes aren’t comparable. Maybe the neighbor’s house has more bedrooms and an updated kitchen, for example. Or maybe the homeowner doesn’t realize that the beaten-up house nearby has a bigger lot that is dividable and that’s why is sold for more. This is where the agent’s expertise comes in. When the agent conducts the comparative market analysis, they do so with an eye for homes that are similar enough to yours. And now seems as good a time as any to note that if you interview multiple real estate agents and one tells you your home is worth way more than the others, that’s not a good sign. They may be fibbing to get your business.
- New Is in the Eye of the Beholder. Often homeowners consider their home to be recently updated, when in fact several years have passed. If you’ve lived in your home for 30 years and redid the bathroom 8 years ago, you might think that bathroom is pretty new! But a buyer touring the same home still sees 8 years worth of someone else’s showers.
- “Zillow Told Me It’s Worth This Much.” These days nearly everyone uses the internet at some stage of a real estate transaction, whether buying or selling. As we recently covered, though, internet value estimates can be tricky. Zillow is especially notorious for overvaluing (occasionally they are under too, but more often the error is overshooting).
- Memories and Sentiment. Finally, when a seller has lived in a home for long enough, the home becomes special to them. Every seller wants to believe, understandably, in the intrinsic value of the space in which they built their own life. And it can be hard to separate sentiment from practicality.
Reasons NOT to List Your Home Over Market Value
As tempting as it may be to gamble on succeeding with a higher list price, listing over market value comes with many risks. Some pitfalls that could befall you include:
- The Listing Goes Stale. An overpriced house may take longer to sell. That means not only are you sitting on it for longer, but the longer you do the more wary buyers become. What about Portland’s hot seller’s market, you ask? Shouldn’t it fly off the market in no time? Maybe. But if not, even more reason for buyers to be cautious of a home that isn’t selling. Even in this historically hot Portland real estate market, there are plenty of homes sitting there not selling. If you’re a home buyer it might not feel that way, but a quick look at a modern Portland home search portal filtered by days on market will show over one hundred Portland homes that have sat on the market for more than 30 days.
- You May Have to Drop the Price. Overpriced homes often need to drop price multiple times, creating unnecessary stress for the seller.
- You’re Missing Out on Your Target Audience. According the National Association of Realtors, over 90% of buyers use an online source during their home search. Let’s say the fair market value of a seller’s home is $475,000, but they’ve decided to list at $525,000. What with bidding wars going on in Portland left and right, it’s a no brainer, right? Well, not if the target group of buyers is looking at homes using online sources. Buyers in this range are likely searching using a price cap of, say, $500,000. That would mean this seller’s listing isn’t even showing up for the target buyers. If the buyers don’t see the listing, they aren’t taking a tour, and the seller isn’t getting any bids.
Bottom Line: Trust Your Real Estate Agent
At the end of the day, having a great agent on your side is the best way to see a fantastic return on your investment. Our agents come with years’ worth of local expertise. They know how to get you the most out of your home sale, and will fight for it. And we’re ready to conduct a CMA for you with no obligation to list! What’s there to lose? Check out our 1% sellers agents today!May 3, 2021