Compass put together an informative report that shows how overpricing one’s home when going on market almost always has negative ramifications for sellers: Across Bay Area markets, listings that require price reductions before selling consistently take much longer to sell and sell for significantly lower average values than homes priced correctly.
The correct calculation of “fair market value” before going on market typically has large financial consequences. And in the “Inner East Bay,” which includes Alameda, Oakland, Berkeley, Piedmont, El Cerrito and other towns, it’s especially important to differentiate the value, and probable ultimate selling price, from the “list price” which might be 10-25% lower than the expected selling price.
How buyers win when houses are over-priced
Overpriced homes can provide opportunities for buyers who carefully track time on market and price reductions (as well as homes taken off the market without selling), and react accordingly. In December 2024, one of my buyers was able to get into a wonderful property due to few buyers looking in this slower winter season.
Such buyers will almost always face reduced competition from other buyers – often no competition, which generally eliminates any need for overbidding – and allows for more aggressive negotiation of the purchase price and terms of sale.
(The Compass Private Exclusive program is designed to help sellers test the right price privately, before going on the open market.)
How home pricing works
“Ironically, instead of getting more money… [Over-pricing] usually stigmatizes a property and reduces the eventual sale price to less than it would have been with more realistic pricing.” House Selling for Dummies
Fair market value is that price a qualified, reasonably knowledgeable buyer is willing to pay, which a seller, not under duress, is willing to accept after the home has been properly exposed to the market.
Neither agents nor sellers determine market value: Only the market itself – willing and able buyers – establishes value. A comprehensive comparative market analysis is the best way to estimate current fair market value prior to listing the home for sale. Agent and seller then work together to create a plan – pricing, preparation and marketing – to maximize the conditions that reliably achieve the highest possible sales price.
The vast majority of buyers will not make offers on homes they consider significantly overpriced. Either they don’t want to waste their time, or are uncomfortable with possibly “offending” the seller. They simply move on to listings they consider fairly priced.
Well-priced homes create a sense of urgency in the buyer/broker communities to act quickly with strong, clean offers, and often lead to competitive bidding between buyers — which is the most likely way to increase sales price.
Pricing a home lower than the expected sale price is typical in the Alameda – Berkeley real estate markets
Even if it seems strange to price much lower than the price a home seller is hoping to get, it’s important to follow what it expected in a market. The chart tells all…
Notice how rarely homes sell for under the list price. That’s because the East Bay has so many experienced agents who understand how to drive demand among buyers.
How overpricing a home for sale can botch the sale
Overpricing wastes the optimum moment of buyer and broker attention: When it first comes on the market. This moment cannot be recaptured.
Overpriced homes kill any sense of buyer urgency and take longer to sell, which then significantly reduces value in buyers’ minds: “There must be something wrong with it if it hasn’t sold by now.” It almost always eliminates the possibility of competitive bidding.
“Let’s just put it out there at this price,” – higher than the comparative market analysis justifies –“and see how the market reacts” risks a substantial decline in sales price. (See chart.)
If a listing has inadvertently been overpriced (or market conditions suddenly cool), the sooner it is recognized as such and the price adjusted, the smaller the negative impact. Price reductions must be big enough to regain the attention of buyers and their agents – typically at least 5%.
Some agents suggest a list price considerably higher than what market conditions and comparable sales justify—because they believe this is what the seller wants to hear, especially during the process of interviewing agents. This is called “buying the listing” and is a violation of the fiduciary duty of honesty that an agent owes their client.
3 tips for success in the hot East Bay market
1. Price it right to begin with.
2. Prepare the home to show in its best possible light.
3. Implement the most comprehensive marketing plan possible.
Hire an agent who will do all of the above, who will negotiate effectively on your behalf, and and who will diligently manage the disclosure and due diligence processes.
In the Bay Area, the difference in pricing accurately can add up to tens or even hundreds of thousands of dollars in the proceeds of sale.
Curious how homes in Rockridge or other Bay Area neighborhoods were priced and what they sold for? Ask me for a spreadsheet that tells all!
BACKGROUND ON THE CHARTS AND DATA
Using data on over 50,000 home sales occurring over a period of 12 months, Compass performed analyses such as this one on 5 Bay Area regions comprising 10 counties, comparing house, condo and townhouse listings that sold without reducing list price prior to sale, to those that required one or more price reductions before going into contract and closing sale. The specific results varied by market region, but large differences in sales-price-to-original-list-price percentages, measuring overbidding and underbidding, average days-on-market, measuring speed of sale, and average sales values were universal.
The calculations regarding the value differentials between these sales must be considered approximate: The same home can’t be sold at the same point in time at different list prices, with and without price reductions to compare the results. But in all the regional analyses we performed comparing the 2 types of sale, the average change in value – i.e. the average loss in value seen in price reduced homes – was about 10%. Certainly, this differential varied widely amid tens of thousands of individual homes in varying circumstances of sale, but considering home prices in the Bay Area, even a small percentage decline in sales price typically adds up to a substantial loss in seller proceeds.
Pertaining to residential real estate sales in Alameda and Contra Costa Counties. Analysis performed in good faith with data from sources deemed reliable, but may contain errors and subject to revision. All numbers are approximate. How these analyses apply to any specific property is unknown.
