Why do home sellers overestimate the price of their homes?

home sellers' price

Finding the right price for offering the home for sale is the most important thing. Why do so many homeowners (and Realtors) get it wrong?

 

1: Listing Presentations

I get invited to a lot of listing presentations. I win some. I lose some. I lose more than I win. But that does not bother me. My broker recently told me that the industry average is one in five. That means I have a 20% chance of getting the listing that I present for.  Knowing that takes the pressure off.

Also, I’m a busy agent already and I haven’t got the time to take on a listing that will not sell. I don’t have a staff that I need to keep busy with busy work, (anointing the home seller’s ego, “working” the listing, marketing the team). I don’t have a half page in a monthly glossy real estate magazine that I have to fill with another home for sale. I don’t have the patience to get a listing, knowing that I am going to have to work the price down, or use it as bait for other listings and to attract homebuyer clients.

The listing presentation, for me is a business meeting. We are going to interview each other and see if we can enter into a partnership to sell your home. That’s it.

Reason #1 that home sellers overprice their home is because real estate agents let them. 

2: Upgrades and improvements

Like a used car, a house has to be maintained or its value is going to depreciate at an alarming rate. By maintained, I mean not only doing the roof when the roof wears out and having the furnace cleaned and adjusted every couple of years, I also mean, doing a kitchen renovation every ten to fifteen years and painting every five or six years. We have to make improvements to the equipment and the features, the rooms, the floors, walls and light fixtures – your house has to stay relevant.

But, herein the problem lies. Homeowners who take the time and spend the money on upgrades, overestimate how much those improvements add to the value of the home. When it comes to home improvements, some homeowners think that they can get back what they put into it, (some think they can get back more). The reality is that you get back a percentage – maybe 70% of a kitchen remodel, maybe 60% if you add a backup power generator to the basement.

Reason #2 that home sellers overprice their home is because they overestimate the value of upgrades and improvements. 

 

3: The media

If you pay attention to the news, you will hear (what you want to hear when you are getting ready to sell) that home prices are going up, up, up. They are. But not as much or as fast as you might be led to believe. Statistics are funny. They are reported incorrectly, misleadingly. You read a headline that home prices are up 15%. But what does that mean?15% over last month when only low priced condo townhouse sold? 15% over this month last year when it was snowing like hell and only the homes that sold had to sell? Sometime sales volume gets mixed up with price increases. “Sales are up 25%” means the number of homes sold, not prices. Sometimes people read about what is happening in Toronto and think that’s going to happen on their street too.

Reason #3 that home sellers overprice their home is because they overestimate their appreciation value based on faulty assumptions and information. 

 

The 5% Solution

A recent statistical study, published in the Journal of Housing Economics, found that homeowners on average overestimate the value of their properties by about 8%. We also know that in Kitchener Waterloo, most houses sell within 97% of their listing price. That means, if you price your house 3% above market value you should be confident about selling in a reasonable amount of time.

That also means that 8% is 5% too high. Before you talk to a realtor, before you do any real research, when you are at the “I think my home is worth X amount” stage, knock 5% off and you will likely be close to correct.

1 Comment

  • Good stuff Keith. I don’t remember how I found your blog originally, but I’ve been following your posts for a while. I like your no-nonsense approach.

    I went on a listing appointment in Nashville yesterday and she wanted to “test” a price that was… you guessed it… 8% above my recommendation. Luckily we were able to come to terms.

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