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Monday, April 19, 2010

Using the power of price points

The Pricing Pyramid above demonstrated the importance of optimally pricing your home for the market to maximize showings.

Imagine yourself as a homebuyer. You are excited and motivated to begin looking at homes in your local market, so like most home buyers you hop online or head down to a local real estate office to begin your search. In either case you will probably do something very predictable. You, as a typical homebuyer, will pick two price points as in - We would like to look for homes between $200,000 and $225,000 dollars. Interestingly, even if you have been told by your lender that you are qualified to purchase a home up to $229,400 dollars, inevitably you will just round down to $225,000 or round up to $230,000. Because of this savvy sellers often use price points as a way to gain maximum exposure for their home. How? By slightly adjusting their listing price to a more strategic price - a price where more buyers are likely to see their home.

To understand the importance of using price points, let's try a thought experiment. Suppose a buyer walks into a real estate agent's office and asks to see homes priced between $400,000 and $450,000 dollars. Would this buyer be exposed to your listing if it were priced at say $457,000? Nope. A common misconception among home sellers is that all buyers are automatically exposed to their home just because it's listed in the MLS database. Not true. The only time a buyer will see your home is when it falls between the two price points the buyer has set as their acceptable price range. Miss the mark and you miss the opportunity. To gain maximum exposure for their home, successful sellers use price points to their advantage. For instance let's analyze three different sellers with three different pricing challenges.

The first homeowner, seller A, has listed his home for $307,000 dollars. The challenge with this number is that a typical home buyer isn't likely to say - "Let's look for homes from $292,000 to $308,000". So pricing a home at $307,000 doesn't make a lot of sense. Instead a strategic price for this home would be either $305,000 or $310,000. By making this simple adjustment homeowners can help keep their listings in the sweet spot for buyer searches.

Now let's look at Seller B. Seller B has priced his home at $283,500 dollars. A better pricing strategy might be to list the home for either $280,000 or $285,000. In addition, you might notice there is another category for this home, called the Major Price Point. A Major Price Point is any $25,000 pricing increment. Major Price Points are important to recognize because these are generally the diving boards that buyers and agents spring their home searches from initially, and then slowly ratchet up from later. Because of this a seller who wants to secure a sale quickly may consider adjusting his price down to the nearest major price point. In Seller B's case that would mean a price of $275,000.

Finally, let's review seller C's strategy. Seller C has listed her home for $196,000 dollars. But could she improve this pricing strategy? Yes, but before we discuss her options let's put something controversial on the table. How many times have you heard the urban legend about a seller who, after unsuccessfully marketing their home, actually increased their price and then, bingo, sold the home. The truth is it can happen. How? The seller hit a more active price range. For instance take a look at this sample data:

Obviously the most active price range for this particular market is the $200,000-$225,000 price range. It goes against the grain of traditionalist thinking which always says to price a home based on its individual merits compared to other similar homes, but this often ignores the overall market reality. If seller C is currently priced at $196,000 it might be a smart play to consider adjusting the price upward to $200,000 dollars. Why? There are significantly more sales in that price range. Of course this works both ways. For instance, a seller who was considering a strategic price of $230,000 may be wise to move down a category and price her home at $225,000. Why? For the same reason - it's a better pricing strategy!

To decide on a pricing strategy that is competitive and appropriate for your home, consult with a local agent and request a list of recently sold comparables to review, as well as a breakdown of sales by price category. This is often referred to as a competitive market analysis (CMA) and is often prepared free of charge.

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