Pricing Madness

It doesn’t matter if you’re buying or selling, it’s absolutely crucial to estimate fair market value. But have you tried to figure out prices lately? It’s no easy feat. I know because I try to do it every day. It used to be that I could look at a home, factor in its list price and predict the sale price within $10,000. I can still do that much of the time, but not quite as often these days because prices can be all over the place.

To give you an idea of what’s been happening, consider the home that was recently listed at $2m, reduced to $1.8m when it didn’t sell and then increased to $1.9m when it still didn’t sell. Eventually, it sold for between $1.8m and $1.9m. If you were a buyer looking at this home, you probably would’ve scratched your head and said  “What’s going on here? Thank you very much, but I’d rather deal with sellers who are a little more rational.”.

Or how about the private seller I called a few weeks ago because my clients might have been interested in his home (I leave no stone unturned). He told me that the price was $1.6m and that it would be listed on MLS the following week for $1.4m. This made little sense to me from a pricing perspective, but I held my tongue because it wasn’t my place to advise him on price. I was fairly confident that his home wasn’t going to sell for anywhere close to $1.6m, but I still showed it to my clients so could see it before other buyers and before it was listed at $1.4m. It ended up selling for $1.5m.

It’s clear to anyone who follows the market that prices have become MUCH more unpredictable. Probably because buying decisions are now influenced by emotion more than ever before and there’s no scientific way to account for emotion in estimating fair market value. It’s no wonder many Realtors throw their hands up in the air and say “Let’s list your home really low so you’ll get a bidding war and the market will determine its value” or “Let’s list your home really high and keep reducing the price until someone bites because then we’ll know its real value”.

It’s true that pricing low and pricing high are sometimes effective, but most of the time I think they’re cop outs used by people who either don’t know how or don’t want to take the time to determine the fair market value of a property.

There’s no question that determining fair market value is hard. Really hard. Sometimes impossible, especially in today’s market. But that’s no excuse for not trying, especially because price is almost always the most important factor in a real estate transaction. That’s why I like to take as much time as I can to think about the right price. Ideally, I like to sleep on it for several nights to make sure I’m comfortable with the price I’m going to recommend to my clients. (I’m not saying I’m right 100% of the time because that would be impossible, but I’m usually pretty close.)

There’s no real secret to estimating fair market value, although in central Toronto it’s a skill that really only comes with years of experience since it’s part science and part art. The science part involves examining the recent sale prices of comparable properties. Most everyone can do this. If the comparable properties are all selling for $1m, for example, then the house you’re thinking of buying or selling is probably also worth approximately $1m. The art part involves estimating a home’s emotional component: how much extra or less is someone likely to pay for a home because of its emotional pull or lack thereof? This is where experience comes in because there’s no formula for calculating emotional pull; you have to use the “gut feel” that comes from seeing thousands of homes over many years and in many different kinds of markets. For a more in depth look at how to estimate fair market value, check out Understanding Prices – Master Class.

The bottom line is this: It doesn’t matter if you’re buying or selling, you need to understand what’s going on with prices and you need to avoid getting caught up in pricing madness. The best way to accomplish theses two things is to take the time to estimate fair market value. You’ll be glad you did. And so will your bank account.

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