This is a Guest Post by Danielle Lazier from Compass.
The dangers of overpricing your San Francisco home are very clear: it just won’t sell.
Simple enough, no? Then we’re all done here! But if you’re still curious, read on to explore the reasons why pricing your home too high for the San Francisco market is perhaps the worst thing you can do when trying to sell.
Say you love the old tile smattered over your unconventional floor plan. You feel the pool you installed for six figures was an excellent investment. Your afternoon naps simply wouldn’t be the same without those blaring trains nearby. You love everything about your home, so it must be worth a little extra, right? Not necessarily.
An all-too common mistake by those selling a home in San Francisco (and literally everywhere else) is that they overvalue their property. Maybe they want to recoup their investment on costly improvements. Maybe their personal taste doesn’t match with market trends. Maybe they did some misguided research, or maybe they’re just going with their gut. Whatever their reason for an unrealistic sense of their home’s value, they can all be deadly to a listing’s chances.
Inevitably, a portion of sellers will heed poor advice from agents who will say anything to sign a listing. Others may scorn the advice of a good, well-meaning agent. So what’s the effect of overpricing a listing?
MORE IS LESS
Ironically, if your listing is overpriced, it’s more likely to sell for less than if you had priced correctly at the outset. Buyers are often reluctant to make a “lowball” offer on an overpriced listing, for fear of wasting their own time or possibly offending the sellers. Sure, some bold buyers might decide (or be convinced by their agent) to bid low, but many more of them won’t even bother.
When a listing is priced too high, buyers will move on to spend their time and energy on the reasonably priced listings in the area. They don’t want to waste their effort. That leads to decreased competition for the overpriced listing and, in the end, a lower sales price. Good agents can spot an overpriced listing from a mile away. When they spot one, they will know that their clients needn’t worry about getting stuck in a bidding war. A seller who has overpriced should expect to see lower bids and fewer of them.
Your first days and weeks on the market are the most crucial. When your listing goes live on the MLS, it triggers a cascade of events meant to help drum up interest in your property. Notifications are sent to buyers and agents through automated MLS alerts and search websites like Zillow and RealScout, when a home that meets their criteria hits the market. If your listing is overpriced, then those alerts won’t get a second look. In fact, if your pricing is way off, those alerts won’t even go to the “right” subset of buyers at all. Either way, you’ve wasted an opportunity.
As soon as your listing goes live, open houses and broker tours will populate on search sites, and your agent’s marketing plan should be in full swing. Snail mail, email, social media, agent networking—everything is full-speed ahead to supercharge your entry into the market. But, if you’ve priced too high, then you’ve stymied that effort from the get-go.
Once the initial marketing period is over, an overpriced listing will continue to linger on the market. And linger. And linger. And linger… you get the point. “Going stale,” in industry lingo, confronts you with two options. First, you can simply wait. Perhaps you have the time to wait for conditions to improve. You’re not in a rush, and at the very least inflation will catch up to your unrealistic expectations eventually, right? Some sellers choose to pull their home off the market, but many don’t have that kind of time to spare, or they don’t want to live in listing limbo.
Your second option is a price drop. Sometimes, a price drop is a perfectly reasonable course of action; if it’s spurred because of a shift in market conditions, then you’re at least somewhat insulated by the fact that everyone else is floating in the same ebbing tide. However, if you must drop your price due to your own initial mistake, then you’ll turn into easy prey. Much like the lion that hunts the sickly gazelle, buyers will identify your listing as fundamentally weak. Offers will come in low, and buyers who see multiple price drops will just wait around for the next one.
Listings that underwent a price reduction between Nov 2018 and Nov 2019 sold for a lower price relative to their listing price and spent more days on the market. Naturally, that’s what you’d expect, since the prices started too high (ergo a lower percentage sale/list price), and more days on market lead to price drops. However, reduced listings also sold for 10% less per square foot, a sign that those sellers earned less than they might have.