Is testing the market a good idea?

Posted

Selling a house isn’t exactly like selling any other piece of property; there’s no reference book on how much a home should cost because home value depends on so many different factors that vary widely from residence to residence. For this reason, when many sellers are preparing to sell their house, they want to “test the market” — throwing a home price at the wall to see if it sticks, essentially. In practice, this usually means that sellers get a sense of how much their home might be worth by talking to some experts, then deliberately overprice their home when they list it on the market … just to see if anybody will bite.

This is an incredibly risky strategy that might work for some one-of-a-kind items like antiques or rare animals, but if you try it with home sales, it’s most likely to blow up in your face. Here’s why.

 

You’re squandering the ‘just listed’ window of opportunity

Think for a moment about what it’s like to be a buyer in most real estate markets in the country. When you first get pre-approved and start seriously looking at houses to buy, you look at everything available that meets your general specifications and price range. If you don’t find your new home in that first batch of listings, though, then you play the waiting game, stalking the MLS for every new listing that could be a match and racing to view it as soon as it hits the market.

Now think about this pattern from the perspective of the listing itself. When is your home likely to get the most attention from qualified, ready buyers who are eager to see it? You may see small spikes of attention when you drop the price, but your home is going to get the most eyeballs on it when it first hits the market, and if you’re testing the market with a price that you know probably isn’t realistic … well, you’re blowing a huge opportunity to get your house sold quickly for a decent price on the very slim chance that a rare buyer is going to fall in love with your house and pay your dream price.

 

It’s not ‘room to negotiate’ if you can only move down

If you think your home is the very best in the neighborhood, and you price it at the very top of the range of homes in your area — even if you’re correct, you’re not giving buyers any room to negotiate except for down. And if any variable doesn’t align with your ideal, if the market is slightly less hot or if your home has one fewer bedroom or the kitchen is a bit outdated, then you’re only going to be negotiating down or dropping the price.

 

A smaller pool of buyers is not better

One basic law of economics is that more buyers will be able to afford your product if it’s priced lower than higher. This is why companies do extensive research on the demand for a product and rarely decide to price what they sell at the very top of the range they determine is possible — at a certain point, it’s better to sell more units at a lower price than fewer at a higher price because there will be more consistent demand.

When you only have one unit to sell, you might think that the best approach is to price it as high as you can and hope that the buyer who’s willing to pay the most for your home is in the pool of buyers who can afford your ideal price. But if that perfect buyer’s budget doesn’t stretch to include your home, there’s every chance they might miss your “price drop” announcement in a few weeks … or that they might have settled for a different house by then.

 

Buyers are educated …

There is more information available to buyers today online than ever before in human history, and considering the importance and financial impact of a home purchase, you can rest assured that those buyers are taking full advantage of all that available information. They’ve seen every valuation available for your house and know what the algorithms think it’s worth, and they will instantly recognize your attempt to inflate the price. If you don’t have a very good reason for that inflation, you might have trouble keeping their interest.

 

… And they don’t always want to talk sellers into a fair price

Some people relish the prospect of a tough negotiation, and it can be difficult for those people to recognize that not everyone enjoys going back-and-forth to see what each concession is worth. For buyers who aren’t interested in negotiating, an overpriced listing is a huge red flag that they’re going to be spending more time than they’d like talking the seller back down to reality. 

Even if it’s their dream home and they’d love nothing more than to move in (at a more reasonable price), those buyers are going to move on to greener pastures. So which buyers are left over? The ones who appreciate the art of negotiation just as much as you do … and who are looking forward to getting one up on you so they can tell all their friends about the great real estate deal they just made.

 

Your house isn’t more attractive for the price, but maybe your neighbor’s will be

Real estate prices don’t exist in individual bubbles; they’re part of a larger ecosystem of the real estate market, which includes every home on a block, or in a neighborhood, or an entire metropolitan area. If you price your house at the very top of the realistic price range, and everyone else in your neighborhood who’s selling is behaving more reasonably when it comes to pricing their homes, you’re all but driving buyers into their arms when they see that they can get a similar home on the same street for tens of thousands less.

 

A lingering home makes buyers wonder what’s wrong with it

Sellers who test the market usually do so with the rationale that they don’t have to sell their house immediately — they have time to experiment and see what works best. This might be a solid philosophy with many other industries, but in real estate, most sellers are under some kind of time pressure, and homes that linger on the market for weeks, then months, sometimes even years, tend to raise buyers’ suspicions. They’re used to the best homes flying off the shelves, so to speak, while homes that don’t sell immediately usually have issues.

So what will buyers think when your home has been on the market for months and you’ve dropped the price several times? It will depend on every buyer’s individual experience, but it’s safe to say that their impression probably won’t be good.

 

The house won’t appraise at your full price

Even if you’re somehow able to find a buyer who thinks your home is worth the inflated price and is willing to buy it, unless that buyer is paying all-cash, they’ll need to get their mortgage lender to agree that the house is worth the loan amount. Rules and regulations implemented since the Great Recession have created an environment where lenders are adamant about confirming a home’s value, and appraisers are nowhere near as easy to influence these days. If an appraiser evaluates the neighborhood and comes to the conclusion that your home is overpriced, no matter how enthusiastic your buyer is, they won’t be able to close the sale.

There are several tactics you can use to maximize your profit on your home sale, none of which include testing the market. If you’re curious about what price your house could fetch realistically in the market today, what improvements might get you more money, and the best approach to listing your house for the neighborhood and type of home, talk to a licensed real estate agent or broker today.