When you’re shopping for most things, you accept the price for what it is. That new kitchen table or awesome TV costs what it costs. The price is the price. One common exception is cars, where it’s normal to think about negotiating. Another exception? Houses.
When a seller lists a house, they include a price … but that price means pretty much nothing. This quirk of homebuying is why it’s common to hear about homes selling for more or less than list price.
“You rarely pay list price,” says Flyhomes Client Advisor Jack Schwabeland. “I always tell my clients the price tag is not the price tag. Either there will be a lot of interest and you’ll pay above asking price, or it won’t be competitive and you’ll pay below.”
So, what is list price?
List price is a strategic tool for the seller and their agent to position a home on the market.
When pricing a home, the seller’s agent comes up with a value based on an analysis of comparable homes in the context of the current local market.
What prices did similar homes recently sell for? How quickly have homes been selling? How many buyers are out there looking for homes?
The value based on comps is a starting point. Now it’s time for strategy.
The agent considers the seller’s goals. In a less-active market, time is a main factor. Is the seller willing to wait longer if they’ll get a higher price?
In a competitive market, one common strategy is to under price in hopes of driving competition.
For a home the agent thinks is worth $600,000, they might price it at $550,000, aiming to start a bidding war that drives up the price.
Lanz Camacho, Flyhomes Client Advisor Lead in the Bay Area, says, “It’s supply and demand. In a hot market, buyers are willing to pay more to get a home they want, so the home is worth more. Generally, when there’s less competition, the home is worth what comparable home sales say it’s worth.”
The local “rules”
Not only does market activity play into list price, every region has its own norms.
For example, in the Bay Area, certain places are known for using the tactic of pricing houses low to create a frenzy among buyers, which drives up the price.
“You almost never see a home listed at market value in northern California,” Lanz says. “In San Francisco proper, Oakland Hills and other parts of Oakland, Fremont, and some parts of the South Bay, like Sunnyvale and Cupertino, houses are being priced extremely low.”
In a competitive market, pricing a home about 10 to 20 percent under market value is typical, but Lanz has seen homes that research showed were priced more than 30 percent under market value (and subsequently sold for more than 30 percent over the list price).
Lanz notes that the market value an agent finds through research is generally higher than the estimates you find online on popular pricing websites. Be careful about how much stock you put in online numbers.
What if the house isn’t worth as much as I’m willing to pay for it?
Let’s talk about how a house’s worth is determined. At the point when your offer is accepted, your mortgage lender will send a professional appraiser to decide on its value.
If the appraiser comes back with a value that’s lower than the purchase price you’ve offered, you may have to pay the difference out of pocket at closing.
Because this scenario isn’t uncommon in active markets, talk with your agent about considering this potential payment in your max budget. Worst case, you plan to make up a difference and end up not needing to. Then you’ll keep that money!
There are other ways to deal with a low appraisal, too.
- Appeal the appraisal
- Have a second lender appraise the home
- Restructure your loan terms
- Renegotiate the home offer with an appraisal contingency
- Back out of the offer within an appraisal contingency
At Flyhomes, we use real-time market data and analysis prepared by our research team as well as information on pending properties to get the best sense of where an appraisal is likely to come in so our client knows what to expect.
Condos and townhomes
The list price strategy of under pricing is most important for single-family homes. Condos and townhomes sometimes see more transparent pricing and bidding wars on these types of homes are less common.
For that reason, homebuyers who are wary of paying more than they think a home is worth or who simply don’t want to compete for a home they love might consider looking at a condo or townhome.
The bottom line
Unlike most things you buy, a house is worth what someone is willing to pay for it. It’s key that you, as a buyer, think hard about your highest price given your budget and how much you love a home. A good agent will help you understand the nuance of why a particular home is priced the way it is and what the pricing strategy seems to be, and they’ll help you land on a price you’re comfortable offering the seller. They have insight into what’s been going on locally, so they’ll be able to let you know if offering under list price is a realistic option for your situation at that moment.
Questions? Let’s talk!