How Much Less than List?
How Much Less than List? (A Tale of Two
Sellers)
A question we're often asked by Buyers and Sellers is how much less than list does a property usually sell for? Broadly speaking, it's a hard question to answer. The statistics above compare the average, original price of a listing to the average eventual sale price, broken down by price categories. The numbers are from 2012 (the last full period we have good data for). So, as an example, the average original price for properties in the $300K to $400K price range was $361,318 in 2012. The average price that those homes sold for was $336,999 or about 93% of their list price
But in any given market there are properties that are IN the market and properties ON the market. Properties that are IN the market are priced at or below market value to achieve quick sales. ON the market properties are just that- properties that sit ON a given market, until something changes (eg. its price; its condition; or the market).
To better understand this, let's look at two hypothetical Sellers:
Seller A and Seller B both decide to list their homes on the first day of the summer. They happen to be identical in every way... which is ridiculous- especially in Nelson, but indulge me.
Seller A
Market Value of home: $336,999
List Price: $336,999 – IN the market
Days on Market (DOM): 7
Seller B
Market Value of home: $336,999
List Price: $361,000- ON the market
Days on Market (DOM): 200
So the interesting question is this: how much will THESE homes sell for relative to their list prices?
Answer: Seller A gets $336,000 and Seller B gets $314,449.
I know what you're thinking- you're thinking how can I possibly know that? You're thinking I can just make up any hypothetical number I want and plug it in there, right? Actually, any real estate agent or real estate economist will tell you that Seller B will likely get less, and how much less they will get is a guess, but it's an educated one. Let's do some math.
THE HONEYMOON
A home's first 2-3 weeks on the market
are its honeymoon period. All the active buyers in a certain price
range are looking for new inventory as they shop. They either buy
market priced property when it comes on OR lose interest when they
sense overpricing and move on. As the home gathers Days on Market
(DOM) it also begins to gather a reputation. All buyers ask “how
long has it been on the market?” They will know this number going
in if and when they choose to view the home and are often, right or
wrong, prejudiced against a long DOM home. This is the phenomenon
known as stigma.
And as any REALTOR® can tell you, stigma is a bitch. Let's be super conservative and call the penalty to the market price 3%. Worse yet, it's not the only thing that's going to cost Seller B money.
OTHER COSTS TO THE OVER PRICED SELLER
Months pass. The kids go back to
school. The smell of autumn leaves are lost in the first snows of
winter (remember: 200 DOM is 6 ½ months!) By this time Seller B has
retreated from his high price and has now moved it back (usually in 3
or 4 price drops) to where his agent told him he should've been in
the first place. Which takes the seller from a July market to
January market, where the volume of buyers is down by 30-40%. The
homes that sell in these conditions tend not to be market priced
homes but below market priced homes. Let's be super conservative and
say this will get a buyer an additional 2% discount off a market
price (on top of the stigma penalty) for a total of 5 points off
market. But wait... there's more.
CARRYING COSTS
A true assessment of the cost of long
DOM needs to include carrying costs. These can vary widely but if the
Seller's mortgage is $1,200 a month, and 80% of that payment is
interest, that's $5,700 more lost over that 6 month period.
FINAL ANALYSIS
In the above scenario Seller A is “IN”
the market from the start, and would likely sell at or close to list.
Seller B: not so much. With a 5% penalty for stigma and selling when
he should be skiing (off an assumed unchanged market value of
$336,999) plus $5,700 in carrying costs, Seller B's decision to reach
for that extra $24,000 above market could actually cost him $ 22,550.
Which of course is the price of an economy car, a year of university for the kids, or very luxurious African photo safari.
Plus Seller A already snapped up the home Seller B was planning to buy because her house was sold already and she could.
Moral of the story: Price smart to sell
faster.
-Paul Shreenan
