To set the right price on a home, you should combine an objective evaluation of your property with a realistic assessment of market conditions.
In good markets and bad, you are more likely to benefit by determining a fair value and sticking close to it than you are by asking an unrealistic figure and waiting for buyer response to sift out the "right" price. And in a buyer's market, setting the right price from the outset may be the only effective strategy.
You could set a fair price and then refuse to bargain. But that would deter all those people who hate to pay full price for anything and like to feel they're "getting a deal."
Better to leave a little room for negotiation by asking slightly more than you expect to get -- 5% to 10% above the value determined by looking at recent sales of comparable properties could be a good starting point. If sales are brisk in your area, you might just end up getting top dollar.
What many sellers don't realize is that overpricing can result in their getting less for their house than if they priced it right to begin with. The reason: Knowledgeable agents and buyers often won't bid on a severely overpriced house. By the time the seller wises up, many of his best prospects will have bought other houses, decreasing demand for the now properly priced property. An overpriced house can end up being sold for less than it would have a few months earlier.
Occasionally, an agent may agree to list a property for far more than it is worth -- usually at the owner's insistence. The agent knows that, if the owner is serious about selling, the price will have to come down sooner or later. But sometimes an agent who is competing against other agents for a listing will give a seller an unrealistically high estimate of value, to ensure getting the listing. After the house sits on the market awhile, the agent will suggest a new, lower price more in line with what other agents suggested in the first place.
Some sellers who don't have a deadline for selling ("unmotivated sellers," they're called) will cling for a long time to their overly high asking price -- say, 20% higher than it should be. They probably won't get their asking price, and even if they eventually adjust their price, their property may have developed a bad reputation among agents who will take their clients to see other homes. If sellers manage to find a buyer who agrees to pay more than fair market value, an appraisal probably won't support that price and the deal will fall through because the buyer can't get their financing. Sometimes agents will suggest that these sellers take their homes off the market for as long as required in order to relist it as a "new" property on the local multiple listing service.
Unmotivated sellers might think that they were smart to hold firm, but in fact they were naive, ignoring the time value of money. In the year (or even six months) that they clung to their high price, the rest of the real estate market probably wasn't standing still. In a declining market, their home will continue to lose value. In a rising market the next home they buy may have gone up in value by at least the same margin, and possibly more.
Study the comparables
Shop your competition. Whether you are using an agent or not, learn the offering and selling prices of similar properties. Find out how long each took to sell.
To be comparable, a house that sold has to be close to yours in age, style, size, condition and location. When looking at closed sales, try to find at least three comparables no more than six months old (three months if market vales have been rising or falling more rapidly than usual). You can do some of this research yourself on local agents' Web sites.
If you are listing your home with an agent, this kind of market research should be prepared and presented to you. Agents can also find out what concessions, other than price, sellers of comparable homes gave their buyers. For example, did they agree to pay discount points to reduce the buyer's mortgage interest rate or throw in $10,000 of repairs?
Get an appraisal?
If your idea of what your property is worth and the listing broker's recommendation don't coincide, an appraisal may be in order. An appraisal is an especially good idea if you are attempting to sell your home yourself. It will cost you about $300 to $400.
Next: Negotiating with Buyers