The biggest plague in the property market is overpricing a property and most experienced estate agents will caution sellers against it. Sellers are under the illusion that their property is worth more than the market is prepared to pay. Sellers expect the highest possible price for their property, buyers want to pay as little as possible and estate agents sit in the middle. If a seller wants the highest possible price for their property, a Sole Mandate is the only sure way sellers will achieve this goal. The reason being that buyers compete to buy the property and the agent is not under pressure to take the first and best offer to the seller in fear of other agents selling the property first.
Paul Kruger, Licensee Hermanus and Seeff National Board Director, mentions that there are 4 main reasons why properties don't sell, and overpricing is in most cases the number one culprit. A seller can ask whatever they want for the property, but eventually it is the buyers (the market) who determine if they are prepared to pay the price.
The other three reasons are:
- Location/Condition which is determined and controlled by the seller
- Suspensive conditions. Determined by buyer and sellers. Conditions might include finance, the sale of other houses to sell, occupation date etc.
- Marketing, which is the only element an agent has control over. It is concerning to see how many sellers appoint their estate agent based on the price the agent agrees to the seller. In most cases the agents create unrealistic expectations and sellers want to believe them. Not even the best agent can sell an overpriced property. Appoint your agent based on the marketing and service delivery they can do, and not based on the price the agent promises you.
To highlight the importance of correct pricing and avoiding the consequences of overpricing, the following are of value to take cognizance of.
1. Why correctly pricing your home is important?
This is the most important factor of a successful sale. Buyers buy property by comparison. They will view 6 - 8 properties and then decide which one provides the most value for the price of the property. Your property must be priced at a level that is competitive with other similar properties on the market, creating an impression of good value. In other words, don't price your property, rather position your price in the market. Buyers will buy from the bottom up in relation to the value the property offers. Know what is in the market (your competition) and price (position) accordingly.
Correct pricing increases advertising response, stimulates buyer interest, compensates for property shortfalls, and provides the seller with a negotiating advantage. By overpricing your property, you will attract buyers in a higher price range with higher expectations, leaving you with no realistic chance of selling your property.
2. Why properties are overpriced
Sellers overprice their property to:
- ensure bargaining room in the marketing price. The reality is that educated buyers recognise a fair price and will be more likely to pay it.
- get more money for a bigger home in a better neighbourhood - your destination can never determine the price of your property.
- allow for funds for transfer fees, bond costs, removal fees. A seller's need for money should have no effect on the property's actual value
- recoup money spent on improvements or alterations. Most buyers are not willing to pay extra for upgrades or luxury. They will pay a market-related price.
Agents' reasons for accepting an overpriced mandate:
- To secure the mandate and deter competing estate agencies, in the hope of a timeous price reduction closer to market value and only then for a potential sale
- Free marketing opportunity for the agent - especially if it is in a highly visible location.
- To use your overpriced property to boost correctly priced properties
3. Setting the price
In establishing a marketing price, agents do a CMA (comparative market analysis) and take the following into consideration:
- Similar properties for sale in the area (what your property will compete with)
- Similar properties recently sold in the area (what buyers are willing to pay in recent times)
Buyers in general do a more thorough comparative market analysis of the properties in the area they wish to buy than sellers. Sellers focus more on their own needs or financial obligations in terms of their next property or lifestyle choice. Buyers establish the market value of properties in an area by comparing the property to all the others they have seen. If the price is too high, they will simply ignore the property or if it is not priced correctly (that it offers them less value than other properties), they will rank it lower on their "short list".
If the seller chooses not to put their home on the market at the suggested marketing price, but rather at the higher price indicated by the agent, the agent will usually comply. It is, however, advisable to reduce the price if there have not been any offers after six weeks. Sellers should not compare the price of their home to the marketing prices of other homes in the area which may have sold - but rather to the sold prices achieved.
4. Results of Incorrect Pricing:
There is a direct correlation between the marketing time span and the price of a property - as a correctly priced property tends to attract the most buyers within the first four weeks of marketing. A property which is priced at about 10% above its actual value can extend the marketing time beyond two to three months, whilst a property which is priced at about 15% above the market value, can prolong the marketing period by up to six months.
Properties that are 20% or more above market value remain in the market for up to a year or more. Such properties unfortunately become a benchmark, i.e. to which buyers compare the actual value of properties. The stigma attached to a property that has been on the market for too long a period also has a direct bearing on the type of offers the seller will receive. Experience shows such offers can be below the property's market value, as the buyer will test the level of urgency or priority of the seller.
5. Estate agent's role in pricing:
Correct price counselling is the foundation of all successful sales and the estate agent's most valuable service. An agent, who has not researched the market and cannot justify his valuations by comparing them with other similar sales, is damaging the seller's chances of success. Sellers must be provided with the statistics on which every valuation is based. In an upswing or downswing market, a good estate agent needs to take care in explaining to the sellers exactly what formula - i.e. rise or fall in buyer activity, affordability, etc. that he or she has worked into the price of the property. Monitoring all recent sales activities is therefore crucial.
Awarding a sole mandate to a reputable agent can help a seller achieve the highest possible price for his or her home, as it prevents the temptation for competing agents to decrease the price for the sake of closing the sale - in other words, it is important to let buyers compete for the sale and not the agents.
It is also vital for your selected agent to: continuously measure the market response to the property, monitor market trends in the area, and to communicate with you as the seller to make speedy adjustments to the price.
Good luck with the marketing of your property. It could be a fun process - as long as you do it right! My Team and I are at your disposal to advise and assist, even if you choose not to appoint Seeff!!
If you are not sure if your property is priced correctly, please call Seeff Hermanus at 028 313 0390 and we will be glad to assist.