It might surprise you to learn that most real estate agents never get any formal training in pricing a home. Let’s face it; most agents don’t come from analytical backgrounds. Don’t get me wrong, there are some great agents out there that excel at other aspects of the business, but the data shows pricing is not one of them.
In fact, as I write this in late 2022, more than 50% of listings in Northern Virginia have a price drop. Even during the crazy high demand days during the pandemic, we would see about 1/3 of all listings with a price drop. There are several reasons for this, but it speaks to the idea that pricing is more science than art, and too many agents paint with a broad brush.
With a background in business intelligence and analytics, I wanted to guide clients using data and not just based on a hunch. That’s why I became a certified Pricing Strategy Advisor® to ensure our team’s pricing recommendations for sellers and offer guidance for buyers are based on a disciplined process using data.
By the way, less than 1% of all Realtors are certified in pricing. Crazy, right??
As a Pricing Strategy Advisor, you first learn that there is a difference between what you set as a price and the market value of a home. This is done through a detailed analysis of comparable homes, adjusting features compared to the subject property, and the latest directive information about the local housing market. The output of this analysis is provided to the client through a Comparative Market Analysis (CMA) report.
What is the difference between price and value?
The first step in the analysis is determining the home’s market value. What does the data tell us about the price a buyer is willing to pay? Note that what the buyer is willing to pay does not necessarily correspond to the listing price. Instead, the price should be set strategically and by the market’s direction to extract the maximum value potential for the home. In other words, pricing should be part of the overall go-to-market strategy to obtain the best outcome for a seller.
In most market conditions, it’s a good idea to set your asking/listing price just under the market value if you are looking to sell for top dollar. That’s because a home priced slightly below that neighborhood’s value will attract many buyers and agents who believe they may have found a good deal. As a result, you are most likely to fetch multiple offers with the potential to bid the final sales price up to or over the anticipated market value. A home priced over its market value will likely see fewer showings and either no offers or a “lowball” offer. Ultimately, overpriced homes cause sellers to “chase the market” downward and often end up with below-value final sales prices.
This idea of pricing just below the market value sounds simple, but it relies upon the agent’s ability to find comparable homes and interpret local market data. Should your home be priced 1% below market value or 10% below? The answer to these questions requires confident analysis.
The challenge of finding true comparable homes
Finding comparable homes in Northern Virginia can be challenging, especially in areas like Reston, which has a highly varied housing stock. A trained Pricing Strategy Advisor knows how to find the closest comparables – even from different neighborhoods – and make appropriate adjustments in value compared to the features of the subject home. This process requires understanding how to determine the relative value of an extra bedroom, garage, or half-bathroom, for example, which is a skill that few agents possess. As a result, the initial value analysis is already flawed. It could jeopardize any reasonable chance to correctly set the price of the home in all but the most seller-favorable markets.
Interpreting local market data
Assuming an agent has valued the home properly, the next challenge is interpreting the local market data. The key is to find out the direction and pace of the market. Is the demand rising or declining, and how fast is it moving? We conduct this analysis with leading indicators, such as daily or weekly showing and days on market trends. The pace at which the market changes should influence whether you price 1% below value or 5%.
In a shifting housing market, skills matter. Pricing is one of the most critical determinants of whether you meet or exceed the anticipated market value of your home. You don’t want to leave that job for someone without the necessary training to interpret the data or a computer algorithm that has never seen the inside of your home.