Understanding the Effects of Price Reductions on Real Estate

Real estate that is well-priced according to the current market conditions and economic realities always yields buyer interest quickly. In every market, there are lots of examples of homes going on and off the market in a matter of days. Buyers and their agents understand value vs. price, especially in a marketplace where there is a glut of inventory. So pricing correctly to begin with is essential.

But what if your home pricing is not yielding showings or contracts (the only two signs that really matter)? You will likely need a price reduction.

Keep in mind that every price reduction for listings that are in a Multiple Listing Service (99% of homes that are listed by a real estate are using one of these services), is typically able to seen by other agents, and good buyer agents will share price changes and timing with their buyer-clients to assist in making offers and eliminating (or including) listings to see.

Reducing the price of a property is done one of two ways: aggressively, or a little at a time, over a long period of time, and neither is an ideal part of a good marketing strategy.

Aggressive Price Reductions: These are big, all-at-once price drops. They can be used to correct mistakes, make up for lost time for listings that have been on the market a long time with no pricing changes, and to help keep current listings in line with new listings that are now competition.

But keep in mind that large drops also can signal desperation. When a property has a large drop, some buyers and agents may be asking themselves when the NEXT large price drop is coming or if foreclosure or the like is imminent and smell blood in the water. Regardless of the reason, big price drops garner a lot of attention...not all of it positive.

Small Price Drops Over Time: As agents, we see it all the time; price drops every two weeks, or every month, just a few thousands each time. Not enough to inspire action for most buyers, unfortunately. Most buyers and their agents know that all prices are negotiable, and seeing a steady stream of price cuts cause most buyers to wait on the sidelines since when the prices stop dropping is unknown...why pay more when the price might be even lower next week?

If you're putting your home on the market at higher price to, 'test the waters,' or to, 'see what happens,' don't do it. Serious, pre-approved, ready-to-buy buyers (and aren't those the only ones you're interested in?) will immediately rule OUT your home if it's over-priced, and likely not come back at a price reduction...they will have moved on. Your home is always, always, being compared to the competition in terms of value and price. If you're too high, agents know it, and savvy buyers will, too. Very few buyers overpay. They pay what the market demands; bidding wars and increased prices in times of scarce inventory; shopping for deals and taking a longer time to compare and decide when there's lots of inventory and sellers are more desperate.

Newer buyers, just starting the process aren't as price-savvy yet as they've typically seen less inventory and haven't done the work to secure a loan yet, and maybe haven't secured a buyer agent. They are out looking at open houses, but even they are comparing homes on line, making judgment calls about value.

If it looks like your property needs a price drop, doing it early and modestly is the best bet, assuming you were in the ballpark to start with. Choosing your listing agent wisely should including asking about a complete marketing plan, and the office's average DOM (days on market), which is a good measure of both marketing skills and pricing expertise. Appropriately-price homes need fewer and small, if any reductions, and that's the best strategy of all.