The listing presentation was going well. The sellers loved my approach to property prep. They were pleased with the marketing plan and advertising collateral.
Just as I was getting ready to have them sign the listing agreement, they said, “About the price … we want to ‘test the market.'”
The concept of “testing the market” has migrated into homeseller’s psyches and attached itself like barnacles on the bottom of a boat.
The hardest sell in the universe is not peddling ice to Eskimos or hawking sand to desert nomads — it’s convincing sellers that their home is not worth more than other comparable homes on the market just because it’s theirs.
In their minds, the home is so much more than a building: it’s where bonds were established, memories were created and immeasurable personal value was deeply etched into the fabric of the home with every loving upgrade.
Many sellers have a hard time separating their emotional attachment from the logic required to market their home. However, though buyers do make emotional decisions when buying a home, they balance it with logic. If the numbers don’t work, they move on.
Like urban legends, the concept of testing the market has developed a life of its own and is perpetuated in real estate folklore by sellers looking for some way to justify an unrealistically high price.
In reality, testing the market usually has the exact opposite effect of what a seller is hoping to achieve. Here are the top six reasons testing the market is a seriously flawed idea:
1. Buyers avoid overpriced listings
Unlike previous generations, today’s buyers have extensive access to property valuation data and are, consequently, extremely savvy about market pricing and trends.
They know when a house is overpriced. Because a seller has mere seconds to attract a potential buyer based on the online property profile, if a home’s pricing does not fit within logical parameters, it’s “swipe left” and on to the next house.
They figure that if the seller did not have enough sense to price it right to begin with, they will probably be unrealistic in other ways as well. They also reason that if they get into a multiple offer situation, the already high price will go even higher.
Rather than potentially waste their time and money, they simply stay away.
2. Buyer’s agents are looking out for the best interest of their clients
If buyers do look at an overpriced listing, their agent will run the comps and show them what the price should really be.
Any offer will reflect the current comps, not the seller’s “emotional value.”
Additionally, buyer’s agents typically call the listing agent to see if other offers have come in. A wise buyer’s agent knows that if no other offers are on the table, writing an offer at an unrealistic price is a lose-lose proposition for them and their client, and they will write the offer lower.
3. Homes priced over their correct price range will miss a significant number of buyers
Based on their purchasing power, buyers only search within a set pricing strata.
If they qualify for $600,000, they will search up to that amount but no higher.
In an overheated market, buyer’s agents tell their clients to search even lower to factor in headroom to compensate for multiple offers. Consequently, if a home has a market value of $560,000 but is priced at $620,000, buyers searching for homes between $550,000-$600,000 will never see it.
Buyers searching over $600,000 will ignore it because they understand it is priced too high, and buyers in the correct price range will not know it is there unless they stumble across it in some other way.
If that happens, see no. 1 above.
4. If it is priced too high, it will not appraise
Even if a buyer is willing to pay a seller’s unrealistic price, an appraiser will only assess the value at current market levels.
To consummate the deal, a buyer will need to contribute extra cash to bridge the gap between offered price and appraised value.
This problem has been exacerbated in recent years by the number of appraisals coming in lower than expected due to volatile market conditions, which make buyers exceedingly cautious.
Additionally, if buyers have limited funds, they will not risk making an offer and paying an appraisal fee only to be denied, thereby pouring good money down the drain.
5. Listings become stale and lose value quickly
With fewer showings and no offers, overpriced homes grow stale (30 days or less in a hot market, up to 90 days in a slow market).
At this point, buyers start asking what’s wrong with the house, reasoning correctly that if it was an acceptable property, it would have sold long ago.
Consequently, if the house finally sells, it will usually be at a lower price than the sellers would have received had they priced it right to begin with.
6. The urban legend of ‘testing the market’ is the exact opposite of reality
Whereas a manufacturer, when testing the market, has an extensive research and development department, skilled marketing teams, focus groups, multiple chances to test a product in varied markets, the ability to “tweak” the product as they go and the financial stability to launch their new product under current market value, a homeseller has: one house, one market and only one chance.
And if they don’t get it right the first time, the only thing that will be tested is their patience as they lose time, money and potentially a sale.
Carl Medford is the CEO of The Medford Team. Follow him on Twitter.
