It was a normal listing appointment. I toured the home with the sellers as they proudly pointed to improvements and features they would miss when they moved. When the tour ended, we sat at the kitchen table to discuss the next steps. As I began my presentation, they stopped me with a simple statement.
“We want to test the market,” they said.
Loosely translated, this meant: “We want to list at an artificially high price to see if someone loves the home enough to pay that price.” As a rookie agent, I had no idea how to respond. So, I took the listing and watched it whither. Of course, now that I have years of experience under my belt, I’ve been able to craft better responses.
To begin, it’s important to understand the concept of a “testing a market.” In a standard practice utilized by manufacturers of everything from soap to breakfast cereal, marketing companies are hired to test product effectiveness. The product is presented to marketing test groups in targeted geographical regions. Comments and reactions are studied to evaluate product potential.
Once responses have been analyzed in one region, they frequently try others to get a feel for market acceptance. If responses are poor, they either scrap the idea, or make necessary changes and try again.
Once they believe they have a viable product, they place it on market shelves in a carefully selected area to once again test the market, this time with low “introductory” pricing. They continue this complicated process until they succeed or conclude the product is not viable.
So, how does this relate to the idea of “testing the market” with a listing?
Not in any way. Whereas a manufacturer has extensive research and development (R&D) and marketing teams, multiple chances to test a product in varied markets, significant marketing budgets and the ability to “tweak” the product as they go, a homeseller has this — one house, one market, one chance.
In other words, it’s a bad idea. Increasing access to market data, evolving buyer behaviors and the new COVID-19 realities have made this practice obsolete. So, here are five reasons to share with sellers to keep them from making this critical mistake.
1. Today’s buyers have zero tolerance for artificially high prices
Years ago, buyers relied on agents to provide market data. Today’s buyers use available automated valuation models (AVMs) like Zestimates to gauge approximate pricing and determine whether a price is realistic or not.
Although agents know AVMs have serious flaws, buyers use them to establish benchmark pricing. Whether we like it or not, buyers are going to pre-judge listing prices based on their research using AVMs available from many different sources.
If a price is obviously high, many buyers will assume the seller is unrealistic and simply not show up. Since most buyers will only give any listing about seven to 10 seconds, overpricing a listing is a very bad idea.
2. All transactions with loans must go through an appraiser
Even if a buyer falls in love with a home and is willing to pay the above-market price, if they are obtaining a loan, chances are high that an appraiser will come back with a lower value.
If a buyer has extra disposable cash and wishes to continue — fine. I’ve discovered, however, that a low appraisal usually has a sobering impact on a buyer who will then try to renegotiate the price.
3. Overpriced listings miss the ‘magic window’
The highest priced offers usually show up during the “golden window” (the first 14 days). Homes that languish longer become tainted and are viewed as “defective” in some way. Offers arriving later will usually have lower prices.
If a seller, after extended days on the market, relents and lowers the price, buyers will often write offers even lower. It’s far better to price it correctly to begin with and capture the market activity that occurs during the golden window.
4. Seasoned listing agents have a low tolerance for overpriced listings
Although not true in every market, here in the San Francisco Bay Area, listing agents frequently invest large sums into marketing homes, including extensive property prep, complementary staging, full professional picture packages and more.
As a businessperson, I’m not willing to “invest” in listings I know will not sell. Not only do I lose money when the listing is cancelled, my reputation is tarnished by my “failure” to sell the listing.
Some agents might be willing to accept an overpriced listing in the hopes that they can eventually lower the price and get it sold. But by then, the damage is done.
5. COVID-19 has changed everything
Because many regions across the country now have dramatic restrictions limiting buyer access, searches have become more purposeful. Because open houses are not allowed, we are given 30-minute windows in which a buyer’s agent and two individuals from the same household may visit.
Additionally, we must fill out COVID-19 disclosures and submit preapproval letters for every home we visit. Consequently, the time it takes to view homes has gone up significantly, meaning buyers are getting very picky as to which properties they will visit.
Even though our market is currently red hot, overpriced listings are still sitting there with their days-on-the-market counters spinning upward. In short, now’s not the time to try this tactic.
“Testing the market” may have been a viable idea years ago, but with ever-increasing access to market data and new buyer behaviors, it’s a practice that needs to go the way of the Stegosaurus. For sellers who insist on “testing the market,” the only true test may be of their patience as they lose time, money and, potentially, any hope of a sale.
Carl Medford is the CEO of The Medford Team.