How Do Sellers Price Their Homes and How Much Should I Offer?

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We're often asked by our clients, "How much should we offer?"  This is an excellent question.  The answer is not straight-forward, especially in a market like ours. 

Pricing, in the late 1990s through the mid 2000s was a bit of a no-brainer.  Most agents advised their sellers to price homes very low, suggesting that this would draw multiple offers to the property.  In most cases this was true.  Depending upon the time frame, houses priced low would draw multiple offers and would sell not only above their asking price, but often way ahead of the 'market comps.'  Fueled by low interest rates and pent-up demand, homes would sell quickly and at high prices.  The answer to the question of how much should we offer? was a tough one--I would analyze the current market, try to evaluate the demand for a house--30 disclosures handed out was a sign of strong demand.  I'd advise my clients to bid above a certain range.  How much over was their call.  If they wanted to get too aggressive, I'd suggest that they lower their offer.  While it was frustrating to lose the bid on great homes, I didn't want my clients to bid too much.

In this market, homes were priced low and at market.  The ones that were priced low--sometimes 10 to 15% low often received more than 10 offers, and the ones that were priced at market usually received multiples, just not as many.

Today, the market is very different.  In the last few years, prices in many San Francisco and Marin neighborhoods have fallen, ranging on average from 10 to 20 plus percent, depending upon neighborhood and type of property (home, condo, etc.).  There are three ways that Sellers are pricing their homes:

1.  Ridiculously Overpriced--We've seen properties sitting on the market recently. It seems that the sellers and their agents have mis-priced properties based on the following beliefs: 

  • "I should never lose money in the real estate market", so take our purchase price (from when we purchased and over-paid in a bidding war) and add our selling costs (transfer tax and brokers commission) and put it on the market. 
  • "I've made improvements, so my home should sell for much more"  Some improvements will add to the value.  Doing a major overhall is likely to improve the value.  Replacing a few windows while a few others still leak will not.  Replacing the linoleum in your bathroom and repainting your home may not increase value significantly, but it may be the difference between a quick sale at a reasonable price or a price reduction.
  • "My house is nicer than my neighbors house, and it sold in 2006 for X" so let's price it there.  There is one, and sometimes two problems with this strategy.  First the market has gone down.  Second, many times the house isn't as nice as their neighbors' house and Sellers aren't willing to hear objective advice.  Or is it the agent, willing to go along with this strategy just to get a listing?

2. Reasonably (if not a hair over-) Priced--These sellers fall into two categories:

  • Those who feel their home is worth every penny of their asking price (and there is good recent market data that supports this--very local and very recent).  These homes have also been properly prepared and marketed by a professional agent.  These homes usually sell within four weeks at or very near the listed price.
  • Those who want to leave a little "negotiating" room.  These homes can be 2 to 8% over-priced.  The theory here is that Buyers have been reading about the terrible real estate market for years and want to feel like they are getting a bargain.  Sellers think: even if we price at market, buyers will want to bid lower, so let's just price a little high.

3. Homes priced Below Market Value--In San Francisco, when these homes are in a great location and properly prepared for market, they usually sell very fast (within 10 days), often above their listed price and often above what they might have sold for if they were reasonably priced.  There are usually competing offers in this situation, and you may need to make your first offer your best offer.

Given these three pricing profiles, it is best to work with your agent to understand current market dynamics, local and recent sales that are relevant to the property you are considering to determine the answer to the question, "How much should we offer?"