"Energy" Pricing

As I mentioned in the previous post, in a depreciating market a home seller cannot afford to overprice his property and then wait because by the time he lowers the price, the market may have already slid further than his new price point.

The concept of "energy" pricing (sometimes called "drama" pricing) entails finding the price point which generates the most excitement and energy about a property. It's the kind of price that causes sellers to say "Ouch" and the buyers to say "Wow". The goal of "energy" pricing is to generate the greatest number of buyers viewing the property in the shortest amount of time and then to have more than one buyer interested in the property thereby driving the price higher than asking sometimes as much as 10% higher. How can this be in a "bad market"? Because when buyers perceive value, they are prepared to step up to the plate and offer what the property is truly worth. After all, it is the buyers who determine what a property is worth, not the sellers. Buyers will sense the energy and excitement surrounding the property and will want what they can't have. This happens all the time in "hot" markets, but it can be created in "soft" markets as well. With the drama price, all the buyers' attention is drawn to the particular property and it will generate enough buyer interest to set up the best scenario for the seller to have a multiple offer situation. Adding the element of sealed bids from buyers may even increase the potential net to the seller.

Here is a typical scenario:

Mr Smith has a 3 bedroom 2 bathroom ranch on 1 acre. It has been updated nicely and has good curb appeal. There are 5 other comparable ranches in the same town with similar characteristics that are currently listed at 250k, 255K, 259K, 260K and 262K. These are the homes that are "not selling". In other words, if the property is not under agreement or sold, then it is a property that is "not selling". By pricing his ranch at 237K, Mr. Smith will drive the buyer pool to his property. His real estate agent, familiar with energy pricing and depreciating markets, lists the home on Monday. She plans to hold a broker open house on Thursday and a 2 day weekend open house. After listing, there are 4 showings of the property, with 2 repeat showings and one offer submitted on Wednesday. The offer on Wednesday is 5,000 below asking and has no deadline. Mr. Smith's agent advises him to wait until after the open house to consider the offer since his property has not yet had its "full week in the sun", in other words, all the potential buyers have not yet had a chance to view the property. Mr. Smith, of course, can accept the first offer if he chooses. He decides to wait. At the broker open house, agents coming through comment that the price is amazing and more appointments are set and some will be bring buyers to the open house over the weekend. At the two day open house, 10 sets of buyers come through on Saturday and 8 sets on Sunday. Two buyers on Saturday request to make offers. At multiple times during the open house, buyers are hearing other buyers' comments and requests to make offers. Some buyers are calling their own agents to ask about making an offer. By Monday, Mr. Smith has received 4 offers plus the one from earlier in the week. His agent goes over the offers with him one by one. Notice how in this situation, the buyer is in control. He has his pick of offers. His agent tells him that he has several options; he can choose one of the offers on the table, or he can ask the agent to advise all parties that they are now in a multiple offer situation and he would like them to submit their last and best offer by noon the next day. One buyer withdraws his offer, he had been hoping to get it below asking. The first offer has removed contingencies and is offering full price with only an inspection and financing contingency. Mr. Smith has one offer for 240K with only a financing contingency and he can close in 30 days. Another offer is for 242K with inspection and financing contingency. The last offer is for 245K with only a financing contingency, closing in 30 days or less. All buyers have pre-approval letters as well. Mr. Smith decides to choose the last offer if the buyer will put up an additional 2K in earnest money deposit. The property closes in 27 days for 245K, a full 8K above Mr. Smith's asking price.

The 5 comparable ranches are still sitting there. Two of them have lowered their prices by 5K and the others are unchanged. Another month of carrying costs for the sellers, perhaps 2 mortgage payments if they bought something else already. Another month of taxes, interest, insurance.....well, you get the picture. Did the buyer for Mr. Smith's house get cheated? Of course not, since he still got the house for 5K below the next comparable ranch. Without the perception of value, the buyer would not have moved forward with his offer. He saw the competition and saw that Mr. Smith's house was just as nice if not nicer and was certainly worth 245K in his mind. Did Mr. Smith lose out? Could he have gotten more? A property will sell for the most money in the first 2 weeks of exposure in a depreciating market. The longer is sits in inventory, the less likely the seller is to have a multiple offer situation and the more likely the seller will have to cut his price as his most important asset loses value day by day. With a knowledgeable professional to represent his best interests, Mr. Smith cannot lose. Nor can the agent. Because of her approach, market knowledge and negotiating expertise, she was able to net Mr. Smith top dollar for the property in the shortest amount of time. Remember that top dollar is not what the sellers "needs" to get for the property, but what the best buyer is willing to pay.

And what will Mr. Smith tell others of his experience. "What a fabulous agent! I love energy pricing! I'm off to Florida to find a great deal because I heard the market is really bad down there. My agent referred me to an agent down there who will help me get "tomorrow's prices today". You should really talk to her and try energy pricing for your home."

Helping sellers find out what their home is worth, managed in a careful and controlled way is the sign of a true professional. No amount of advertising, marketing, signage, open houses, 4-color flyers, direct mail post cards etc. will help an over-priced property to sell. The property will sell when the agent and the seller find the price point which generates the perception of value.