A house is worth what someone is willing to pay. I’ve often heard that phrase, and I’ve used it myself. From what I’ve seen in the last seven years, I now wonder if that idea is more of an oft-repeated saying than a fact. Let me explain by giving you a scenario that is common across the price-point spectrum.
A house comes on the market for $699,900. With a few days of marketing before showings begin on Thursday, seven showings are scheduled over the next three days. An open house is held on Sunday, and 25 people attend. By the following Tuesday, four buyers submit offers. All buyers were made aware that other offers were with the seller, and all buyers were given the opportunity to submit their best offers. Two of the offers were for $705,000 and included a contingency for a financing commitment from a mortgage lender. One offer was $710,000 in cash. The last offer is the highest-priced offer and is for $735,000. It is also a cash offer. This buyer had submitted an offer of $720,000. And when they were told there were three other competing offers, they increased their price to $735,000 because they had lost out on three other houses, and time was becoming a factor, making them feel they had to get this offer accepted. The seller accepted the $735,000 price. Because one person offered at least $25,000 over the other offers, would you say the house is worth $735,000?
Maybe Not
If we believe the open market is the best indicator of value, and we agree that the property was made available to a sufficient supply of ready, willing, and able buyers, do the three unsuccessful offers say more about value than the one accepted offer? The fact that three offers were at prices within 1% of $705,000 makes a strong case that the value is between $705,000 and $710,000. It was only for the competition and the buyer’s motivation that the winning bidder stretched beyond what anyone else was willing to offer.
Can the buyer sell the house for what they paid?
Maybe. More likely though, the winning buyer has paid a price that no one else will be willing to match. I look at it this way: The market value was about $705,000, and the buyer gave the seller a $30,000 incentive to accept their offer.
Why this is important
When pricing your house by comparing it to homes that sold in your market area, it’s important to consider whether the sale prices were influenced by competition or other extraordinary circumstances. Chances are, more than one of the sales that are used to determine a marketing price will have extenuating circumstances that inflated the price. When we price a house based on sale prices that escalated beyond the asking price, we may end up with a price that is beyond what the typical buyer considers reasonable. When that happens, competition vanishes. Competition is the most powerful force working for home sellers, and it’s been a unique attribute favoring sellers since at least 2021.
Price your house relative to asking prices.
If you want to get the results other people got, it may be wise to price in line with asking prices of recently sold houses. The asking prices that drew a crowd, not the price that an outlier paid, is the price that will draw the crowd that gives you the competition you want to drive the price and terms in your favor.
Do you have a different opinion?
I could be wrong; I sometimes am. If you disagree with me, I’d like to hear your thoughts. Email me at [email protected]. All opinions are welcome!