If you want to get the best price for your home, should you:
A. Ask for more than you think it's worth?
B. Ask for exactly what you think it's worth?
C. Ask for less and count on a bidding war to push you over the top?
A study in the Journal of Economic Behavior & Organization this year argues that the answer — despite what you've probably heard — is A: overprice. Underpricing doesn't work for the average seller, the authors say.
They suggest that pricing high pays off in an extremely modest way, a boost of about $100 to $200 on average over similar homes. Underpricing in the hope of setting off a bidding war, the study says, nets average sellers a bit less than they otherwise would have received.
"The key idea, really, is not necessarily how much more money you will make if you overprice, because that depends on a whole lot of factors," said study co-author Julia A. Minson, an assistant professor of public policy at Harvard University's Kennedy School of Government. "We had 14,000 houses we were looking at, so for any particular house, that number is meaningless. … The main takeaway for all sellers is to not buy into the story that you will make more money if you underprice."
Whether overpricing is a smart strategy — as opposed to right-on-the-nose pricing — might depend on how quickly you want to sell. Sales figures from the Baltimore region, which were not part of the study, show a strong connection between how long a home sits on the market and how much the seller has to drop the asking price.
The speediest deals in the Baltimore region's housing market in the past decade — through bubble, bust and aftermath — sold for what the owner originally asked for, on average. After 10 days on the market, the average sales price compared with the asking price started dropping — and kept dropping as time went on, according to data from Rockville-based RealEstate Business Intelligence.
This year, for instance, homeowners who sold after 30 days but within 60 days knocked an average of 7 percent off their original asking price, the company said. The average sellers whose homes sat for six months to a year accepted 13 percent less than they'd originally asked for.
Chris Benedetti watched his next-door neighbors in Baltimore's Upper Fells Point wait a couple of months to sell this year and drop their asking price several times. He didn't want his rowhouse to sit around, particularly since he'd bought a new place in Severn. So he took his agent's advice to ask for $275,000, close to the neighbors' sale price.
Result: He got two offers within a week and a half, gave the would-be buyers a chance to modify their bids, and ended up with a contract for $500 more than his asking price. He's scheduled to close on the deal in about a week.
"The whole story, I think, is the fact that we priced it at a point where it was attractive," he said. "If we were living there and weren't in a hurry to sell, then if it took six months it wouldn't matter. But when you're paying the double mortgages, the quicker, the better."
The market statistics showing that price drops increase the longer a home sits on the market make sense to Pat Hiban, who heads a real estate team at Keller Williams in Columbia. He became so frustrated with unrealistically high asking prices during the housing-bust years — when he saw sellers ultimately getting less than they could have received because values fell as they languished on the market — that he set up a blog to talk about the downturn.
"The more you try to stretch it in the beginning, the longer you're going to be on the market, and the more you're going to end up dropping it," he said.
What's harder to measure is whether sellers are always better off if they set a price that attracts an immediate offer or offers. Could they have done better if they went higher and waited?
The downside to data showing how asking prices fall the longer a home sits on the market is that you can't know for certain the cause. Did it takes months to get a deal because the original asking price was too high, or did the seller drop a reasonable price because he got tired of waiting? Or was something else at work?
"You can't run experiments in the housing market," Minson said. "Basically, what you want to do is have the same house be underpriced or overpriced and see what happens."
She and a colleague, then both at the University of Pennsylvania's Wharton School, did what struck them as the next best thing: analyze thousands of single-family home sales in Pennsylvania, Delaware and New Jersey between 2005 and 2009, catching some of the housing bubble and bust. They looked at the characteristics of each home to try to determine whether it was underpriced or overpriced.
According to their study, an asking price of 10 percent to 20 percent more than other properties in the neighborhood equaled a sales-price bump of $117 to $163 for the average home. Overpricing by more than 20 percent produced added gains, though modest ones, they said. That's for homes that took an average amount of time to sell.
Underpricing takes an equally modest amount of money away from average sellers, Minson said.
She knows this goes against what many homeowners have heard from real estate agents and others in the industry. But "psychologically, it's not a very counterintuitive story," she said. Buyers are subconsciously taking a cue from the asking price.
"We just assume that expensive things are nicer," she said.
Jonathan Hill doesn't know whether Minson's findings would hold true in all markets, given that the bubble and bust hit Maryland differently from the three states she analyzed. (Federal figures show a bigger boom and bust here.)
Hill, president of RealEstate Business Intelligence, the data arm of the region's multiple-listing service, also doubts that sellers can "trick the market."
"You're just going to sit on the market until you come down to where the market is," he said.
Patrick Newport, an economist with market-information firm IHS, sides with the study authors — especially given the state of housing markets in much of the country today.
"In most places, I think market conditions are strong enough that ... it just seems a sensible strategy to shoot high and then lower the price if the home just doesn't sell," he said.
Still, what the study suggests is a very small impact for the average overpricer or underpricer, said Bob Hunt, a former director of the National Association of Realtors.
"That is what, in other contexts, one would call 'a rounding error,' " he wrote in a piece for the real estate news site Realty Times.
Tina C. Beliveau, a real estate agent who leads a team at Cummings & Co. Realtors in Lutherville, is convinced that overpricing is a bad idea. As little as $5,000 or $10,000 above comparable homes can put buyers off, she said.
"If there are two gas stations and the one further down the road is 5 cents per gallon less, people don't go to the more expensive gas station and negotiate with the owner," she said. "They just buy the cheaper gas. ... The first two weeks on the market, you get the vast majority of your traffic. When you waste that opportunity, you're playing a game of catch-up forever after that."
But while she and the study's authors have come to different conclusions about the effect of overpricing, they agree on one thing: Time matters.
"If you have lots of money and very little time, then you price your house to sell tomorrow," Harvard'sMinson said. "If you have infinite time and not that much money, that's a different story."