mortgage

Death by a thousand price cuts

"Our survey reveals a wide gap between the perception homeowners have about their own home's value and the realities of a market in which three-quarters of homes declined in value in the past year. We attribute this gap to a combination of inattention and a fair bit of denial that causes people to believe their home is insulated from the woes of the market that affect others, but not them," says Stan Humphries, Zillow's VP of data and analytics.

Price cuts 'encourage aggressive bargaining'

A collective delusion may be but cold comfort for home sellers who suffer the consequences of mispricing their home. Overpriced listings start out behind the market, which forces the seller to drastically cut the price or follow the market down through multiple price reductions.

Buyers, who are well aware of that dynamic, will request a history of asking prices before they make an offer, Reitman says. A series of price cuts acts as a "code" that signals to buyers that the seller is extremely motivated, and that knowledge empowers buyers to make lower offers and "stick to their guns," he warns.

A December 2007 study, "Seven Tactics for Selling a Home," published by Redfin, states this same point: "Once a property fails to sell at its debut price, the time it spends on the market can encourage buyers to become more aggressive in negotiating. Price reductions can further encourage aggressive bargaining."

The difficulty is that while all homes are unique, comparable homes compete with one another for buyers' attention. If your neighbors reduce the price of their home, those homes are more likely than yours to be sold.

"You have to keep up and down with the Joneses," Reitman says.

If your home has been on the market for several weeks without an accepted offer, you should reassess your assumptions and rethink your strategy, experts say.

Factors to consider in repricing home
  • Number of showings to prospective buyers.
  • Foot-traffic at open houses.
  • Offers (or lack of).
  • Recent closed sales of comparable homes.
  • Recent closed sales of comparable homes.

Price cuts should be meaningful, so your home will "get the market's attention again," Reitman advises. A series of smaller cuts, rather than one big one, can result in a slower sale and lower price.

Lower price beats gimmicky giveaways

Sellers and listing agents sometimes try to entice buyers with incentives such as a buyer's agent bonus, big-screen TV or brand-new car. But experts say those extras don't work. Bonuses are ineffective because the cash doesn't accrue to the buyer, and it's unethical for agents to deliberately show higher-compensated listings in lieu of or before other homes a buyer might want to purchase. And as for buyers, given "a choice between $15,000 off the price or a new car, (they) want the cash," Reitman says. "Price is the No. 1 incentive."

The bottom line is that lower asking prices and price reductions are a painful, yet unavoidable reality of selling a home today. In some cases, the pain is so severe that the seller has to bring cash to closing or sign a personal note to pay off an existing mortgage.

Upside for sellers who bite the bullet
  • They will sell their home.
  • Save themselves the expense of a second mortgage payment if they've already bought another home.
  • Eliminate the stress and anxiety of having their home on the market.
  • Move on with their lives.

"If they are serious about selling, they have to adjust the price to whatever it has to be to get the property sold," Marriott says. "If you're upside down, but you can get out of it for $10,000 today, do you want to wait six months and get out for $25,000? That's what they need to think about."

"No one wants to make these tough decisions, so they do it in increments," he says. "But eventually, you get to the same place."

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