It used to be that when a person wanted to sell their home they would contact their realtor, or interview 3 or 4 realtors, and through an analysis of the market sales statistics come up with a potential listing price for their home.
As with most subjective processes there is usually a range of opinions on the best price to list the home at, the seller usually wanting a higher list price and the realtor trying to strike a balance to reflect the recent sales activity and keep the seller happy without over pricing the home.
The Sales Price
In reality there has always been a price range that the home will sell for. There is the absolute maximum that can occur when the perfect buyer believes they have found the perfect house and nothing will stop them from getting the home. This may mean a multiple offer situation and a mini auction where they buyers emotions take over from logic...and the sellers gets a premium sales price.
The opposite end of the spectrum is a scenario where the seller is backed into a corner, they are facing foreclosure or extreme financial pressure due to having already bought a home and where the buyer can either take or leave the deal but is in a very strong position financially and can close the deal in a matter of days. This usually results in the sellers taking a lot less than they had hoped for but lets them move on and avoid all the financial stress of two house payments or a foreclosure.
At the end of the day each deal ultimately revolves around the motivations of the buyer and seller and the ability of the listing and buyers agent to facilitate a series of offers and counter offers and finally achieving an result where no one is over the moon but each feels they fought a good battle.
This basically sets the parameters for the list price. The maximum and the minimum price range. The home is usually price somewhere in-between. If its priced above the maximum then the market tells the seller that the home is over priced ie they can find a home for the same price in a better location, more sq ft, better fittings etc. If the house is under priced then it will probably be bought in seconds by a savvy investor or the listing realtor themselves ;)
Once the agreed list price is chosen, the home is listed in the MLS and made available for the public to see and for realtors to suggest to their clients.
The Sellers Market
We have seen that in a seller’s market, if the demand outweighs the supply, then the maximum price may driven upwards by the market in terms of multiple offers which in turn inflates the new listings as the comparable sales prices have increased. The seller’s market sends numerous signals out to the potential buyers saying that if they find a home they like don't hesitate...just buy it now...before someone else makes an offer! In this way the buyers perpetuate the upward pressure on the list price and the sellers end up as happy sellers.
Each time a house is sold, the next listing uses this inflated sales price as the foundation for pricing the home at a higher level even to the point where the seller announces they are only taking bids over and above the list price.
The Buyers Market
In a buyer’s market the sellers do not have such an envious position. Here the buyer holds all the cards. As the signals from the market and the media keep telling the buyer that the real estate market is in a state of collapse and that prices are continually falling then the buyers state of mind is totally changed. Now as they search for their next home , the sense of urgency is totally gone. They can search for homes in their own time frame so that if they find a home they like, they can continue looking to see if they can find a better deal. Invariably they do come across a better deal It may be a home that has been over priced and now has been reduced to a realistic list price or it may be a home that has been on the market for only a short time but the sellers are desperate to sell and as a result they have reduced the list price to a "bargain"
Now that the buyers have found an ideal property at an ideal price they can move in for the kill! At this point their mindset is that they have all the power, the seller is very motivated, so why not low ball? Now the sellers are faced with rejecting a lowball offer or trying to negotiate the price up by showing that the home is extremely well priced for the current market already.
As happens in many cases like this, the buyer decides to move on and keep looking. Now the sellers get desperate and cave in a little, the buyer gives a little and the sales price gives the buyers a good deal. Now the comparable sales price for the rest of the market creates a downward pressure on the list price of the next home to be sold in that neighborhood.
With the glut of foreclosures coming on to the real estate market in general, the downward pressure on the list price is now even stronger coupled with the educated buyer and realtors who are aware of the continuing decline of some real estate markets.
Buyers have even got to the point where they have found a home that they like but continue to look, are just about to come back to home they liked to make an offer, but as they left it a couple of weeks the listing agent suggests a price reduction to stimulate interest again. Now the buyers, who were ready to make an offer see the list price reduced. Now the buyers have to decide if they want to make an offer or just wait and see how much lower the seller can go. other homes in the neighborhood face the same predicament in that now they are overpriced and they reduce their list price too. the buyers seeing all this downward trending and motivated to hold off a little more and sit on the fence a little longer!
Eventually the list price gets to a point where investors start seeing the value in buying up homes that are effectively under priced. As the market shows signs of improving as sales numbers increase all the buyers sat on the fence get he signals and then try to jump in to the real estate market and buy their home of choice. the problem is now that the market has started to swing from a buyer’s market to a seller’s market and as the consumer confidence increases more amd more people want to get into the market and as a result the increased demand results in higher offers and higher sales prices and the whole cycle of real estate starts all over again!