Price Reductions in Real Estate – What Do They Mean?

Buy low, sell high – it’s a base principal of all economics and it’s no different in the world of real estate. Price reductions don’t change that theory. Whether you’re a stockbroker, a manufacturer, making a few extra bucks online, or buying a house, your goal is always spend the least as a buyer and earn the most as a seller. So when a buyer sees a seller slashing prices, they start to salivate, thinking this is their moment to pounce and pick up a steal. But is it? Since there can be many reasons for a seller to lower the price of their home, you can’t always lump price reductions in to one easy category. Let’s explore some of the reasons sellers reduce the price of the their homes.

While homes are a commodity and have values based on costs of materials and labor, we also spend a lot of time with our homes – we build memories, watch our kids grow, pass milestones in them – they have a value that isn’t always easy to write down on paper. Because our lives are so linked to our homes, we often assign a value to them that takes into account those feelings. Unfortunately, the buyer of your home isn’t looking to purchase your memories too, so that value doesn’t exist for them. When a seller overprices their home on this “feel-good” factor, they often have to face facts at some point and start slashing prices. These are often the most painful price reductions for sellers to make.

Most of us can’t afford to carry two mortgages, so when we’re ready to move up, we need to sell the current home in order to use that money to help pay for the new one. If you find the home of your dreams and want to buy it, you may need to get your current home sold fast. Price is king – so a reduction in price can bring more potential buyers to the table and get your home under contract much quicker.

Have you ever seen sharks in a feeding frenzy? It’s an amazing sight to behold. That same feeding frenzy is sometimes used by sellers who drop their price so low that they know it will sell for above that price. If there are multiple offers and everyone wants the house, they can drive the price up higher – so sometimes dramatic price cuts are a tool used to drive up the price (seems backwards, but it can work).

Time ticking away as a house sits on the market is one of the toughest psychological barriers there is. We hear the question all the time, “why has the house been on the market so long, is there something wrong with it?” As the days on market grows, buyers begin to get fearful that there’s a reason no one is buying that house and they certainly don’t want to be the one that makes that mistake. A price drop brings attention back to the house and can bring the offers finally.

Maybe it was just overpriced to start. We see that a lot. Everyone wants to believe their house is the best, biggest, most beautiful, etc. Sellers often will compare apples to oranges and want to price it like caviar. That’s where the CMA (comparative market analysis) comes in – the numbers don’t lie.

A need to move quickly can also drive pricing – in a city like San Antonio with a large military presence and a growing economy, we see a lot of traffic both into the city and out of the city. Whether it’s a company shifting a CEO to a new market, a small startup attracting new employees, or a member of the military assigned to a new station, relocation is a common factor in price cuts. These are people that often have to move quickly and don’t have time to test the waters and see how it goes. They’ll be much more aggressive in slashing prices because they need the house sold fast.

Price Reductions Come In All Shapes and Sizes

As you can see there are many different reasons to reduce the price of a home while it’s on the market. Be careful you don’t get caught up in a price reduction game though (see our article “Are you reducing yourself right out of a sale?“). Price reductions can be very effective is done right, but they can also lead to a downward spiral that drags the price down if you’re not careful. The best thing you can do? Price the home correctly to start – talk to you agent about the market factors and your needs. While your agent can’t solve your need to make 10x what the home is actually worth (we all have that need), they can take into consideration some of the factors of your current situation that may affect price.

image courtesy of rafael-castillo