The Problem with Over Price Listings (and their sellers)

Let’s say you’re a buyer, you’ve traveled to Austin to find a home, spent the weekend looking at homes with your Realtor and found a home you like. In fact, you’ve found your top three picks, but one stands out as your favorite. Problem is, it’s way over priced.

Do you make an offer anyway, well below the list price, hoping the seller and the listing agent will accept your rationale for the offer price? Well, it depends, but usually, yes, we will have our buyer make a run at the home if it’s their top pick.

Sometimes this results in success, but sometimes it results in wasted time and lost opportunity for better priced homes. If our buyer has roughly equal leanings toward two different homes, and they are substantially comparable, we would go first for the properly priced home because it offers the better odds for achieving an accepted offer.

Over priced listings are always a bit of a gamble. But if the buyer clearly has a preference for a top choice, regardless of it being priced too high, we take a run at it with an offer based on market value.

How do we do this and what might the result be? Read on.

I recently submitted an offer for an overpriced listing. The offer was send with the following note to the listing agent.

Attached is an offer for {Address} in {Neighborhood}. Also attached is a pre-qualification letter. My buyer is relocating from {City}.

The offer price is based on the Market Analysis that I completed for the Buyer, and factors in the updating needed, especially in the kitchen and master bath. The buyer likes the lot and the wood floors, but we saw several other homes in the same price/size range in {Neighborhood} and also SW Austin that need no updating and were on greenbelt lots.

I hope the seller will give strong consideration to this offer and I look forward to hearing back from you soon.

Our offer was about 7% below the list price. Result: Seller didn’t even provide a counter-offer. Agent sent me her own CMA, as I requested, so I could make sure I wasn’t missing some comps. The CMA was interesting, if not amusing. Here was my response.

Dear {agent},

Thanks for the response. A couple of points for you and your seller to consider.

{Listing address} is built in 1990. Your oldest comp is 1997 and you’ve included 2 comps built 2004, one built 2005 and four built in 1999 (nine+ years newer than {Listing}. Those are not valid comps as the interior conditions of those newer ones, anything after 1999 really, are not comparable to the current outdated kitchen (pink countertops) and interior condition (dated, tired master bath) of {Listing}.

When I do a market analysis for a home built in 1990, I generally limit the comps to homes no more than 5 years older due to the change in decor and other features that occurred largely around 1995 in Austin. Thus I cut off the comps for my buyer CMA at 1995 whereas you don’t have any comps older than 1997. Therein lies the gap in value between what your seller thinks the home is worth and what I’m telling my buyer its’ worth.

If you run a new CMA and properly leave out newer homes, or older homes with full remodel and updating, I think you and your seller will find that the offer sent in by my buyer was a reasonable offer price.

Also, if you tour the competing homes in the immediate area of (Neighborhood} (homes priced $310K or less), as my buyers and I did on Sunday, you’ll see that for about the same price, or a bit higher, they can purchase a home with a modern updated kitchen and master bath, in model condition on a greenbelt. Though they liked the big culdesac lot, they are not willing to pay more than what my CMA suggests the home to be worth.

I’m disappointed that the seller would not even provide a counter-offer. I believe you and the seller are relying on optimistic and invalid CMA data for your pricing. The buyers appreciate your consideration but will be moving on to their next choice. If the sellers wish to reconsider, based on what I’ve stated above, please let me know asap as we’ll be sending in a new offer on another home tonight.

Response from the other agent, and finally we get to the obvious truth:

I have made all of your points with my Sellers. They have an amount that they are not willing to go below, even though the market is telling them the home will sell for less. They do not have to move, they are just choosing to try and sell at this price. I am sorry for their inability to counter also, but they felt like it would be wasting time to try and bridge the gap.

So there we have it. Some sellers know they have their home over priced, they don’t have to move, and we have agents willing to take those listings knowing they are over priced.

Wouldn’t it be nice if the listing comments said “we know it’s over priced. Seller is not going to budge but is hoping an uneducated, poorly represented buyer with irrational enthusiasm (from California probably) will pay too much”

That would have saved my buyer and me two days of time, during which one of their other top picks went pending. Thus is the risk of going after an over priced favorite, though sometimes it’s worth the risk. Just not in this case.

18 thoughts on “The Problem with Over Price Listings (and their sellers)”

  1. The problem with sellers is that they frequently do overprice. Why it is that reasonable, well-educated people who otherwise act completely sensibly and rationally turn into know-all lunatics as soon as they put their property on the market nobody knows.
    I find honesty is the best. If the property is overpriced we tell the seller. Then we tell any buyers interested. People appreciate our honesty and we do seem to be able to get dialogues going.
    But mostly it really is a total waste of time.

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  2. Hi Eva,

    Emotion and Denial to blame. Most of us truly do love our homes and think others will love them too. The other problem is that listing agents can cherry pick the comps that justify the seller’s fantasy of a higher value, often doing so just to get the listing. When I saw the “CMA” for the above listing, I nearly fell out of my chair. I was astounded. It was apples to oranges.

    The other problem is that if a buyer agent isn’t diligent and skilled at valuing a property, they can produce an inflated CMA as well, causing the buyer to think that the price is fair. Luckily, this is rare. Also, most buyers actually learn the pricing pretty quickly after seeing the competing properties. Why would someone pay more for a house that offer less?

    Steve

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  3. The answer is that a market cannot go up in value unless some people overprice. My neighbors priced at 609K (houses cost about 350k in 2001). My last appraisal came in around 485K when I did a HELOC so I thought they priced way too high (by about 75K). They also did not use a realtor and did FSBO. Amazingly they got 3 offers in the first week and took a full price offer at the end of one week. At over $200/sq ft that is a record for our area which has traditionally been around 170/sq ft.

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  4. Well, market place is not exact science. CMA is merely a loosely constructed guideline of home pricing, and because there are just too many variables out there that differentiate home to home, not even counting the emotional factors involved on both sides, it’s practically impossible to predict an “scientifically” precise price of a home. Clearly the seller is attached to their home and they want their adoration of this house reflected in their selling price. It’s like you are looking for a high dowry for your favorite daughter (or son in some cultures) regardless of the her look, talent, and other attributes. Yes, you do look at your wealthy neighbor’s weddings for comparison, I wouldn’t call this behavior “irrational” or “lunatic”.

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  5. Hi Tony,

    > The answer is that a market cannot go up in value unless some people overprice.

    Usually, price increases are incremental and can be justified by demand factors, Active to Pending ratio, and an upward slope of price trends. Absent those factors, it’s just an over priced listing.

    Hi ARZ,

    > Well, market place is not exact science. CMA is merely a loosely constructed guideline of home pricing…

    True, but a smart buyer is not going to pay $20K too much for a home. Buyers become savvy pretty quick. It only take one afternoon of viewing 12 or so homes for a buyer to look at me, inside the 8th or 10th home, and ask “what’s the price on this one?” I’ll tell them $285K, and they say “that seems high doesn’t it?”. And I’ll say “yes, this one’s over priced – it should be priced in the $$260’s”.

    Then they will continue with something like “yeah, that other one had granite counters, updated master bath and didn’t need any paint or anything, and it was bigger and had the nice deck in back and is $15K cheaper than this one… but I do like this yard …”.

    The problem is when, ignoring price, the buyer really does like the over priced home better, due to some specific aspects, such as a nice 1/3 acre culdesac lot, but those aspects still don’t justify the price or offset the negative aspects. And if the seller love’s the home and isn’t motivated to sell at market value, a buyer has to absolutely be willing to simply walk away.

    Steve

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  6. Steve, you’d be surprised and appalled at how many agents simply go into that CMA tool that MLXchange provides, take whatever data it spits out, print it out and hand it to the seller.

    I’ve had many arguments about it with agents in my office, because I feel we should manually do CMAs, and look out for features/differences that the computer can’t see. Unfortunately, those agents never listed. This is the result, I guess, of having too easy of an entry. People with below average intelligence can call themselves agents, and run around buying listings or buyers (with commission rebates).

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  7. jim-

    you said it all…. 95% of agents are 95% incompetent…

    if NAR does not address this problem…. somebody OUT OF THE BOX will provide the consumer with a better mousetrap

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  8. Hi Jim,

    Yeah, I know. I’ve also run into over-priced listings where it turns out the agent didn’t even do a CMA. They simply listed the home at the price the seller wanted. I learn this when I inquire about making an offer and ask what comps were used for the CMA, and the agent says “the seller decided the list price”.

    Lenny,

    I think you’re probably a bit on the high side with 95% of 95%. But I do think real estate customers often don’t use a very good hiring strategy when selecting Realtors. That one act alone would clear the deck of a lot of the driftwood agents.

    Steve

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  9. Well, the price that most non-desperate sellers want is the value they put on their property. In relation to why many properties are pulled without sale this is obviously consistent with this premise. The seller simply prefers to wait for the market to catch up to their sense of valuation. The price that most agents favor is the lowest possible price to be worth the agents time in making sufficient sales and commission in a given time period, so as to keep themselves and their boss if any happy. No wonder there is often a discrepancy.

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  10. Ray…there ought to be one other consideration too given today’s banking situation…where will the bank appraisal come in???

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  11. A great discussion. I think it behoves the Professional Agent to make sure what he/she sells today can be sold next year without the buyer taking a serious bath. Pricing is really very basic – Location, Location, Location plus layout and condition of the house, layout of the neighborhood, amenities of the neighborhood, financing offered, current interest rates, etc.

    I want to be able to get the buyer out of the house within 12 months if necessary. Therefore, I would make sure that they did not make an offer on an overpriced turkey by doing my own CMA.

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  12. Steve, nice post.

    As a Realtor myself, I think our whole MLS system is totally inefficient. Why do we let these delusional sellers list for whatever crazy price they want and then sit on the property for two years waiting for some fantasy offer from a rich, half-baked Californian? (Yes, I have a couple of these listings myself, taken way back when my market didn’t look so bad, which makes me as guilty as anyone, and yeah, okay, it’s hard to let go after you’ve spent five figures on marketing expenses and endless hours on the phone trying to reason with these folks while still being sympathetic to their cause.)

    I think we need to redesign the whole system. Here’s my proposal: if you put your house on the MLS, I think your price should drop automatically by $1000 per day until someone comes forward to enter into contract. Overpriced your house? No problem, the system will correct it daily. Can’t stomach this idea? Then you’re not a seller, you’re a poseur, needlessly bloating the inventory without any intent to sell for market price… Please, don’t waste our time. Post your house on Craigslist, represent it yourself and good luck.

    Yeah, I know, this may sound a little extreme. But a house only worth what a real buyer with money is willing to pay. Why not automate the process a bit and make it more efficient for all?

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  13. “I think your price should drop automatically by $1000 per day until someone comes forward to enter into contract. Overpriced your house? No problem, the system will correct it daily. Can’t stomach this idea? Then you’re not a seller, you’re a poseur, needlessly bloating the inventory without any intent to sell for market price… Please, don’t waste our time. Post your house on Craigslist, represent it yourself and good luck.”

    Diane,

    This has got to be a joke. A seller has every right to list the house at whatever price they wish. As they’re agent your number one priority is help your client make informed decisions, not to sound like a used car saleswomen. Furthermore, last time i checked, realtors didn’t HAVE to represent every client they come across.I understand the spandrel consequences of over-pricing your home, but for most owners, their property will be the biggest investment they make. Should they choose to sit on a house, waiting for a buyer to hatch, so be it.

    -TRED

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  14. I didn’t read all comments so I apologize if this has been addressed. One thing I hate to see is agents taking overpriced listings just to try to pick up buyers off sign calls and I know that there are agents who do that. In this market, we need to educate people as well as we can about prices, which I expect to start falling. February was flat with minimil appreciation and listings are up, so which way will prices go?

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  15. As a would-be buyer who has been following the credit crunch closely, I expect that any property I would buy today would decline in value or stay flat (if it was well priced to begin with) for at least the next two years, possibly beyond.

    It is not a huge issue for us since we would stay in any new home for at least 5-7 years maybe longer but it has definitely slowed our enthusiasm for buying this spring. In the central city area where we are searching everything seems to have slowed down.

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  16. Hi NT: A good hiring strategy for a buyer agent would involve interviewing more than one Realtor. Also, it would be good if you have a buyer agent who actually sells homes and knows how to produce a CMA. Most don’t. Ask the questions that will reveal these things.

    Ray: The question is ‘who is served by an over-priced listing?’ In the end, it’s not the seller.

    Diane: Interesting idea. I like your “thinking outside the box”. Some Realtors I know actually set a price drop schedule at the time of the listing, up front, which is similar in theory to your $1,000 per week auro drop, but not as radical an idea.

    TRED: Be nice. 🙂

    Sam: I just wrote another article outlining this exact point. The right Realtor, with the right setup can turn an over-priced listing into a stream of prospective buyers for other homes.
    http://crosslandteam.com/blog/2008/03/08/why-will-an-austin-realtor-take-your-over-priced-listing/

    Shireen: There are plenty of homes in Austin you can buy that will appreciate in value between now and next year. It’s a matter of buying a home with the best odds of appreciating and staying away from the ones that we can reasonable assume won’t. But if you plan to stay for 5-7 years, buy what you like. Trying to time the market is a risky venture.

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