The Truth About List Prices.

They're 100% Arbitrary.

If you were to take a random home that was ready to go to market and ask 10 Realtors what price they would list the property at, you'd likely get 10 very different answers — sometimes varying by as $100,000 or more in some cases. I know this first hand because I often bring other Realtors and Brokers through listings that I'm preparing, and will ask them the very same question. It seems strange how this could happen, and we'll discuss below why it often does. But it underscores a point that I've tried to drive home countless times on this blog: That buyers should not get hung up on what a house is listed at. Rather, they should focus on the value of the home and what it will ultimately sell for.

To say that pricing a home is an inexact science is probably the understatement of the century. Setting aside the obvious factors such as the location and condition of the home, the strategy that is undertaken by the seller and the listing agent has as much of a factor on where a house may list than just about any other influence. And that strategy can vary widely from agent to agent.

If you've followed the San Carlos real estate market for any period of time, you know that it has become almost customary to price a home slightly below its ultimate market value in hopes of generating multiple offers. This perception of “value” creates more excitement for the property, and fuels the competitive juices of potential buyers. There are obvious exceptions to this strategy, particularly when it comes to homes that have may inherently have a smaller buyer pool. For example, view homes that have no flat yard may not garner the same interest as a home on a flat yard in White Oaks because buyers today have placed outdoor living high on their priority list. In these cases, it's a much more risky strategy to list the home on the low side and expect multiple offers to drive the final sales price up to the desired goal. But it's fair to say this only applies to a small minority of the homes that sell in San Carlos, and the method of pricing the home below market value is still the most common used strategy.

So much of where a home is listed is a function of the listing agent's strategy, and not necessarily the actual value of the house — and that's a critical fact to remember for home buyers. Some listing agents absolutely love to price their homes 30-40% below what they anticipate it will sell for. This generates LOTS of offers, creates a frenzy around the property, and allows the agent to later boast how they routinely get 30-40% premiums above the list price. While those numbers look impressive, it doesn't guarantee that the home sold for the highest possible price, as we will discuss further below.

Recently you've seen on the blog numerous examples of homes selling $500K, $600K, or even $700K above the list price, and that gap is even greater in higher value cities like Palo Alto, Menlo Park, and Portola Valley where $1M premiums are common. But in a number of cases that I studied in San Carlos recently, the eye-popping premium was a direct result of the list price being absurdly low in the first place, and the home ultimately sold about where it should have. Certainly, there are cases where a home's sale price just blew the lid off everyone's expectation, but that's not as common as you may think.

On the other end of the spectrum, there are a few agents who purposely list their homes on the high side, often well above what they think it will sell for. This plays into the theory of “you don't get what you don't ask for”, and sets the stage for an interested buyer to negotiate the price down to the expected sales price. This doesn't happen as much in San Carlos as it does in some of the higher price point communities, but it's still a strategy that is used by agents.

Advice to Buyers.

How is a buyer in this market supposed to make heads or tails of such an arbitrary process as what the home is listed for? Here are a few pieces of advice.

• Know the Value of the Home. If you study the prices of homes that have sold recently, you'll start to see distinct ranges that a 3BR home will sell for, versus what a 4BR or 5BR home may fetch. And don't forget the other X-factors, such as lot size and location. That should ultimately drive your offer price instead of what the home is listed for.
• Disregard the Premium. Don't get fixated on how much you may be spending above the list price. As I mentioned above, some homes have sold recently with gargantuan premiums but in the end the price was probably about what it was worth. Taking a hypothetical situation where we may be writing an offer at $2.6M for a home that is listed at $2M and the buyer is freaked out about spending $600K above the asking price, In this situation I would pose this question: “Would you feel differently about writing an offer for this house at $2.6M if it was listed for $2.5M, instead of $2.0M?”
• Work with a Market Expert. Aside from the obvious shameless plug, assessing what a home is going to sell for can be a challenging task for seasoned local agents, let alone for those who are not familiar with the area. The consequence of not being tuned into the inherent value of the property is either losing out on your desired property, or even worse, drastically overpaying for it.

In the end, it's critically important to remember the arbitrary nature of the list price of a home, and the influence that the listing agent's strategy plays in determining that list price. Don't get hung up on how much over the asking price that you might be offering — instead, focus on the current and future value of the home, and if your offer is aligned with that figure who cares how much over the arbitrary asking price that you paid?

In theory, one could list a house for $1, and it will ultimately sell for about what it's worth. That sounds like a preposterous idea, but it has actually been done before!