The Dangers of Overpricing in San Francisco Real Estate
Photo by Aman Kumar on Unsplash
As will be illustrated in this report, overpricing one’s home prior to going on market almost always has negative ramifications for sellers: Across Bay Area markets, listings that require price reductions before selling consistently take much longer to sell and sell for significantly lower average values than homes priced correctly. The correct calculation of “fair market value” typically has large economic consequences.
Conversely, overpriced homes can provide opportunities for buyers who carefully track time on market and price reductions (as well as homes taken off the market without selling), and react accordingly. Such buyers will almost always face reduced competition from other buyers – often no competition, which generally eliminates the need for overbidding – and allows for more aggressive negotiation of the purchase price and terms of sale.
The Truth About Home Pricing
“Ironically, instead of getting more money… [Over-pricing] usually stigmatizes a property and reduces the eventual sale price to less than it would have been with more realistic pricing.” —House Selling for Dummies
Fair market value is that price a qualified, reasonably knowledgeable buyer is willing to pay, which a seller, not under duress, is willing to accept after the home has been properly exposed to the market.
Neither agents nor sellers determine market value: Only the market itself – willing and able buyers – establishes value. A comprehensive comparative market analysis is the best way to estimate current fair market value prior to listing the home for sale. Agent and seller then work together to create a plan – pricing, preparation and marketing – to maximize the conditions that reliably achieve the highest possible sales price.
The vast majority of buyers will not make offers on homes they consider significantly overpriced. Either they don’t want to waste their time, or are uncomfortable with possibly “offending” the seller. In any case, they simply move on to other listings.
Well-priced homes create a sense of urgency in the buyer/broker communities to act quickly with strong, clean offers, and often lead to competitive bidding between buyers – which is the most likely way to increase sales price.
Overpricing wastes the optimum moment of buyer and broker attention when it first comes on the market. This moment cannot be recaptured.
Overpriced homes kill any sense of buyer urgency and take much longer to sell, which then significantly reduces value in buyers’ minds: “There must be something wrong with it if it hasn’t sold by now.” It almost always eliminates the possibility of competitive bidding.
“Let’s just put it out there at this price,” – higher than the comparative market analysis justifies – “and see how the market reacts” risks a substantial decline in sales price. (See chart below.)
If a listing has inadvertently been overpriced (or market conditions suddenly cool), the sooner it is recognized as such and the price adjusted, the smaller the negative impact. Price reductions must be big enough to regain the attention of buyers and their agents – typically, at least 5%.
In order to win the listing, some agents suggest a list price considerably higher than what market conditions and comparable sales justify—because they believe this is what the seller wants to hear. This is called “buying the listing” and is a violation of the fiduciary duty of honesty that an agent owes their client.
Price it right to begin with.
Prepare the home to show in its best possible light.
Implement the most comprehensive marketing plan possible.
Hire an agent who knows how to negotiate effectively on your behalf, and manage the disclosure and due diligence processes.
In the Bay Area, the difference can add up to tens or even hundreds of thousands of dollars.
Home Pricing Analysis: San Francisco
Home Sales With & Without Price Reductions*
*The sales-price-to-original-list-price and days-on-market analyses based on 3900 home sales over 12 months through July 2023, averaging Broker Metrics monthly data. The average sales price and dollar per square foot analyses based on a Broker Metrics sample of 1830 home sales in 12 months through late-August 2023. Average sales prices adjusted for difference in average square footage. Data from sources deemed reliable, but may contain errors and subject to revision. All numbers approximate.
Homes requiring price reduction before selling averaged a sales price 12% under original list price, while those selling without reduction averaged 3.5% over original list price.
Homes requiring price reduction averaged 8 weeks longer on market to acceptance of offer.
Homes selling after price reduction averaged a dollar per square foot value and an average sales price approximately 7.5% below homes selling without price reduction.*
SUMMARY
Using data on over 50,000 home sales occurring over a period of 12 months, we performed analyses such as this one on 5 Bay Area regions comprising 10 counties, comparing house, condo and townhouse listings that sold without reducing list price prior to sale, to those that required one or more price reductions before going into contract and closing sale. The specific results varied by market region, but large differences in sales-price-to-original-list-price percentages, measuring overbidding and underbidding, average days-on-market, measuring speed of sale, and average sales values were universal.
The calculations regarding the value differentials between these sales must be considered approximate: The same home can’t be sold at the same point in time at different list prices, with and without price reductions to compare the results. But in all the regional analyses we performed comparing the 2 types of sale, the average change in value – i.e. the average loss in value seen in price reduced homes – was about 10%. Certainly, this differential varied widely amid tens of thousands of individual homes in varying circumstances of sale, but considering home prices in the Bay Area, even a small percentage decline in sales price typically adds up to a substantial loss in seller proceeds.
Pertaining to residential real estate sales in San Francisco County. Analysis performed in good faith with data from sources deemed reliable, but may contain errors and subject to revision. All numbers should be considered approximate. How these analyses apply to any specific property is unknown.
A comparative market analysis (CMA) reviews “comparable” properties that recently sold, active listings on the market, listings pending sale, and listings removed from the market without selling, while factoring in the effects of existing economic and real estate market conditions and trends. Because individual homes are relatively unique commodities –varying in location, architecture, condition, circumstances, systems and amenities – and the market is constantly changing, a comprehensive CMA relies upon a straightforward analysis of data, as well as the experience to weigh the many factors at play, to arrive at an informed estimate of fair market value at a specific point in time. It is one of the most important services qualified agents provide their clients.
Differentials in values should be considered approximate calculations based on samples of thousands of sales, and how they apply to any specific home is unknown. Overbidding percentages can be affected by strategic underpricing strategies by sellers and listing agents, as well as by buyer demand. In recent years, the house and condo markets in San Francisco have sometimes diverged in their dynamics, but the effects of overpricing on the statistics reviewed in this report are broadly similar, even if varying in degree. Based on data provided by local MLS association(s) to Broker Metrics, considered reliable, but may contain errors and subject to revision.
Compass is a real estate broker licensed by the State of California, DRE 01527235. Equal Housing Opportunity. This report has been prepared solely for information purposes. The information herein is based on or derived from information generally available to the public and/or from sources believed to be reliable. No representation or warranty can be given with respect to the accuracy or completeness of the information. Compass disclaims any and all liability relating to this report, including without limitation any express or implied representations or warranties for statements contained in, and omissions from, the report. Nothing contained herein is intended to be or should be read as any regulatory, legal, tax, accounting or other advice and Compass does not provide such advice. All opinions are subject to change without notice. Compass makes no representation regarding the accuracy of any statements regarding any references to the laws, statutes or regulations of any state are those of the author(s). Past performance is no guarantee of future results.