The Pricing Process

The Pricing Process – How and Why Econometric Home Valuation (EHV) Works

Initial Pricing

No one wants to leave money on the table, and our objective is to get you everything that the market is willing to offer.That´s why we will always set an initial price that is somewhat higher than the “most likely” price.

In fact, we want to initially price at the highest price that we can, with the huge caveat that we don´t want the price to exceed various “upper bound” constraints:

1. Competition

If an identical model to ours is priced lower than your home, you can be assured that an offer will come in on that one before yours. The more of a “commodity” you are (town homes being the closest to a commodity), the more precisely you can peg an initial price to be just a little bit more competitive than the second best value in your market.

Non-commodity features (custom homes, forest preserve backups, waterfront, etc.) make the analysis a bit trickier. Any premium (or negative) feature can be assessed a market value, but the current market value of each such feature is a random variable that depends on the current buyer pool.  Bottom line, the variability of market value goes up the more unique features you have.

In many cases, we will want to physically inspect the toughest competition to make a judgment about high a price we can realistically test.

2. Appraisals

After all the abuse by lenders in recent years, there has been a tough crackdown on appraisers.  One of the biggest problems Realtors are encountering is appraisals coming in lower than the offer price.

We have been quite effective at both appealing appraisals (providing better comparables), and at getting buyers to come up with extra cash (since the lender is only going to lend a percentage of the appraised value). However, we are very cautious about pricing a home beyond the “best case” appraisal (the one that uses comparables that will net the highest value).  Not only is it risky to count on a given buyer being willing to pay more than appraised value, but the “best case” is a good estimate for the upper limit of what the market has been willing to offer.

3. History

The “best case” appraisal is an example of looking at the history of sales to extrapolate an upper limit. However appraisers are tightly constrained (6 month look back on sales within a half mile radius is typical).

There is far more valuable statistical data available than the appraiser will ever use.For example, by accurately calculating general price trends, we can look at a two year old listing that is closer (both in location and configuration) to your home than any recent sales, and by adjusting the price to account for appreciation or depreciation, we can get a better idea ofwhat the market might bear.

Two Week Review

Within two weeks of testing our “highest feasible” price, we will have some powerful indicators of whether we are on track. The number of showings, and the feedback from those showings, is all that was available until fairly recently.

We now have “reverse prospect statistics” that tell us how many people were e-mailed your listing (these are people for whom your home met their search criteria).

Those statistics also tell us exactly how many buyers indicated “interested”, “maybe”, or “not interested”, and coupled with the total number, showing activity, and feedback, we can make some statistically significant predictions about the odds of striking at the current price.

Wasting weeks (and even months or years) at a price is one of the most common problems faced by current sellers, who often believe that simply by waiting, they´ll get their buyer.  In some rare cases (especially with highly unique properties) this is true, but in most cases, if the above stats are sufficiently bad, you are far better off opening up the market by moving to the next critical price point (so more buyers will see you, and so that you´ll be more competitive for the buyers that did see you).

Negotiating for Top Dollar

Once we have an offer, there is a final “pricing” exercise that takes place, and that is properly assessing the maximum price that our specific buyer is willing to pay.

Roughly, this involves determining not only their loan qualification amount, but also their “flight risk” — usually, this is their #2 choice. We can´t always find out the #2 choice, but when we can, it is extremely helpful.

If there is a close #2 choice, it is actually to the buyer´s benefit to let us know what we are competing with in their case, because we are more likely to respond to the market realities if we know them, and they have a better chance of getting their #1 choice (ultimately we have to price to competition anyway). If their #2 choice is a foreclosure or a short sale, we most likely will not try to compete, since many buyers don´t have the flexibility to pursue short sales, and we will get more money from such a buyer. On the other hand, if their #2 choice isn´t as good a value, we call their bluff.

There is much more to the pricing/negotiating process (can’t give away all of the trade secrets!), but hopefully this will give you some idea about our approach.  It turns out that the math matters, and our ability to pull out 3% more for home sellers than the vast majority of “top” Realtors is based on that math.  Generally speaking, it is based on reducing the error range in our initial predictions; recalibrating quickly to the “dual interest sweet spot”; and knowing exactly what cards we hold when it is time to call a buyer’s bluff.

Why does Econometric Home Valuation maximize expected sold price?

The simple answer is that pricing exactly at market value (if we knew actual current market value at time zero) maximizes the buyers who are interested in your home, and therefore the chance of dual interest.

As eBay users all know, dual interest (a bidding war) gets the most motivated buyer to reveal their hand (at least up to the level of the second highest bidder).

In a number of instances over the past 11 years of perfecting the pricing model, dual interest has pulled a stubborn lone buyer up (in 3 cases, by over $30,000).  The lone buyer makes a lowball offer on a modestly overpriced listing, and sits stubbornly on that price … until.  Upon moving the price to the next critical price point, another offer surfaced that forces the not-so-alone buyer to reveal their hand.

Then there are the much larger number of cases where we don’t even get the lowball offer, but where a mere $5,000 price change takes us from no offers to three or four within a week.  That’s because your home offers more relative value to the buyer who can barely afford you, and for whom you just meet their minimum requirements.  A bigger budget implies more choices, and corespondingly, higher expectations.

What my median 99% sold-to-list price proves conclusively is that you don’t need much wiggle room.  If you are priced right, you’ll sell at that price.  But if you are priced high, you’ll likely not get full market value.

Most of the other top 30 REALTORS in the Fox Valley actually beat our FSA Partner in the first 14 days, because he intentionally prices at the highest plausible price (with a better estimate of just what the highest plausible price is).  But his median market time still ends up being significantly lower, and his sold-to-list ratio ends up much higher (3% higher in the vast majority of cases).

About our FSA Pricing Partner and the Author of EHV Process visit:

The Pricing Process