Deciphering “Value Range Pricing” in Real Estate
There’s a “new” concept in real estate: Instead of publishing an asking price, you publish a range. For example, instead of listing a house for $349,900, you might list it for $339,900 – $375,000.
To understand this effect, we first have to think about a house with only one asking price. When a buyer sees a $350k asking price, he thinks, “I should be able to buy it for less.” It turns out that the average selling price of a house is 96% of the asking price. So the buyer could reasonably think he could buy it for $336k.
However, this is different when there are multiple bids on the house. (The selling realtor is happy to tell buyers when there are multiple bids.) In this situation, the buyers will typically bid higher than the asking price in hopes of making a more attractive offer than the other buyers. The size of the offer over the asking price depends on trends in the neighborhood and the number of buyers making offers, but 5% is a reasonable offer. That would yield a price of $367.5k.
What changes when instead of an asking price there is a price range? Imagine the price range for our house is set at $340K – $375K. First let’s look at the low end. If there is only one buyer, he is thinking, “If they are willing to accept $340K, they are probably willing to accept less.” They offer something below $340K. I’m thinking the final price will end up being somewhere around 96% of the $340K, which is only $326.4K. First piece of advice: If you decide to use a price range, set the low end of the range to what you would have set as your asking price.
Now let’s look at the high end. This only matters if there are multiple buyers. Before, when there was only one asking price with multiple buyers, the buyers tried to get a little above the asking price. Now there is a higher price for the buyers to coordinate around. Buyers will likely bid near or probably even over the $380K. This is significantly more than what they would have gotten with multiple buyers and a single asking price.
The real advantage to this method is in neighborhoods where demand for housing is greater than supply, where many houses get multiple buyers bidding on the house.
Here is the good news: Time and data will tell us the real impact. Someone will compare the results of the houses sold with range pricing vs. a single asking price and determine if it has any positive or negative effect.
A lesson we can all take away, though, is that for pricing we always have to put ourselves in the minds of our buyers.
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