The Importance Of Pricing A Property Correctly When Selling
When selling a property, the price you set for it can play a significant role in the outcome of the transaction. If the starting point is too low or too high, you may have fewer chances of being able to attract the right buyers to the deal. Even after getting a valuation, you’ll want to think through how to place the property in the marketplace and get the maximum exposure for it (which you can learn about in a previous article).
Follow these strategies to avoid common mistakes when pricing a property:
Look at Comparable Sales
As you start the selling process, you may find a broker who provides a valuation that is higher than others. (You can learn more about how to value a property in the Sell High series of my podcast, “The Insider’s Edge to Real Estate Investing”). While this may seem promising, keep in mind that you’ll want to make sure the price fits with the market realities. Consider looking at comparable sales data in the same submarket and asset class. As you do so, remember that the information you find is a historical picture of how the market performed. Sales data is often released months after the initial bidding and closing for a property took place. For this reason, it serves as a rearview mirror that shows what has happened before.
For multifamily properties, you can check the price per unit, which is often available on public record. Also look at the cap rate, which is found by dividing the net operating income of the property by the sales price. Find out how the net operating income was determined, and investigate if projections were used, and whether the cap rate was reported by a data collection service or in the press. Look at the type of tenancy to see who is renting the property. A national credit tenant could have a tighter cap rate while a mom-and-pop business might have a higher one. Consider how long the place has been rented and how much time is remaining on any leases in place too.
Understand the Timing
As we’ve seen over the last several years, the market can have drastic swings in value. When you’re trying to price a property appropriately, you’ll need to price it in context to where the market is. As I mentioned earlier, comparable sales provide rear view indicators, and you’ll need to keep in mind that the transactions could have been carried out at a drastically different time. Starting in the middle of 2022, interest rates started increasing dramatically. A transaction in 2021 would have occurred in a very different market than what investors have faced since the middle of 2022.
Don’t Overprice the Property
It may be easy to think that starting with a high price will create room to negotiate lower, but this is often not the case. I have found that when a property is priced too high, serious buyers may not consider it as they will see the price as unrealistic. As a result, the property can linger on the market, and the longer it stays unsold, the more buyers may begin to question its value. They might wonder if something is wrong with the property or why it hasn’t sold, further driving down interest and perceived value. If later the owner has to drop the price, it could lead to a position of weakness during the negotiation process.
Avoid Underpricing the Property
On the flip side, underpricing a property also poses risks. While pricing slightly below market value can generate more interest and create a bidding war, pricing too low may result in a sale that doesn’t reflect the property’s true value. Sellers may receive quick offers, but if they haven't allowed the market time to respond, they could miss out on higher bids. Or an investor may purchase the property and then put in back on the market with an increased price. I describe an occasion in which my friend Matt Blesso found an underpriced opportunity and acquired it, and then went on to sell it for a much higher price, in my book, “The Insider’s Edge to Real Estate Investing.”
Set the Optimal Price
At Avison Young, our team has found that the best approach to pricing a property is often to aim for a value just above where it’s expected to sell. This strategy often encourages multiple buyers to engage in a bidding process, driving up the final sale price. When priced correctly, a property is more likely to attract serious buyers who see it as a reasonable investment, increasing the likelihood of competitive offers.
As you consider the right price for a property, you’ll want to work with an experienced broker who is familiar with the market. Look for someone who will help you set realistic expectations, compare your property to others that have recently sold, and be able to position your place correctly. By working within a set timeframe, you can increase your chances of getting the highest value for your property.