What’s up with those value ranges?
I received an e-mail from a reader yesterday in which I was once again asked to unlock the mysteries of Value Range Pricing. Seller will entertain offers between $535,000 and $595,000. Why would anyone ever offer anything more than the bottom of the range? It’s a good question, and today, people rarely do.
We have talked about value ranges in the past. (”Haven’t we talked about everything in the past?” she asks rhetorically.) And, while I have generally been known to trumpet the virtues of range pricing, changing market dynamics have caused us to reevaluate our position.
The best explanation of value range pricing I have ever seen is still this post written by Broker Bryant. Back in March of last year, I said:
There is not a single market value for any given home, but a range of value, as each would-be buyer is going to perceive value to a varying degree. One person may be willing to pay a premium for your Koi pond or proximity to the neighborhood park while another may consider little personal value in these things. Our responsibility as agents is to find the guy who actually covets most those features which your home has to offer.
This range of value concept is why Value Range (VR) pricing can be such a powerful tool for maximizing a seller’s chance of success…
- VR pricing establishes a range within the seller is willing to negotiate.
- A proper range will include a low number lower than the market’s perception of value and a high number higher, thus giving both parties an opportunity to negotiate their way to a palatable price.
- VR pricing benefits the seller by providing a wide berth within which to maneuver. The home will be exposed to a larger potential buyer pool, and the likelihood of finding the one buyer who values the home most is increased.
- VR pricing benefits the buyer by exposing them to a property they might not have otherwise seen and by giving them the confidence to submit an offer anywhere within the range knowing that they won’t be thrown to the curb. This is because the seller is obligated to “respond” to any offer written in the range; that response can be an acceptance or a counter offer, but it can not be an outright rejection.
Fast forward to last August where I spoke of how I was rethinking my position in favor of value range pricing:
We used to say, where value range pricing is concerned, sellers see the top, buyers see the bottom and agents see the middle. What I was really interested in this morning was whether or not this tired mantra still holds true in a market of deal-seeking, emboldened, buyers, buyers who are all at once fearful of the market yet fearless when it comes to submitting an offer.
Of the 25 value range-priced sales in the past 30 days, just over 40% of these sold below the low end of the range. Three others sold at the bottom. As an agent who uses value range pricing more often than not, my only surprise was that sold-below-bottom cases were not greater in number, yet I think this is a trend that will continue until our market stabilizes… It seems that now, sellers see the middle, agents see the bottom, and buyers see the bottom as “full price”.
Today, I find that last entry somewhat prophetic. We still find ourselves in situations where value range pricing makes sense, but these situations are far fewer. Sometimes, a truly unique home will beg the use of a value range price. Maybe the home is in fact significantly superior to recently sold homes in the neighborhood. The higher end of the range may, in these cases, be closer to true market value, but you must first be able to get the buyer inside so that you can prove it. Thus, a lower number at the bottom. Now, we often find ourselves using range pricing as a way to settle a bet. If the seller’s perception of market value is dramatically different from our own, a value range helps everyone sleep nights, with the high end appeasing the seller and low end helping to ensure that the home is at least shown.
Ultimately, regardless of pricing structure, the buyers are the market, and they are going to determine value. The primary goal with any pricing structure is to get them in the door.
{ 14 comments… read them below or add one }
Tara Jacobsen
06.13.08 at 3:42 pm
We had one house listed that was really fabulous, waterfront with wrap-around porches and a dock with a lift. The owner was smart and wanted to price at a competitive price so we listed it at just under a million. Over the course of time we realized that we were missing showings because agents were not looking for that type of house under a million! We went to high (1.2 Million) and low ($999,999) to get more showings - weird, but it worked!!!
Kris Berg
06.13.08 at 3:45 pm
Tara - Now, there is a twist I hadn’t considered! Funny story!
John K
06.14.08 at 8:58 am
I would certainly consider the lower end of the value range the “real” listing price, realizing of course maybe it was lower than what a seller might actually accept and perhaps they were just trying to get more traffic to their home where someone might fall in love with it. I would very likely offer something below the low end pricing in today’s market. I wouldn’t be offended at the high end price.
Thinking of sales strategies, my brother owns a incredibly beautiful weekend home in Julian, on five acres. He loves it up there, but it is getting harder for him to go up there from San Diego on the weekends, because of a busy personal and work life. He was telling me yesterday that he has noticed a few high-priced homes selling on his street recently, three of which were higher priced than his home. He called a local realtor, someone he has known well for over 20 years, and said he doesn’t want to go through the hassle of listing it, but he would give her a key to the home and she could show it when she had buyers in the nearby area. Particularly if the buyers say the are not seeing what they like, she can run by my brother’s well-maintained and lovely home. He is not motivated to sell, but if someone fell in love with it, which is possible, he would accept a market price, whatever that may be these days. He doubts he will sell it via this method, but it might. This “strategy” wouldn’t work for most homes, but if one has a unique home I could see where it might work.
Smithers
06.14.08 at 12:23 pm
The “I will entertain your offer” range is a big put-off, and makes me assume (correctly or otherwise) that the seller thinks it is still 2005, and that there is no point in dealing with them.
Jakob
06.14.08 at 3:15 pm
Interesting… I can kind of see the argument to get people in the door. But as someone posted on sdlookup, would you recommend buyers present a range as well? “I’ll offer between 500,000 and 510,000″. I’m with Smithers, overall the whole range concept seems arrogant and silly.
John K
06.14.08 at 6:41 pm
That is a funny concept, having the buyers offer a range. Maybe it should be a range with a time limit. Say something like I will leave my offer on the table for up to 4 days, but each day you wait the price goes down by $50K. Or, if you wait to hit my offer on the fourth day you have to finance $50K as a seller carryback second with a rate of 4%. OK, I’m not serious but it may make as much sense as a value range for sellers. Seriously, I still wouldn’t be offended by their dreams of the upper range. Let folks dream a bit before reality hits in. I don’t consider that arrogant, just a bit of wishful thinking.
Sash
06.16.08 at 8:11 am
Lol, that’s funny. Crazy what happens.
Sash
Sven
06.16.08 at 11:32 am
I was told once that in California due to the Truth in Advertising act that people had value ranges so the seller could still negotiate if they got an offer at their asking price. From what I’ve heard, if you get a contingency free offer at your asking price (with no range), you have to take it. You can be sued if you don’t. While if you have an asking range, they would have to offer the top end which is ideally a number so high that you would be happy if they did.
Not sure how factual this information is. I heard it from two different sources on real estate forums.
On a side note, we just had the worst May in Southern California in more than 20 years for real estate sales volume. (with the ever useless/meaningless Median price falling 27% year over year). I’m waiting to see the Shiller graph for May.
Kris Berg
06.16.08 at 2:27 pm
Sorry about my absence (and she says this naively assuming someone actually noticed). My youngest munchkin is graduating from high school tonight, and that in combination with my job-thing has been keeping me a bit preoccupied.
Briefly, though, value ranges used to work marvelously - They opened more options for the buyers and maximized the sale price for the sellers. Today, they are more often than not a little goofy, as you all pointed out.
An aside to Sven: I do not believe that is correct. (I inserted the obligatory qualifyer because “they” make me.) No one is every going to make a seller actually sell if they don’t want to just because the home is listed. A commission might be owed at full price, but there is always the caveat of “acceptable terms.” What does that mean? Well, if the seller gets a full price offer and doesn’t want to sell, I suppose it could mean a three-hour escrow with a 48 month rent-back provision. Value ranges are a pricing strategy intended to shorten market time and maximize sale price period. Studies have shown that VR pricing has been historically successful in accomplishing both of these goals.
Off to hear Pomp and Circumstance.
Smithers
06.16.08 at 6:56 pm
Kris and Steve,
Congratulations on surviving with your daughter through high school, and I hope you enjoy(ed) the ceremony. We went to one for our oldest son last Thursday. The compressed air horns were obnoxious, but otherwise it made me very proud (and feel very old) to watch him cross the stage.
Regarding the topic, my view as a buyer is that the list price is telling me the seller’s expectations. If (IMO) it is too high, I would not bother to even look at the property, since my assumption is that the seller will not consider coming down to what I think is reasonable, so it would be wasting everyone’s time.
With VR pricing, if the bottom figure is not a “no brainer low ball less than competing FC listing prices”, then I would pass on the property for the same reason, since I would assume the seller sees the low number of their range as their absolute low number, and again would be a waste of time to proceed.
So, I could see VR pricing being effective if the low end of the range is “too good to be true”, but only in that case.
You guys are in the day-to-day business of selling houses to buyers, whereas I am only an occasional buyer. You know much better than I do how to sell houses.
(Phil, my spam word is “cheers”. I am cooperating with a Bridgeport IPA)
Kris Berg
06.17.08 at 6:33 am
Oh, the air horns, Smithers! Steve and I were going crazy, but then I reflected that the obnoxious noise-makers were just as proud of their little ducklings as were we. Guess people just communicate their joy in different ways. (I still think those things should be outlawed.) Congratulations on your son’s graduation, by the way.
More on point, my advice would be to not let a value range dissuade you if you only see value below the range. About half of the offers we see are of this variety, and we almost always encourage the sellers to at least counter. It never ceases to amaze us how the bottom lines of sellers and the most buyers are willing to pay often morph dramatically once earnest negotiations commence.
Galen
06.17.08 at 2:13 pm
Ugh - value pricing seems like a mess to me too. Here in Seattle folks used to maximize prices with bidding wars.
Seems like bait-and-switch if sellers wouldn’t actually sell for the lowest price (not that underpricing by 20%, then letting people bid up the price was much more honest), but I suppose if it worked, it worked.
Jack
06.23.08 at 5:34 pm
Value pricing is such nonsense, especially in today’s market. We recently put an offer on a home at the low range and were countered by the seller at his high range–and get this: they won’t consider anything less than that high range number. My question: if they won’t consider anything lower than that, why not just use that as their minimum range? It’s a waste of all our time.
Kris Berg
06.23.08 at 5:43 pm
Jack, We too are seeing the nonsense of misused value ranges. The situation you describe I have seen many times myself lately, and it starts to feel suspiciously like misrepresentation.