How to Price Your Real Estate Investment Accurately When Selling
Now that you have held your real estate investment property to your time horizon, it’s now time to sell. But for how much?
As with most investment decisions, determining the best way to proceed with an investment property isn’t simple. There are a lot of factors that go into things like pricing a property, from market conditions to speed of sale. While it would be nice to earn a huge profit on every fix-and-flip or relinquished rental property, this simply isn’t reasonable. As with any investment, there will be ups and downs.
The appropriateness of pricing can essentially make or break the outcome of any transaction. To make the most of your next property sale, be sure your pricing strategy is on point.
Avoid the Common Mistakes
Pricing is a challenge. Regardless of your perspective, it’s not going to be as straightforward as you want it to be. For this reason, many real estate investors resort to some seemingly-effective tactics, but essentially are met with a roadblock. With these kinds of tactics, any success is going to be more coincidental than intentional.
When approaching pricing, avoid these common pitfalls:
- Pricing by Square Foot: A strangely popular approach to pricing for novices, going solely by square foot may seem like an easy path that avoids significant grief. However, this is not realistic. While assigning a dollar amount per square foot and doing the math is certainly a good way to quickly come up with price tag, doing so ignores the reality of a property. Taking this approach generally means pricing without a strong knowledge of the market, be it upgrades or something else, that can lead to either leaving money on the table or listing your property at an inflated rate.
- Ignoring the Local Market: A large single-family home may cost $150,000 in Ohio but it will be significantly more in California. This is an extreme example, but by pricing properties based on what you want to see according to national trends, you’re ignoring the idiosyncrasies of the local market. Prices can vary significantly between the city and its suburbs and among various neighborhoods. Take an in-depth view, not a holistic one, when it comes to pricing.
- Prioritizing Unrealistic Desires: Most property investors have a profit target in mind when they purchase a property to fix and flip, but things don’t always go according to plan. Sometimes, repairs are more extensive than previously assumed or renovations go awry, leading to a big expense you didn’t see coming. It may be tempting to attempt to lift prices in an effort to make your money back, but buyers don’t care about lining your pockets – they care about getting a good deal or not worse than market rate.
Do Your Due Diligence
The common advice that seasoned investors should do their due diligence may feel a little like listening to a broken record, but the importance of proper research can’t be understated. Picking a price quickly isn’t a good way to jump into the market; without a deep understanding of the local economy, it’s virtually impossible to be sure you’re making the right choices.
Before picking a price that seems fair, do as much research as necessary. This can mean reading industry publications, speaking with other investors, reading local real estate transactions, and even performing your own projections regarding the current and future state of your local market.
In your research, make sure these targets are taken into consideration.
The street your property is on can have a huge influence on pricing. As neighborhoods and zip codes shift, so do prices; a single cross-street can be the difference between a high price and a low one. While it’s best to know this before buying, be sure you’re still educated on the demarcation of neighborhoods and communities before listing your house for sale.
Keep in mind that school districts play a role in neighborhoods as well. As district lines are often arbitrary, it’s important to know the ratings of area schools and the regulations regarding open enrollment. Being located in a poor school district won’t preclude sales – plenty of families plan on private school or have adult children no longer in need of schooling – but it can play a role in your pricing and marketing strategies.
Who is buying in the neighborhood surrounding your home? Is it newly married millennials? Parents with young children? Aging families with adult children? Before setting pricing, you need to know who you are selling to, the kind of income brackets that fall into the area, and the ways in which your property can accommodate the needs of those shopping for housing.
The current state of residents is important, but also be aware of emerging trends. For example, if a new magnet school recently opened, the age of residents will likely begin to drop as young families are attracted to the area. Keep tabs on everything from crime to new stores, restaurants, and employers to best understand how a particular city or region is evolving.
Prioritization of Speed vs. Pricing
Before listing a property, you need to decide what means more to you: selling fast or turning the biggest profit. There’s not necessarily a right answer – the time value of money can weigh the scales in either direction – but before putting your property on the market, you need to know what means most to you.
If you are interested in a quick sale to repay debts and invest in future properties, speed is likely of the essence. This is the case for many investors, particularly those who prioritize fix and flips. When capital remains tied up in a finished property, it can’t be used in pursuit of further profit.
Other investors, however, aren’t in as big of a hurry. Those who have plenty of liquid cash to invest in additional properties may not need to sell rapidly and instead are willing to wait until they get the right price. Selling at a premium can be a waiting game, but for those with time to spare, it can pay off.
For those with an emphasis on speed, it’s important to realize that going with a high price may work against this goal. By lowering your estimates slightly, it’s possible to present a great deal to buyers that will incentivize moving quickly. This isn’t to say that your target price won’t result in a fast sale, but there’s no way to know that until you enter the market. As such, emphasizing speed often means taking a hit on price.
If turning the largest profit possible is your endgame, it’s okay to start out with a reasonable rate that will likely result in a sale, even if it takes a few months to get there. Instead of pushing prices down for the sake of speed, it’s safe to elevate estimates slightly in hopes it will pay out in the end.
Use of a Realtor
Many real estate investors are extremely knowledgeable in the real estate market with a large network and do not require the assistance of real estate agents. However, some do. There’s no right or wrong approach, but using a realtor can affect your perspective on pricing.
In typical real estate transactions, sellers cover the cost of agent commissions. This can be a significant cost, shaving thousands off of the cost of a typical home sale, but result in a time savings for you. If you are using a realtor, this extra expense should be factored into your strategy, particularly if you have a profit target you are striving to hit.
Tips and Tricks for Success
Pricing isn’t a perfect science, but there are several tips you can use to ensure your property is most likely to sell at the right price for your needs.
When in doubt, be conservative. In some cases, aggressive pricing can be an advantage, but in most, it’s setting you up for unnecessary challenges. When pricing a property, it’s best to come in as close to a realistic rate as possible; going above and beyond this point may work out in your favor, but it’s more likely to hold you back.
Stick to Your Guns
Once you have chosen a price, you obviously did so for a reason. You did your homework, analyzed the area market and the opportunities available, and made a decision accordingly. If there’s not much interest in the first few weeks, it’s certainly tempting to drop your prices and try to up the interest. However, this isn’t a great strategy.
When pricing drops rapidly, it often indicates a problem with the property. It’s certainly not necessarily the case – sometimes, a great property simply doesn’t generate any interest for any number of issues – but to buyers, this can send up red flags. If you were confident enough to settle on this number at first, you should be confident to stand by it.
At a certain point, a stark lack of interest over a long period of time may require an adjustment, but stand strong in the immediate term. Having said that…
Negotiate When Necessary
If your property is priced too high or is otherwise inappropriate for the area market, the time to make compromises on pricing is after a buyer is interested. Your property may be priced too high – a lack of interest can signify this – and if it doesn’t look like a sale is happening any other way, it’s time to negotiate. Don’t let too much go if you’re not comfortable sacrificing profits, but be willing to be flexible if compelling offers are on the table. Don’t be afraid to go with your gut; if a potential buyer is too pushy or wants to go beyond your limits, it’s still okay to stand strong.
Selling investment property is both a science and an art. Part of the pricing process calls on experience, but a larger element should involve thorough research to ensure you’re on the right track. From understanding how not to approach pricing to taking time to manage due diligence and the prioritization of your goals, it’s possible to find a strong price that will help you succeed in your investment endeavors.
Scott Clift is a licensed real estate broker with Westpark Loans. He has been in the real estate industry since 1994. His team of seasoned professionals specialize in providing real estate loans for investors and other self-employed individuals. When you are ready to invest in real estate, call Westpark Loans to secure your financing at (844) 574-LOAN or by visiting westparkloans.com.