Rehabbers: What Pricing Strategy do you Use?

Question

I am working on a blog post about this, but I wanted to get some feedback from you experts at BP.

There seems to be two trains of thoughts in the rehab world on how to price a property:

1. List the property under market value, create a bidding war

These people want to turn their money asap. Put the property in escrow asap and hopefully pick between multiple offers. They made their margin when they bought the property and just want to keep their money moving to the next deal.

2. List the property at the top end of market value and go for top dollar

These people see the value in their property and don't mind waiting. Appraisals will be a challenge and days on market might be longer, but if the right buyer comes along you get a good profit bonus.

We have tried both and I know what camp we live in right now. Before I give me opinion I'd like to see what you guys do?

Eric M. · Answer

I think creating a bidding war with a low listing is a uniquely California thing (and maybe a few other places). In most parts of the country, people are not conditioned to offer over the list price, no matter how low it might be.

Scott Hubbard · Answer

In my own market, there is little chance of a retail bidding war, so this is where the supply and demand paradigm is your best gauge for choosing your strategy. I hesitate to use option 1 in my market as demand is not strong enough. If I list below market value, I will get an offer substantially less than even my already low list price. Regardless of your marketing strategy, in many markets including my own, you need a value proposition. Since demand is retail demand is to relatively low, I prefer to offer a better product than my competitor just as Will does.

James Vermillion · Answer

Finding the listing price is one of the areas of our business we are trying to improve on, as we have had mixed results. The first property sold very quickly for very close to list price. The second property took one large reduction and then a bidding war occurred, getting us close to list price. The third we had issues with. It took multiple reductions, ultimately selling to a cash buyer for $20K under the appraisal; luckily we had enough room to still make a decent problem. We have tried to improve our business by making things as systematic as possible, but exit pricing is one area we are still experimenting with.

Chris Calabrese · Answer

We tend to list at the top end of the market. The main reason is that our houses are generally one of the nicest in the neighborhood when we're done, and we've found that people are willing to pay a premium for quality once you get them in the door. I always suggest to investors, or any home seller, to list at the highest price you can that will still generate showings. Once you get buyers in the door, you can always negotiate, but if no one sees the house, it doesn't matter how it's priced. You can ask agents for your active comps how much activity they've had, or even pretend to be a buyer and try to fish out some info.

Austin Good · Answer

I table all of my comps before I start a rehab and besides columns for Sales Price, $/sqft, etc, I also have columns for: - Curb Appeal (1-10) - Flooring Types (Wood,Carpet, Tile, Laminate) - Staircase(Wrought Iron Spindles or Wood) - Master Bathroom (Type Vanity Tops? Updated Plumbing Fixtures? Finish of Plumbing Fixtures? Bath/Shower Finish?) - Ceiling fans/Door Knobs/Light Fixtures(New & Updated? Oil Rubbed Bronze,Brushed Nickel/Satin,Builder Grade Gold?) - Kitchen Countertops (Granite,Corian,Laminate?) - Kitchen Cabinets (Nice looking 42 inch or dated looking small ones? Paint or Stain Grade?) - Kitchen Appliances (Outdated or Updated? Stainless Steel,Black or White?) This allows me to make sure that I can be a cut above in a few categories to ensure that I am the best price/best product when I put the house on the market. I can still reach for the higher end of the spectrum in terms of resell price as long as I am a cut above in a couple categories and at least the same as the highest in the other categories. Another thing I have done is look at the average days on market of the sold comps and if I notice a trend of the area selling quickly, say 30 days or less on average then I usually am able to push the value up a little more since the demand is obviously more in this area.

Will Barnard · Answer

Since I work the So CAL market, we can have drastic price changes from one subdivision to another, and on one side of a main drag street to another, so picking exit values can be, as jason stated, an art form. With that said, I personally try not to leave any money on the table and do so by pricing my properties at the highest level I can that will still get appraised at that value and still attract enough buyers to get a quick sale. In addition to this, my properties have the extra touches and quality that the listed competition does not usually have, thus I can ask and get my price most of the time. There have been occassions where I had to reduce price and one occassion where I failed to see an issue that would have a negative affect on my subject property in that it was between an old neighborhood and a good neighborhood so the subject property was not as conforming as I would have hoped, thus my price sold ended up $30k below what I started with. I originally listed for $398k and sold for $368, still turned a profit, but a small one rather than a large one. Market conditions and inventory levels also will change from area to area. In my area, there are lots of REO properties and even more short sales, so the standard sale competition is low, thus I can price my properties at the higher end of the spectrum and usually get it.

J Scott · Answer

We try to price at the point where we believe there's about 75% chance we'll get a full-priced contract. Given that we tend to price near the top of where an appraisal will come in, there's not much reason to list higher, and given that we'll generally get an acceptable offer (full priced or not) within a couple weeks, there's no reason for us to list lower. Like Will said, of course, every market is different, so what works for me certainly may not work for others. In our market, pricing is actually pretty easy because of the homogeneous types of houses and neighborhoods we buy/sell in; I envy those rehabbers who work in markets where pricing is an art because prices fluctuate drastically street by street. But, knowing Steve L (and knowing that he's done about 3x as many projects as I've done in the past few years in the SoCal market), I'm sure he's aware of this as well and is probably pretty good at pricing his resales...

Don Hines · Answer

I allow the neighbors reactions to dictate my final price (after studying current comps; for sale and sold). As example, my current rehab that is on the market at a price I derived from visiting with the neighbors. My open house comments from visitors has reaffirmed my price. Even the realtors that are looking out for buyers for us have said it is priced fair. I will leave it there until it stops getting attention. You never know... If I was doing this for my meat and taters, I would price it to move quickly. Don

Gene Hacker · Answer

When I was selling...I had a different strategy for each. My main influence was the supply/demand equation. If there were similar listings then I would be very competitive. If there wasn't much for sale...I would shoot for the stars. I haven't sold a house since 2006...and it was a different market then.

Steve L. · Answer

I am not asking for the magic pill. Both answers have validity and make sense depending on the situation. How do you price your properties and why?