Active Rain January 30, 2009

The Cost of Time and Money (or, J. Philip’s Law of Pricing)

I was inspired by Bill Gassett’s recent posting on why listings expire unsold to share what I tell people when it comes to pricing their homes. Simply put, time costs money and money costs time. The faster you need to sell, the less you’ll get. The more money you want, the longer you’ll have to wait. Let’s take a house that I think will probably sell for $375,000, bearing in mind that in my market, the same house may have sold in 2005 for $475,000 (ouch).

J. Philip's Law of Pricing

Some people are more motivated than others. It need not be duress, they just want to get the show on the road and get packing. These are the people who don’t need their arms twisted about the whole different set of eyeballs their home will get at $399,900 than $409,900. The house shouldn’t take too long to sell. It may not sell the first weekend, but the odds of it getting stale are low.

Others are in hot water. They can’t wait 90 days. They need to tell a collection department (or a judge) that they have a contract on their home in order to hold off a foreclosure proceeding. They may need to price it at $349,900. It might get bid up higher because the market is efficient, but regardless, that will get the people moving on the place. They get less money but they benefit with a faster timetable. Time costs money.

The last group isn’t motivated by time so much as they are on money. For one reason or another, they want to hold out for their price. Let’s suppose these people want $400,000 or more. They might be stubborn, egotistical, or just in doubt about the true conditions of the economy. Or, they might just be of a more speculative mindset and believe that there is one special buyer out there that might pay them a premium for the place because of scarcity or condition. They might be right, but these clients will have to be prepared to wait longer than most of their peers. Again, time is paid for in money, but money’s cost is more time.

If the latter group is educated by their experience after a month or two, they’ll reduce their price. Some don’t get it and are on their 3rd broker in 2 years. Sometimes they will get an offer from that one special buyer but there’s no guarantee that the appraiser will agree, and that is a discussion for another day. If higher-priced people know in advance that they’ll have to wait, they should have less of a problem with a higher commission, a longer listing contract, or both.

It is an immutable dynamic in my experience, and if explained to sellers in advance, it saves me from being blamed for poor price advice, or, worse, priming the pump for another broker later on.