We rarely reduce our sales price, and often raise them on slow moving properties. That makes no sense does it? Actually it does! We had a letter from a student recently who was having trouble selling a property. He had the property listed with a Realtor, who was now insisting that the price should be reduced $10,000. The student said that he would still make money at the lower price, but that it would mean the difference in trading his old car for a brand new sparkly one, or a slightly less ugly used car. The student asked what I thought, and I responded as follows:
People typically shop for houses by the monthly payment they can afford. In other words, if they are comfortable making a $1,200 per month payment for their home, the mortgage broker or Realtor tells them what they can afford in terms of price at prevailing interest rates. People thus want to get the most they can for their $1,200 or whatever their magic payment number happens to be. Reducing the price by $10,000 is going to be less than $100 per month in terms of payment. No Buyer is going to say, “Well, I wouldn't pay $1,200 per month for that house, but sign me up now for $1,160!!!” You are not likely to move into a whole new group of buyers by reducing your price that much. You may catch one or two potential folks who can afford $1,160 on their top end, but you are not going to open the floodgates by any stretch of the imagination. If you cut the price $60,000, you would get more buyers in who could not afford the higher price, but such a cut is not likely if you want to avoid losing money on this deal.
Thus cutting price is not an effective solution, as you are really not going to be able to cut the price enough to get a great deal of additional buyers in to look at the house and get a sale. The realtor is grasping for straws, and cutting price is the only way that they can think of to sell homes for the most part. What I do, and we do cover this in the course, is boost content. I want to give them more with the house than I gave originally. I can spend a few extra thousand and greatly increase the wow factor of the house, and get people excited. People buy houses on emotion, and then seek to rationalize their decision with logic, payment tables, and statements on how great of an “investment” the home will make.
The most common thing that we have done is add a deck onto the back of the house. This always has worked for us when we could not get a house to sell. Typically we will get an offer within 2 weeks when we have added the deck. I have even increased the cost to cover the cost of the deck. Even if I don't raise the price, do you see how spending $2,500 on a deck and keeping the same asking price (which effectively is equal to a $2,500 price cut) is superior to a $10,000 price cut, or even a $15,000 price cut? A big new deck will excite people much more than a $60 monthly savings any day. People think that decks are much more valuable than they are in terms of our costs to build them. We received a quote recently of $1,200 plus materials for a deck on a house.
Other ideas are picket fences for homes with small front yards, landscaping and/or sod, security system and appliances, add crown molding or wainscoting to key rooms such as the living and dining room. You can also include a home warranty with the home if the systems or plumbing are old (get the Realtor to agree to pay half). Accessorize the bathrooms with guest towels, pretty soaps, and candles (not lit) to create more mood. Add new carpet if the old carpet is looking ugly, or paint if you were trying to sell the house without repainting. Refinishing hardwood floors also can help.
We have been caught in the partial mini-rehab spiral a couple of times. Sometimes we like to get in and do minor work to clean it up and sell without much of a fix-up. This is a great strategy that I still endorse. We get more than we would by wholesaling to another investor, and can often sell directly to a homeowner/owner-occupant. We get in and out quickly. However, sometimes we don't do enough, or a house just can't sell unless it looks really pretty. We have pulled such properties from the market, done some more fix up (especially with paint and whatever we can do for the least cost), and put it back on the market. This typically is enough to get them to sell. A minimal investment of a few more thousand trumps a radical price cut.
Thus in short, do not cut price if you have done your market research and feel that the price you are asking is really fair. Spend a little more and glitz up what you already have. Decks are the best return on the dollar in my market. We generally go for 14×16 if there is space. Realtors love to cut prices out of panic. As investors, we have to keep a level head and go in and figure out what has to be done to add some “sizzle to the steak.”
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