Deadly Pricing Mistakes Most Real Estate Investors Make

C A S C A D E

Of all the “tricks” I know that can sell a property quickly, I'd say the most powerful tactic is to price your property right in the first place.

It may sound like an obvious answer – but there is a lot more to this process than just picking the right number. Even when you have a reliable, data-driven valuation of your property, you've only just begun to determine what your actual asking price should be.

What is Value?

To start with, we need to establish what the word “value” actually means to your buyer.

If you expect to sell any piece of real estate, your buyer needs to genuinely believe that your property is worth MORE than the price they're paying for it.

Let me reiterate that… in the mind of your buyer – the value shouldn't just match your asking price – the value needs to EXCEED your asking price.

MarketValueThink about it – ANYBODY can do a “like-kind exchange” and buy a property for exactly what it's worth – there are thousands of properties like this on the market right now that aren't selling – there's no shortage of them, take your pick!

And therein lies the problem… neither you or I are going to rush out and buy any of these properties because we don't see any excess value in them (at least, not until they drop their prices or make other dramatic improvements).

The margin between your asking price and the buyer's “perceived value” is the whole reason why real estate transactions happen. If you aren't able to show your buyers that they're getting a great deal, it's going to be very, very difficult (if not impossible) to sell your property.

Luckily – there are a lot of things you can do to help your buyer see more value in your property, but make no mistake about it – if you're not able to show them this margin of excess value, your property isn't going to sell.

What Does Your Buyer Want?

The beauty of correctly pricing your property is that when it's priced right, it will sell itself.

You won't have to “convince” anybody that your property is a great deal because when people look at the information you've presented, the value will be obvious.

However, the only way to price your property correctly is to understand what your buyer wants. What do they need to see in order to say “Yes!”? Here are some questions to think about:

  • What do these people care about most?
  • Why would they click on your listing in the first place?
  • What will they be using the property for?
  • How can you give them what they want?

Carnegie1Unfortunately, most buyers aren't going to come right out and tell you these answers. You'll have to do some digging and anticipate their needs based on what you can learn from them.

Every buyer has a different set of needs, which means different people will assign different values to the same piece of real estate. In other words – your property is worth more to some people than it is to others.

Just look at how auctions work – they are the perfect illustration of how different investors will value the same property at completely different prices. Every auction ends with only one winner – because everyone has a unique set of needs and a different point at which they'll say “that's enough” and walk away from a deal.

With this concept in mind – let's talk about a few pricing strategies that will help you extract the most value from each property you sell.

Buyer Profiling

If some buyers are willing to pay more than others, how can you find the ones that will pay the most?

You can do it by profiling your buyers and then pricing your property in a way that makes it accessible to as many different types of “profiles” as possible. When you do this effectively, you'll be able to:

  • Sell your property faster.
  • Sell your property for more money.
  • Find buyers who are giddy with joy because you're giving them exactly what they're looking for!

I'll let you in on a little secret…  people LOVE to buy things. People buy real estate because they believe it's going to solve a problem or meet a crucial need in their lives (e.g. – housing for themselves, a great investment opportunity, cash flow to finance their lifestyle, etc). When a buyer truly believes that they're receiving value in excess of what they are paying, they'll be throwing their money at you! And think about it…   it they believe they're going to be significantly better off as a result of their purchase, why wouldn't they?

The trick is to simply:

  1. Know what your property is worth to your market.
  2. Understand the needs of the “buyer profiles” in your market.
  3. Communicate the obvious value and benefits that apply to ALL of these buyer profiles.

Giving Buyers What They Want

There are a few types of “buyer profiles” that exist in almost every situation and in every market:

The Cash Rich Buyer

This person is highly liquid, with a lot of cash sitting in their bank account and tons of buying power. They could easily pay your full asking price, right now, with the cash in their pocket…   but just like every other buyer, they're looking for a good deal and since Cash Rich Buyers can buy almost anything they want, they're hunting for value in the form of a discount.

Example: If you have a $100,000 property and you want it to appeal to a Cash-Rich Buyer, make sure they understand that they can get the discount they're looking for. Just include a section in your description (or even your headline) that says something like this:

ATTENTION CASH BUYERS: Want an instant discount on this property? Close on this purchase by <<Insert Deadline>> and you'll receive a guaranteed 15% off the list price, with an automatic price reduction to $85,000 – no questions asked!

Of course this is just an example (you can use different wording and your discount can be higher or lower), but for a buyer who needs to see a discount in order to feel good about buying a property – this is precisely the kind of “hot button” that could push them to pick up the phone and call you.

The Cash Strapped Buyer

Most markets are FULL of Cash-Strapped Buyers. This person has low liquidity, limited cash in their bank account and not a lot of buying power. They're well aware of the fact that banks won't give them money and their options are limited. Like most people, they realize that beggars can't be choosers and since Cash-Strapped Buyers are looking for a property they can buy with their limited cash on hand, they're looking for value in the form of easy financing & affordability and you can give them this value with the option of Seller Financing.

Example: If you have a $100,000 property and you want it to appeal to a Cash-Strapped Buyer, make sure they understand that they can get this property without talking to a bank. Just include a section in your description (or even your headline) that explains your financing terms:

SELLER FINANCING AVAILABLE! Buy this property with a low down payment of $10,000, with payments of $795/mo. Call for details!

The real kicker is – most Cash-Strapped Buyers don't care what kind of interest rate of monthly fees you're charging (the example above is with a ridiculously high 9.85% interest rate and a $15 monthly servicing fee). They will gladly pay it because they only care about one thing… can they afford the monthly payment? 

It's the same reason they're cash-strapped in the first place – because they don't care about getting a reasonable price, they only care about the monthly expense. Often, these people are the type who live paycheck-to-paycheck, and they have a limited budget to work with, so if you can make it fit within their budget, they'll gladly pay your full asking price – maybe even more!

The Hybrid Buyer

The reality is – the vast majority of the buyers in your market are going to fall somewhere in between our definitions of “Cash Rich” and “Cash-Strapped”.

  • Some of them will have some cash, but not enough to buy your property outright.
  • Some will have tons of cash, but they don't want to spend it.
  • Some will have very little cash, but they also care about getting a slightly lower price.

For the buyer who falls inside this territory, we're going to have to raise the perceived value in this person's mind. We can do this in several ways:

Give them a virtual tour like this:

Give them a money back guarantee like this:

snapshot (20)

Make your listing stand out with some professional pictures like this:

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x6VeZAhRpqd8LczPAOGC_2014-08-27 02.46.52 1

apx8EPiSnWoYHSEiUENI_14553734675_699b2aa038_o

You can also bundle your property together with a handful of other small benefits that will help your buyer to see more “perceived value” in your property.

For example – when someone buys your property, they'll also get the following…

  • A 10% discount off any other properties they buy from you in the future.
  • A professional survey of the property (a small fee, which you will pay for).
  • A limited number of (minimal) improvements to the property to fix any known issues.
  • A professional property report (which you can simply pull from a real estate data service).
  • Title Insurance and a Limited Home Warranty (depending on the type of property).

The Goal

The whole goal of your pricing strategy should be to make your property appeal to every kind of buyer in your market and to make the most money from the buyers who are willing to pay a higher price. When you're offering the right benefits that appeal to every possible kind of buyer, you'll be opening the doors to MANY more offers that otherwise wouldn't come in (because their needs aren't being met).

C L O U D

With the time value of money – you should feel comfortable selling to either one of these buyers (or even a hybrid of the two) because one way or another, you're going to get the same amount of value that YOU need out of your property. Whether you accept slightly less cash now OR significantly more money over the course of time – both situations will give you a similar value in the end.

When you hit all the hot buttons that different customers want, you're going to sell your property MUCH faster than if you only offer them one narrow path (i.e., full asking price, all-cash, non-negotiable).

About the author

Seth Williams is a land investor and residential income property owner, with hundreds of closed transactions and nearly a decade of experience in the commercial real estate banking industry. He is also the Founder of REtipster.com - a real estate investing blog that offers real world guidance for part-time real estate investors.

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  1. linda says:

    Great article..thanks for posting…

    1. Seth Williams says:

      Absolutely – thanks for checking it out Linda!

  2. Quantum Real Estate Dubai says:

    We love the the “Bundle Offer” This is used by us a lot and works really well for referral/repeat business.

    Great Post

    1. Seth Williams says:

      That’s great to know – thanks for sharing!

  3. Patrick says:

    Seth
    Do you have a separate section in your ad where you specify cash buyer and bullets for what they get and then section for non cash buyer? Does this cause a problem where non cash buyer then says, I want title insurance, I want survey etc.

    1. Seth Williams says:

      Hi Patrick, I don’t do this in exactly in the way you’re describing, but I do have a section that specifies what a Seller Financed transaction will look like for the buyer.

      And no – it doesn’t cause any closing problems, you just have to understand how the mechanics work in a seller financed transaction. If the buyer wants title insurance and a survey, then they can pay for it – either with cash out of their own pocket (if they have it) or if I’m comfortable with it, I’ll even finance these costs for them (I pay for these extras upfront and then add it to the balance of their note with me).

      The beauty of seller financing is that if you can do it, there are all sorts of ways you can structure the transaction. It’s really however the deal will work to the benefit of you and your buyer (assuming it stays within the confines of the law).

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