Range pricing is a very common listing strategy in Australia where instead of publishing a single asking price, a certain price range is given to buyers. For example, rather than listing a house for $1,000,000 your asking price is between $950,000 and $1,050,000.
To some people this pricing concept might seem strange as most of us are more familiar to seeing a single price for an item we want to purchase. However, psychological and mathematical justifications behind the range pricing strategy are quite interesting therefore it is very important for every home seller to know them in order to be able to make the best decisions for themselves and their family, independent of their agents advice.
When looking at the property price which is listed as a range, often a buyer considers the lower part of the range as the price a seller would accept, so most bids come on the lower end or even below that in some cases. The seller gets offers on the higher side of the range only if there is enough competition amongst potential buyers and which starts a bidding war.
At the end of the day the value of a property in the eyes of the buyer is still compared to other existing listings and overall average prices of similar properties in the area. Therefore if the price range is set inappropriately – for example most of it is set below market value – buyer offers might be even less lucrative than using a standard single price.
The goal of range pricing is to attract more people to your property. Theoretically it can do that because if there is a wider range of price there should be more potential buyers whose budget would match at least some portion of the price range. However, price ranges are usually quite small – by law only up to 10% in New South Wales – and therefore the pool of potential buyers can only increase ever so slightly. More people coming to inspect the property can be a good thing in regards to creating a perception of interest and competition. Unfortunately there is another argument as to why it is done so often which is something that adds no value to the vendor – the real estate agent is prospecting for new potential home sellers (remember, a lot of buyers often need to sell before they buy).
If the entire price range is set above the market value then the selling process is as long as selling with a single overpriced number and often ends in a long campaign with multiple price reductions. However, if the price range is set appropriately (best practice suggests the range to be set so the estimated property market value would be around the 15-20th percentile of the range). If the seller is willing to consider bids at the bottom of the range, it could save time but you have to be aware that this is only a couple of days on average Sydney. At the end of the day, how fast and for how much the property is sold still mostly depends on a well executed selling process, appropriate marketing campaign, the quality of presentation, your BATNA and etc.
The main idea behind range pricing is having exposure to more potential buyers which in theory should mean more lucrative offers. However, such offers should only be expected if there is a bidding war amongst the buyers therefore perfect conditions for this pricing strategy are when market demand is high. In a bear market when there is an oversupply of property and demand is limited hoping that buyers fight for your property would be quite naive. The same principles apply for auction and the reason your real estate agent will almost always push you to do auction regardless of market conditions is because it is a quicker way to guarantee themselves a sale, not because it makes more sense for you as a seller.
This comes from how property market value is estimated: using comparables, hedonic approach or any other valuation methodology, for the most part estimated market value is a price under which the likelihood of a sale is the highest.
The graph above visually depicts the demand and property market value interaction, where the demand for the property is high below its market value and starts dropping greatly after a certain point in price. Below market value the pool of people willing to buy the property is large, but it does not make much sense for the seller to pursue such price and when priced above market value the demand starts to drop sharply and the likelihood of finding a buyer who would be willing to pay more than market value is diminishing, hence the parabolic distribution of the sale likelihood around market value. Basically the price point of the estimated market value is an equilibrium where you still have a large amount of potential buyers with the price being reasonable for a seller.
However, from a sellers perspective, there are still a lot of potential buyers left who would theoretically be willing to buy the property for more than the estimated market value and you really need only one buyer for the transaction to happen. Market value estimate realistically only is useful for administrative or tax purposes. When selling property price range analysis around the market value is the more important estimation. As from it you can make a statistical judgment on the best pricing strategy, which would capture a significant amount of potential buyers for you to get the optimal price. Listing your property as a price range, mathematically might be even more correct then listing under one standard price, however psychological factors from the buyers side when seeing this type of pricing have to be considered. Furthermore, because most property is unique and the actual price is what the market is willing to pay for it, the best practice is to reassess expectations once the campaign has begun and buyers start giving their feedback.
To conclude, each property is unique therefore a bespoke strategy optimal to that particular estate has to be created every single time. A statistical analysis around the top range of the potential buyer pool is probably the best strategy to build property selling campaigns in Australia, but many factors have to be taken into consideration. It is important, however, that homeowners are aware of the logic behind using range pricing strategies and understand the process as well.
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