The Psychology of Pricing


IN a market where buyers and sellers circle one another warily — each certain that he or she is being taken advantage of, no matter what the conclusion of a deal — the asking price of a property is rarely a straightforward reflection of comparable values. While comparables may be a starting point, the price at which a seller offers a property is often also based on wishful thinking, propaganda and ploy.

Buyers, in turn, parry by deconstructing the price. They aim not merely to assess a dwelling’s fair value but also to plumb a seller’s bottom line and vulnerabilities. How a price tracks with similar properties, how large and hasty any reduction is, and even how parsed or rounded a number is — all these are grist for concluding, rightly or not, whether a price is firm, desperate or a sign of painful dealings to come.

Or even a sign of delusion.

Despite whispering advice like courtiers into the ear of a monarch, brokers say some sellers have delusions of grandeur, stemming from a failure to grasp that what they want for their home has nothing to do with what it’s worth.

“Most of the time a seller will start to talk about what they want, and I will say, ‘I don’t care — don’t tell me,’ ” said Andrew M. Phillips, a senior vice president of Halstead Property, who teaches classes on pricing to Halstead agents. “I will do my analysis and come back to you with quantitative information.”

Even when the seller and broker reach an agreement on a home’s value, it is often wise to adjust the asking price downward, and not just because buyers like bargains.

An equally compelling reason to fly low is to adhere to psychological “break points.” These are dollar thresholds that buyers are most likely to select as the top amounts they are initially willing to spend or to use in Internet searches.

(“Initially” is the key. Once buyers set foot in a house or apartment and make an emotional connection to it, they are more vulnerable to budget creep, by which a $25,000 increase can be rationalized as a little bump of $30 or $40 a month in the mortgage.)

Major break points occur at $500,000, $1 million, $1.5 million and so forth. Smaller ones occur every $100,000 and then at every $20,000 or $25,000. So, for example, if the market value of an apartment is around $610,000, brokers generally advise sellers to round down to $600,000 so that the property lands within a buyer’s budgetarily myopic field of vision.

(For each type of apartment, there are other contextual break points. For example, Mr. Phillips noted, many studio buyers say they won’t look at anything over $300,000, while buyers of small one-bedrooms often hover below $500,000 and, for larger one-bedrooms, below $750,000.)

Many brokers tweak break points even further, counseling their clients to name a price just under a break point — for example, choosing $599,000 rather than $600,000. While buyers intellectually recognize the lack of meaningful difference, the lower amount is said to appeal on a less conscious level. (It works in reverse, too: buyers in a bidding war are often counseled to offer an amount just above the next break point.)

“I always joke with people that I’m a department store pricer, because I think that psychologically the first number has an impact,” said Frederick W. Peters, the president of Warburg Realty. “Even though it may seem cheesy, it actually works.”

As an example, Mr. Peters said that it’s wiser to price a property at $4.995 million if it’s worth $5 million. “People are influenced by the first number,” he said, adding, “It’s the 4 that influences the way they perceive the price. Also, if you stay under a threshold, you are going to be found by more computer searches.”

Barbara Fox, the president of Fox Residential Group, suggests pricing a property slightly below a threshold but a little higher — say, 5 percent — than its market value. “Everybody likes to be able to negotiate a little bit,” she said.

Some brokers reject the relatively common $99 or even 99-cent endings. They argue that marching to a more distinctive rhythm — like $487,500 instead of $499,000 — may not only sweep aside listing clutter but also telegraph that the asking price has been so carefully calculated as to be nonnegotiable, assuming that is the desired message.

Theoretically, with a carefully calculated figure, “the power would be much more on the seller’s side in terms of a negotiating position,” said Joan Sacks, an associate broker at Stribling & Associates, “whereas when you get to the more typical type of pricing, rounded numbers, like $995,000 or whatever, the instant perception is that this is just the first asking price.”

A highly specific price reduction that follows a rounded original listing price may lead some buyers to more strongly infer nonnegotiability, which may or may not be the seller’s intention. But affixing a truly oddball number can also send that message.

“I’ve seen prices like $433,779,” said James Lake, a vice president of Bellmarc Realty. “It indicates it’s going to be a difficult transaction from beginning to end.”

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Jenna Ryan is a real estate Broker specializing in Frisco, Plano, McKinney & Allen Real Estate. She is a native Dallasite and lives in Frisco, TX. to arrange a tour of the area or to view the homes & property of your choice.