Why does teaser pricing work?
What is value? Depending on the context, Google will share the following definitions:
“either the regard that something is held to deserve; the importance, worth, or usefulness of something, or estimate the monetary worth of (something).”
Those both seem like fairly straight forward answers and you likely didn’t need me to share them. This does beg the question: why do we spend so much time obsessing over how to price real estate and more importantly, why do we price it so low? What’s the point? And does it matter in the end? Won’t the open market figure out the importance, worth or usefulness of a piece of property and assign monetary worth to it?
I see value as a two way street. Whether you are an employee, business owner or home seller, you make an offer to the market and the market will respond back to you with its opinion of value. Said another way, you make an offer of value and the market tells you how valuable it thinks that offer is. That is perfectly logical and efficient. The trouble is that markets don’t function perfectly logically or efficiently.
A Specific Example of Teaser Pricing
Let’s look at a great example that I recently encountered in Alameda. There were two homes on the market at similar times that mirrored each other in a lot of ways – comps if you will. They were both large, on good sized lots with lots of charm and bonus space. See the stats below:
3100 Lincoln
- Listed: 4/4/24
- Price: $2,195,000
- Stats: 4 Bed, 3.5 Bath 4,272 Sqft
2909 Central
- Listed: 5/3/24
- Price: $1,795,000
- Stats: 5 Bed, 2 Bath, 4,018 Sqft
Property Comparison
Aside from the bathroom count, these properties match up on paper really well. But why the discrepancy in price? Well, Lincoln listed with a much more “transparent” price. Meaning that the Sellers were expecting a number close to that price whereas Central listed with a “teaser” price which was intentionally listed much lower than what the sellers expected and what the comps suggested. The results?
3100 Lincoln
- Reduced Price to $1,999,000 on 4/29/24
- Pending on 5/7/24 for $1,875,000
- 33 Days on the market with one offer
- $320,000 under original asking price
2909 Central
- Pending on 5/15/24 for $2,176,000
- 12 Days on the market with three offers
- $381,000 over the original asking price
There are a lot of ways that this comparison is imperfect. It’s not entirely fair to blame the performance of the two properties on their pricing strategy and I admit that. Short of being able to sell the same house twice, this is about as close as we will get. With that said, the days on market and the sales price to list price ratios are striking. The fact that the home on Lincoln, a well maintained/presented large home in the East End was on the market for over 30 days is shocking. And I would argue this property underperformed. Conversely, the home on Central surely overperformed as it had strong competition.
This is what I meant by our market is not efficient or logical. These outcomes don’t make sense on paper. Lincoln had more bathrooms, more square footage and arguably a better block (less busy). Yet, it sold for significantly less money than Central did. Why? Because of human nature.
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Principles Explaining the Performance Differences
There are a few truths we encounter every day in our profession. They are:
- People want what other people want. When there is competition, there is a sense of urgency and fear of missing out. When you get multiple bids, the home inevitably performs much better than when you just have one.
- Buyers don’t like to be told what to pay. Time and time again, we see houses that price “transparently” struggle. They collect days on market and end up selling with fewer offers and often for less money then they might, dare I say should, have.
- When a buyer’s mind is open to possibility, they allow themselves the time and freedom to consider all the decisions that go into a home purchase. Said another way, they spend more time in their hearts. When they are met with something like a high listing price or major disclosure items, they immediately turn their critical minds on. And the small repair or floor plan oddity that would have not been a big deal suddenly becomes the reason to walk away.
Simply, teaser pricing is part of a much larger strategy. The goal is to allow buyers to make a buying decision with their emotions and justify it with logic. If you try to logic your way to the closing table, it will consistently be met with resistance and suspicion.
I don’t mean to say that teaser pricing is a foolproof strategy that works every time – there are downsides but that’s a topic for another article. Strategy is key. That is why we take the pricing of a property so seriously. Our goal is to end up at the highest value for both the buyer and seller. And the way to get there is to create fertile soil for emotion and logic to coincide.