Question: “I have been looking at houses for sale in my area, and I see that most of them include a listing price for the property. How do the sellers come up with the listing price for a home, and is it always negotiable?”
Let me start with the second part of your question, because it’s the quickest and easiest to answer.
Yes, you can negotiate the listing price when buying a house. As the expression goes, everything in real estate is negotiable. But a lot depends on the type of market you are in, and how realistic (or unrealistic) the asking price is. For instance, in a sellers’ market — one with limited inventory and strong demand — you won’t have as much leverage to negotiate the price. But in a buyers’ market, you’ll have move negotiating leverage.
Additionally, you have to consider the current market value of the house, and how closely the seller’s listing price matches that value.
Asking Price vs. Sale Price
In real estate, the listing price is also referred to as the asking price. The second term is actually more indicative of the seller’s mindset. It’s the amount they are asking for … but it’s not necessarily the amount they’ll get.
When a home is ultimately sold, the selling amount is referred to as the sale price. This is what somebody actually paid for the house. In many cases, the sale price will be lower than the original listing amount, because the seller reduced it at some stage. So yes, it’s negotiable.
How the Listing Price is Determined
If the sellers are smart (or if they’ve hired a smart agent to list the house), they’ll base the listing price on recent sales in the area. In particular, they will find out what similar homes have been selling for over the last few months. These are referred to as comps, short for comparable sales. This kind of data shows the seller what the market is willing to bear, in terms of the asking price. They might even have the house appraised by a real estate appraiser, who will conduct a similar analysis of market trends.
But not all sellers are this rational. Some of them base the listing price on what they paid for the home a few years ago. Or they’ll use some arbitrary annual percentage to “force” appreciation on the home, even in a declining market. Or they’ll price the home for the exact amount needed to pay off their mortgage. These are common pricing strategies among sellers, but they’re all equally flawed. Recent sales and pricing trends are the primary factors that determine market value — everything else is wishful thinking.
Keep these things in the back of your mind when looking at homes for sale. If you’re working with an experienced real estate agent, he or she can help you review recent sales in the area. This is the key to evaluating the seller’s listing price.
I hope this answers your question about listing prices for real estate, and I wish you all the best in your housing search.