The Foundation Of Price
Introduction
Some may have a misconception as to what is the foundation of price. This misconception can lead some sellers to overprice their home, or at least price it uncompetitively, hindering their chances to achieve the best price. Here I discuss and break down who and what makes up the foundation of price.
The foundation of price is buyer sentiment
The ultimate question for selling any property will always be ‘how much is the buyer prepared to pay?’
The worth of any property ultimately comes down to whatever the price the buyer is prepared to pay for it. So a property would be worth £1,000,000 if that is the price the buyer is prepared to pay for it. Conversely, if no buyers are prepared to pay £1,000,000 for the property, then it would be difficult to justify the property being worth that price (at least in the market conditions that it’s selling in).
The price in which the buyer is prepared to pay for a property is two-fold:
The value that the buyer gets out of the property.
The strength of interest, competition and demand for the property.
So a property would be worth £1,000,000 if the value that the buyer gets out of the property and/or the strength of interest, competition and demand for the property matches that price; otherwise, it would be difficult to justify the property being worth £1,000,000.
And so, the foundation of price (or value) is therefore buyer sentiment, not seller sentiment.
It is the buyers (or more specifically, the market) that determine the worth of a property; so essentially, buyer sentiment is the market value of a property!
To put it another way, the market value is believed to be the price that a reasonable buyer is prepared to pay (based on evidence, i.e. comparable properties). And so buyer sentiment is market sentiment!
To better understand this, let’s consider the following scenario:
If a seller believes that their home is worth £1,000,000, but the market disagrees, believing that it’s worth £950,000, then the market prevails, meaning that the property has a market value of £950,000.
If the seller decides against the market sentiment and prices their home for £1,000,000, then in all likelihood, it will not sell for that price and remain unsold and on the market indefinitely!
The parameters of buyer sentiment
Any property that has ever been sold is usually due to the agreed sale price being within the parameters of buyer sentiment.
In fact, comparable properties, the biggest and most reliable piece of evidence that can show the potential value of a property, actually and more accurately shows the parameters of buyer sentiment!
What do I mean by this?
Sold comparables show the prices that buyers are prepared to pay, and available comparables show the prices that buyers are not prepared to pay.
Therefore, any seller wanting to successfully sell their property should price it within the parameters of buyer sentiment. Properties that remain unsold are usually the ones that are priced outside of those parameters, i.e. over ambitiously priced or overpriced. Simply put, these properties are generally overpriced with no buyers that are prepared to meet their asking prices!
PARAMETERS OF BUYER (MARKET) SENTIMENT
If buyers ultimately determine the price/market value, are you suggesting that sellers have no say in the asking price?
No, I am certainly not suggesting that whatsoever. Buyers, or more specifically, buyer sentiment, are the foundation (or starting point) of price. Sellers do have a degree of scope to determine or influence the asking price, but that scope is largely dependent on the buyer sentiment and the sellers’ own bargaining position.
The foundation of price is not seller sentiment, so the question is not ‘how much is the seller prepared to sell for?’, but rather, ‘how much is the seller prepared to sell for relative to the buyer sentiment?’
What scope do sellers have to determine the price?
As mentioned, the sellers’ scope is largely dependent on the buyer sentiment and the sellers’ own bargaining position.
If the seller has a strong bargaining position, then they will have some scope to determine the price above buyer sentiment. However, if the seller has a weak bargaining position, then they will have little or no scope to determine the price above buyer sentiment. In fact, they may even have to settle for a lower price in this case!
So referring back to the earlier scenario, let’s assume that our home does in fact have a market value of £950,000:
If we have a strong bargaining position, then we may have some scope to determine its price to be above £950,000 (maybe even £1,000,000 or more!).
If we have a weak bargaining position, then we will have little or no scope to determine any price above £950,000. In fact, we may even have to settle for a lower price!
How can we place ourselves in a strong bargaining position and avoid ending up in a weak one?
I have covered this in more detail elsewhere in this guide - click here to jump to that section.
Buyer’s market and seller’s market
You may have heard of the terms ‘buyer’s market’ and ‘seller’s market’.
The market itself is indeed represented by buyers, not sellers. Make no mistake, ‘seller’s market’ does not imply that the market is represented by sellers in any way.
‘Buyer’s market’ and ‘seller’s market’ still implies buyer sentiment, but the parameters of buyer sentiment differ between these two types of market conditions. In this particular context, it’s perhaps more accurate to describe the parameters as buyer tolerance, i.e. the extent to which the buyers are prepared to pay relative to the market conditions.
Buyer tolerance
In a buyer’s market, the buyers are able to pay less for properties, since the supply of properties exceeds the demand. And so, the buyer tolerance is lower, meaning that buyers will have a lower tolerance towards price, especially a high price.
In a seller’s market, the buyers are prepared to pay more for properties, since the demand for properties exceeds the supply. And so, the buyer tolerance is higher, meaning that buyers will have a higher tolerance towards price, including a high price.
Narrow and wide parameters of buyer sentiment
When considering the parameters of buyer sentiment itself:
In a buyer’s market, the buyer sentiment is generally narrower, meaning that more properties can fall outside of those parameters and be considered overpriced.
In a seller’s market, the buyer sentiment is generally wider, meaning that more properties can fall within those parameters and be considered within market value.
As an example, let’s consider a property that’s priced at £1,000,000:
In a buyer’s market, where buyer sentiment is generally narrower, the property is more likely to fall outside of those parameters and be considered overpriced.
In a seller’s market, where the buyer sentiment is generally wider, the property is more likely to fall within those parameters and be considered within market value.
PARAMETERS OF BUYER SENTIMENT IN A BUYER’S MARKET
PARAMETERS OF BUYER SENTIMENT IN A SELLER’S MARKET
Neither of these types of market conditions remove the fact that the market is represented by buyers, not sellers. Therefore, the question will always come down to buyer (or market) sentiment.
As far as sellers are concerned, they would still need to price within the parameters of buyer sentiment, but their room for pricing differs according to the market conditions. In a buyer’s market, the parameters are narrower with buyers having a lower tolerance towards price. However, in a seller’s market, the parameters are wider with buyers having a higher tolerance towards price, allowing sellers more room to price their properties higher!
We need to anchor the price to buyer sentiment
What it all comes down to is this - to successfully sell our home, especially for the best price, we need to anchor the price to buyer sentiment.
We should not anchor the price to seller sentiment
Aside from potentially having a strong bargaining position and scope to determine the price as mentioned earlier, we should not anchor the price to our own sentiment, i.e. seller sentiment.
Why not?
Some sellers are generally likely to have a number of factors that are personal and subjective to them that they want reflected in the price. However, the problem is that with factors that are personal and subjective to the seller, it would be difficult to determine or quantify its value, benefit or appeal to the buyer in terms of what they get out of the property itself. It would be difficult to arrive at an appropriate price without the risk of pricing outside of the parameters of buyer sentiment; in other words, overpricing the property! Remember, the price in which the buyer is prepared to pay for a property is two-fold, including the value that the buyer gets out of the property.
Factors that are usually personal and subjective to the seller generally tend to have no bearing on what the buyer can get out of the property, nor translate into any discernible benefit or appeal to them, unless there is of course clear and attainable evidence to show otherwise.
Anchoring the price to seller sentiment would therefore not help to achieve the price we want; and seller sentiment to the point of bias would certainly hinder a sale!
How do we determine the buyer sentiment towards our home?
Just to be clear, determining buyer sentiment and determining market value are the same thing.
In order to determine the buyer sentiment towards our home, we need to be seeing what the buyers see and understand how they would interpret the value of our home. This means looking at comparable properties, as they make up the competition, and working out where our home fits among those comparables in the market.
As mentioned earlier, comparable properties show the parameters of buyer sentiment.
I have extensively covered comparable properties, as well as gone through the steps to work out where one’s home fits among its comparables in the market, in more detail elsewhere in this guide - click the links to jump to those sections.
Ultimately, buyer sentiment is the foundation of price; seller sentiment is the scope of that foundation.
Getting in touch with me
If you would like to discuss any of the above points with me further, or if you need help or have any questions in general, click here to get in touch with me.
So now that we know what is the foundation of price, you may be interested to know that there are in fact three broad types of price, which I go over in the next section.
So if you want to find out more about these three types of price, come join me in the next section.