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The Long View: The art (and science) of the asking price

How do we find the best asking price? And why even ask in the first place?

Is there a science to determining asking price for a luxury apartment?
Is there a science to determining asking price for a luxury apartment?

In March 2013, financier Martin Zweig’s widow Barbara put her penthouse at the Pierre Hotel on the market for $125 million. This August, four years, several brokers and several price cuts later, it finally sold — for $44 million- one of the biggest discounts the market has ever seen.

Finding the right asking price in Manhattan real estate can feel like a game of pinata, and every miss is costly. If Zweig had listed her pad for $44 million four years ago, sold it right away (assuming the demand was there) and put the money in an S&P 500 ticker fund, she would be sitting on around $70 million today.

The Zweig saga is a classic example of a botched luxury sales process. But top brokers say there is a science, albeit an inexact one, to coming up with the right asking price.

Douglas Elliman’s Richard Steinberg said his first step in determining an ask is looking at nearby sales comps from the past six months, and then adding a 3 to 5 percent markup for each floor as you go up a building. But once you’ve figured out what you think an apartment is worth, things get tricky: do you ask exactly that, or more, or less?

Shooting high limits the buyer pool, sure. But it also sends a message about what an apartment is worth, which could influence buyers. I for one, can’t tell the difference between a $50 bottle of wine and a $500 bottle of wine. If a sommelier tells me the bottle is worth $500, I’ll probably believe her. This practice, called signal pricing, works incredibly well in the fashion industry. Remember when Kanye West’s $120 white T-shirt sold out?

But what works in fashion or luxury consumer goods doesn’t necessarily work with homes – given that an apartment deal is generally a sizeable chunk of someone’s net worth, most buyers spend time on research. Distinguishing a $50 wine from a $500 wine may be tricky, but telling a a $5 million pad from a $50 million one is something most buyers can do. And even if they can’t, they usually hire brokers who can.

“I don’t think overpricing is effective in any price range,” said Elizabeth Sample, a top luxury broker at Sotheby’s International Realty. “We all lost listings recently that we just couldn’t take and we’re just walking away from,” Jade Mills, one of the top agents in Los Angeles, recently said.

Research says so, too. In a 2001 study, economists Paul Anglin, Ronald Rutherford and Thomas Springer found that a 1-percent increase in a property’s price increases its time on the market, on average, by 1.3 percent. Time on the market costs money. It can also create luxury real estate’s version of a deflationary spiral: if an apartment gets price chop after price chop buyers may be more inclined to wait and see if it gets another.

“It’s a Zillow world and the price history of a property is akin to getting a tattoo,” said Chad Roffers, chair of luxury real estate auction house Concierge Auctions.

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“Buyers now are so savvy that if a property is for sale for any length of time they think something is wrong with it,” Jeff Hyland, president of L.A.-based brokerage Hilton & Hyland, said in June.

Steinberg said he prefers to undercut the market somewhat. The buyer pool is bigger, and a bidding war that pushes the price up is more likely.

But this raises another question. If a bidding war is best, why publish an asking price at all?

We take it for granted that homes are sold through the song-and-dance of ask and offer, while auctions are for bankruptcy. That wasn’t always so. As TRD’s Adam Pincus pointed out, in the 1880s, a lot of New York properties were sold via auction at the Real Estate Exchange and Auction at 26 Liberty Street. Brokers and asking prices didn’t really take over until the turn of the century.

“There’s no more pure form of economics than to let the market duke it out,” said Rick Sharga, CMO of Ten-X, which runs Auction.com. Wherever housing supply is limited and demand strong, auctions are usually the best choice, Sharga said. Low opening bids mean more people participate, and once they made a bid they’re more likely to catch the fever and stay in the game, which drives up prices. Auctions tend to be over quickly, which solves the time-on-the-market problem. Sellers don’t run the risk of sending the wrong pricing signals because they don’t need to price the property to begin with. And auctions are transparent: every participant sees who is bidding what and when.

“If you were to land on earth from out of space and saw how we sell real estate, you’d conclude there’s no intelligent life on earth,” Sharga said. And to his point, the commercial real estate market, unlike its residential counterpart, has started moving away from the asking price model.

So how come asking prices still reign supreme in the residential sphere? Habit may be part of it. But they also offer an “element of certainty,” Federal Reserve Bank of Philadelphia economist Benjamin Lester wrote in a 2015 essay. Apartment buyers usually research and tour a property. To avoid wasting valuable time, they will want to know if the place is in their price range first. But that can be hard to figure out ahead of an auction.

A short closing period is another issue. Once a buyer wins an auction and puts down a 10-percent non-refundable deposit she has 30 days to close on the purchase, according to Roffers. That can be challenging for those who need to get a mortgage, bring capital in from abroad or raise funds elsewhere. “It’s ideal for people that are liquid,” Roffers said.

Economics aside, asking prices also have a psychological benefit — at least for sellers. Asking high means playing hardball. If the penthouse ends up selling for much less — well, at least they tried. That makes sellers happy, and making sellers happy — more so than getting the highest price — is a listing agent’s job.

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