Dropping a home's price bit by bit is the worst-case scenario for home sellers, weakening their position in a buyer's market, experts say.

By Bankrate.com

It's the worst-case scenario for home sellers: to endure price cut after price cut until their houses become stigmatized and hungry buyers smell blood.

But how can you avoid this unpleasant situation in today's troubled housing markets? The answer, experts suggest, is to put your home on the market at the right price, and, if it doesn't sell quickly, cut the price deep and fast, so you won't be caught in a downward spiral of price reductions.

Not surprisingly, few sellers want to hear that advice. They'd rather price their homes aggressively and hope buyers will take the bait. But testing the market simply isn't a good strategy with home prices depressed, sales at a slower pace in many markets and buyers on the hunt for good deals, says Mark Reitman, Chicago sales manager for real-estate brokerage Redfin in Schaumburg, Ill.

Buyers today are "looking at every aspect in so much more detail and trying to find out how they can get a lower price," he says.

The high-and-hope strategy is so ill-advised that some brokers won't accept listings they think are overpriced. Among them is Tony Marriott, an associate broker with Keller Williams Realty Professional Partners in Phoenix. Marriott says he shies away from sellers who aren't realistic or won't commit to an automatic price reduction if no offer has been accepted within a few weeks after the home has been put on the market.

"We go into it with a fairly aggressive discussion upfront, saying, 'We are listing your property to sell the property, not to go fishing,'" he says. "We need to have a game plan in place to take the emotion and hand-wringing out of it."

Pricing is paramount
Pricing is especially crucial today because home prices have fallen drastically over the past two years and may continue to do so, albeit perhaps more slowly.

There is "no national turnaround" in home prices, though it's "possible that we are seeing some regions struggling to come back, which has resulted in some moderation in price declines at the national level," says David M. Blitzer, chairman of the Standard & Poor's Index Committee.

House prices have fallen more sharply and quickly during this downturn than they did during previous downturns, according to "Downward Stickiness in Prices," a paper by Karl E. Case, professor of economics at Wellesley College and co-creator of the S&P/Case-Shiller home price indexes. Case attributes this diminished "stickiness" -- to use a bit of economist-speak -- to foreclosure sales and the use of adjustable-rate mortgages during the recent housing boom.

Yet homeowners still cling to outdated beliefs about the value of their own home. A survey by real-estate information Web site Zillow.com found that 62 percent of homeowners believed their home had appreciated or held steady in the past year, even though 77 percent of U.S. homes lost value during that period.

"We attribute this gap to a combination of inattention and a fair bit of denial that causes people to believe their home is insulated from the woes of the market that affect others," says Stan Humphries, Zillow's VP of data and analytics.

Cuts may be counterproductive
A collective delusion may be but cold comfort for home sellers who suffer the consequences of mispricing their home. Overpriced home listings start out behind the market, which forces the seller to drastically cut the price or follow the market down through multiple price reductions.

Buyers, who are well-aware of that dynamic, will request a history of asking prices before they make an offer, Reitman says. A series of price cuts acts as a "code" that signals to buyers that the seller is extremely motivated, and that knowledge empowers buyers to make lower offers and "stick to their guns," he warns.

A December 2007 study, "Seven Tactics for Selling a Home," published by Redfin, states this same point: "Once a property fails to sell at its debut price, the time it spends on the market can encourage buyers to become more aggressive in negotiating. Price reductions can further encourage aggressive bargaining."

The difficulty is that while all homes are unique, comparable homes compete with one another for buyers' attention. If your neighbors reduce the price of their home, those homes are more likely than yours to be sold.

"You have to keep up and down with the Joneses," Reitman says.
If your home has been on the market for several weeks without an accepted offer, you should reassess your assumptions and rethink your strategy, experts say.

Price cuts should be meaningful, so your home will "get the market's attention again," Reitman advises. A series of smaller cuts, rather than one big one, can result in a slower sale and lower price.

Gimmicks seldom work
Sellers and listing agents sometimes try to entice buyers with incentives such as a buyer's agent bonus, big-screen TV or brand-new car. But experts say those extras don't work. Bonuses are ineffective because the cash doesn't accrue to the buyer, and it's unethical for agents to deliberately show higher-compensated listings in lieu of or before other homes a buyer might want to purchase. And as for buyers, given "a choice between $15,000 off the price or a new car, (they) want the cash," Reitman says. "Price is the No. 1 incentive."

The bottom line is that lower asking prices and price reductions are a painful yet unavoidable reality of selling a home today. In some cases, the pain is so severe that the seller has to bring cash to closing or sign a personal note to pay off an existing mortgage.

"If they are serious about selling, they have to adjust the price to whatever it has to be to get the property sold," Marriott says. "If you're upside down (owe more on the home than it can sell for), but you can get out of it for $10,000 today, do you want to wait six months and get out for $25,000? That's what they need to think about.

"No one wants to make these tough decisions, so they do it in increments," he says. "But eventually, you get to the same place."

By Marcie Geffner, Bankrate.com