We have noticed several examples of this principle recently. In general it is this:
When buying something in short supply, the consumer may pay more than they feel it is worth (or possibly may pay more than it is actually worth). Establishing value on something that is in short supply isn’t always easy so there is a grey area there. The perceived value that allows a consumer to pay that extra amount in this scenario is the fact that it is in short supply or hard to find.
An obvious example is when on a holiday, we will pay more for a room with a view of the ocean. The perceived value is the view and most can easily see the reason for the extra cost. We may not all be willing to pay it but the perception for its value is usually there.
In home selling, homes on the lakefront side of a street will get higher prices. Again, the buyer sees the value of paying that extra amount to have a view of the water. Or homes in certain areas with legal and well finished in-law suites may get a premium because again, they are in short supply and buyers in general can see the benefit of paying the extra amount to get what is difficult to find. Supply vs. Perceived Value.
What this article is really about however is when there is a large supply of a product and how the perceived value of a buyer applies.
If a buyer is looking for a home that is commonly found on the market, establishing reasonable value is fairly simple. Review past sales, current listings, market conditions, target audience, timing plus many other variables. These all help us arrive at a value that should be pretty close to the bullseye as far as pricing. When selling this home and pushing the envelope as far as pricing goes however, the buyer is going to need to feel they received added value if they are going to pay that extra amount.
Their perception of value needs to allow them to rationalize the extra amount.
Example: Mr. & Mrs. Buyer are purchasing a home with beautiful gardens and a pool. 2 of the bedrooms are fuscia. The washer and dryer are brand new and make all kinds of fancy beeping sounds. Arriving at a price on the home is fairly straight forward as there have been 4 other sales close by in the last few months. The price on this home however is 6% higher than the others which creates hesitation. For those keeping score, as a seller, you don’t want to create buyer hesitation.
So, in order for the Buyers to move forward, they need to feel or realize some value to allow them to move forward. In the above scenario, the seller may be wise to pre-pay the opening and closing of the pool, have the fuscia bedrooms professionally painted to a new colour (buyers choice of course!) and leave behind that washer and dryer which they really didn’t want to do.
Does this cost the seller? Yes. But if the buyer is paying a premium on something that they can get elsewhere, they need to feel they got that ocean view, or at least a glimpse. The pool work, painting and washer and dryer likely don’t add up to the premium these buyers are paying. But the seller is able to sell a touch higher than normal and the buyers are able to stomach the extra amount they paid.
Again, there is a perception of value in the buyer that allowed them to write the big(ger) cheque. And as long as people are involved on either side of the table, that value is always going to be different.
Look at your home and where it fits into the market. If you fall into the well-supplied category of home, give some thought to how you can increase the value of your home. You may not be full frontal on the ocean but there may be a way to allow the buyer to at least catch a glimpse of the water.
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