Could every landlord and seller have it wrong when it comes to making people buy at the highest possible price? In my experience, commercial real estate investors believe that starting with a high asking price is the best way to achieve maximum value. It makes sense and here’s why.
- It’s expected that people make you offers for less than you’re asking because it’s the American Way.
- When the initial price is set high, potential buyers are likely to think it’s worth more.
- You hope that someone will pay you more than you’re willing to accept because you asked.
Here’s where common sense and science disagree.
Science has proven that lower asking prices can lead to a higher final sale price. Gillian Ku, a behavior scientist, and her colleagues studied this question (Read More in “Yes!” by Cialdini, Goldstein, and Martin) and concluded that there are 3 reasons why the lower asking price results in a higher final sale price than the other way around.
- Higher asking prices act as a barrier to entry. It’s true that the larger your buyer pool, the more likely you’ll receive the final sale price you desire. Lower prices encourage participation by as many people as possible.
- The increase in buyer activity afforded by the lower asking price buyers acts as social proof to other prospective buyers that the opportunity is valuable. Remember, everyone wants what everyone wants.
- Buyers who spent time with an opportunity early on are likely spend more time and effort trying to buy. They’re playing not to lose. If they’ve spent time and energy investigating the opportunity, they’re more likely to stay with it and pay more.
There is one caveat, however. Gillian Ku and her colleagues found that buyers must know that other buyers are interested, otherwise you constrain your traffic and your lower asking price is less effective. For example, if your retail opportunity is listed under office buildings for sale, you have a problem.
Here’s how you apply this scientifically proven method to commercial real estate.
- Start with a lower asking price. Yes, it may feel awkward, but it works.
- Don’t participate in a “no asking price” offering. You’ll alienate buyers who need guidance in the opportunity and don’t have transparency into how much demand exists for the property. Plus, it will upset them and they’ll refuse to compete for the opportunity, perceiving it to be a waste of time.
- Make sure your commercial real estate broker provides your buyers and tenants with social proof for the opportunity by sharing metrics about lead flow, tours, proposals, etc. Again, everyone wants what everyone wants.
- Never limit your offering to a narrow pool of buyers. Ask your broker if your opportunity is being offer to his “list of buyers” or the entire market. Many buyers and brokers like the limited pool of buyer approach because the broker doubles his commission and does less work. The buyers have less competition among each other. Ultimately, you pay more. Insist that your opportunity be made available to the entire market immediately to generate the highest interest level possible.