Pricing Your Property
Usually, when people are thinking about selling a property, they start looking at what is happening around them. I hear things like “my neighbor told me they got $10k above asking” or “that house around the corner has been on the market for months”. While I understand why clients say these things, it’s important to me that they understand WHY some houses sell right away even in buyer’s markets and why others sit and depreciate even during the unprecedented COVID seller’s market.
When pricing a property you need to compare apples to apples.
Many people use the terms market value, list price/asking, and sales price interchangeably, but they are NOT the same. I believe it is important to distinguish the difference so my clients and I can have specific conversations in order to evaluate other homes as well as set expectations. I will elaborate further but below are how I define each.
Market Value- The value the market assigns a property based on past sales of properties of similar style, size, and condition adjusted accordingly to current market trends.
List Price/ Asking - The amount of money the home is listed for.
Sale Price- What somebody who was ready, willing, and able paid for the property*.
MARKET VALUE
The value the market assigns a property based on past sales of properties of similar style, size, and condition adjusted accordingly to current market trends.
The best way to think of this is what an appraiser would look at when deciding the value of your home. As a Realtor, I find a property’s market value, by doing a comparative market analysis (CMA). Market value gives a property a price based on all things being equal.
It’s important to remember that in real estate there are many reasons why all things are NOT equal. This includes REO/ bank-owned properties that typically sell below asking, the listing agent’s abilities, the marketing strategy or lack thereof, and a number of other factors. Usually, a home’s market value is not adjusted for these factors.
LIST PRICE
In my opinion list price is a useless number because anybody can ask any amount for their home. During COVID bidding wars I would hear agents make statements like, “whatever the list price come in $10k - $15k above.” While many homes were going above asking, offers should always be made and adjusted off of the market value, not the list price. Even during quartine, overpriced homes were sitting for a while and eventually selling below asking. Consequently, underprice homes were selling significantly above list price.
UNDERSTANDING THE 3 LISTING STRATEGIES
There are three ways you can price your home: below, at, or above market value.
AUCTION PRICING
Auction pricing is setting the list price BELOW market value to drive a bidding war to get the best offer. In a seller’s market, like the one we are in, it is guaranteed to get you above market value. It is also important to remember that the highest price is not always the best offer. Yes, money is important, but as a seller, you need to ask yourself if the crazy high offer you receive will appraise, if not the buyer might not be able to afford your home and could ask you to reduce the price or kill the deal altogether.
That is why TERMS are so important! One of the terms we will look for on the sale side is a waiver of appraisal. (Note: cash offers do not need to appraise.) We’ll also look at what else the buyer is willing to offer that will make this transaction as easy for us as possible. Are they willing to work with our timeline? What type of loan, if any, are they using? What impact does their loan type have on you as the seller?
The goal of auction pricing is to produce multiple offers allowing you as the seller to pick (and/or leverage in order to create) the best option.
Market VALUE PRICING
This strategy is pretty straightforward. The price is determined by a CMA looking at the sale data from previous homes in the area. When done properly CMAs exclude REO data and adjust (up or down) for things like busy roads, functionality, and especially flood zones.
As mentioned above this is a guideline as factors such as an agent’s ability and marketing do play a factor in a sale price, however, they are not calculated for when finding market value.
LOTTERY PRICING
Have you ever won the lottery? Most people haven’t because the odds aren’t in their favor, the same thing is true about selling a home using the lottery pricing strategy. This is where the home is intentionally priced above market value. Sometimes this is done in the hopes of actually getting more money than the market says the home is worth. Other times it is done to leave room to negotiate down.
In strong seller’s markets, clients use this strategy to “test the market”. Overwhelmingly, this strategy results in sale prices BELOW market value with little to no incentivizing terms. What typically happens is the home hits the market, it either does not get any offers or it gets market value offers which the seller usually rejects at first and as it sits the offer values decrease.
Yes, far and few between some sellers do get asking, however, much like winning the actual lottery, it doesn’t happen often.
SALE PRICE
I defined sale price as “what somebody who was ready, willing, and able paid for the property*.”
Let’s start with the asterisk. Just because a home sold for a particular price, does not mean that was the amount of money the seller took home (even after the typical commissions, taxes, and mortgage payoff.) A home could be sold for $500,000 but they may have given the buyer a $10k concession for closing costs. That means the seller is only making $490,000. Additionally, if issues come up in inspection the seller has the option of paying a licenced professional to fix the problem (they cannot do it themselves), they can offer a monetary credit, or they can refuse to take any action, which gives the buyer the right to terminate the deal. Let’s say the seller then gives another $5k in credits. Even though the sale price might be recorded at $500k in this case the seller is really making $485k ($15k less, -$10k for the concession and -$5k for the credit.) Since concessions and credits are not recorded or reflected in tax or MLS records, comps typically do not account for them.
Now that we know the sale price is not always a true reflection of what the home sold for, let’s break down the rest of the definition.
READY
Time is an important factor, buyers typically purchase when it is best for them. While our industry sees the most activity during Spring Market (February- July) which is dictated by the school year, that’s not always the best time for everybody. If a prospective buyer is not ready to submit an offer, their opinion has no impact on the home’s value.
WILLING
What the buyer is willing to pay. Sometimes this is below asking and/or market value other times it is above. This is where the large fluctuations come in. Good agents use a variety of skills, marketing strategies, and negotiation to try and create bidding wars and leverage the best deal for their clients. Many times clients who are involved in a bidding war become emotionally attached making better offers than they otherwise would.
We also see that buyers become unwilling to purchase a home that nobody else will. A lot of times I will see a house is priced above market value. As the seller waits for their above value offer the days on market (DOM) increase. Eventually, the seller realizes they must reduce the asking price. Even if they are now asking market value, they have a high DOM so buyers assume there is something wrong with the house, some won’t even look at it, while others go in expecting to pay below asking (even though the price was already lowered). When these houses eventually sell, it is usually below market value.
When defining market value, I clarified “all things being equal”. However, in the real world, that’s not always the case. Sometimes, external factors, greatly impact how much a buyer is willing to spend. For example, a daughter may spend a little more on a home because it is next door to her mother. A developer may spend a lot more on a hold-out property that is in the middle of where a multi-million dollar project is planned. A property’s sale price could also negatively be impacted by nightmare neighbors, tax assessments, or new projects planned nearby.
ABLE
The buyer must have the funds to purchase the home either via a loan/mortgage or with cash. Additionally, there is the question of appraisal. If the home does not appraise, does the buyer have the means, and are they willing, to make up the difference?