The pricing of a house is a major component in selling a home. Regardless of the market factors at play, the basics on pricing never change. How does any seller decide what the magic number should be?
It's important to get it right the first time
First let's take a look at why pricing is so important. Care and time should be taken when establishing the original listing price for several reasons:
- 1. Failure to sell. If the house is overpriced, it won't sell. Most studies have confirmed that the first three weeks on the market are typically the point of the highest "days on market" count on any listing. As the day count extends, buyers take it as a signal that the pricing pendulum has swung in their favor. Offers typically will come in well below "market value" if the buyers perceive the market place has ignored the property. Even if now correctly priced, the stigma is there.
2. The appraisal. The appraisal is often an overlooked factor in pricing. Even if sellers find an unaware buyer willing to overpay on the price, when the buyer applies for a mortgage, the chances are good that the lender's appraisal will force the price back down to market activity. Sellers can miss the activity generated by a new listing, by simply pricing outside of the market. Recovering from that initial error can be difficult.
3. Extended market time. If you overprice the house with the intention of reducing the price later just to "see what the market will bear," when the price of the house is lowered, it signals to buyers that it was (and still may be) overpriced. Buyers have access to street value.
4. Declining market vs. rising market. In a rising market, correct pricing is less critical. A home that is overpriced by say 10%, in a rising market will be correctly priced after a few months on market due to the rise in values. Conversely, in a declining market a home that is 10% overpriced, can end up 15% overpriced if the market further declines 5%. Sellers are then in the unfortunate position of chasing the market. In this scenario, the seller now must take a lower price than they would have if they correctly priced it at time of listing.
Now that we have examined the reason price is important, let's take a look at the factors that affect value.
- 1. Location: You can't get away from this one. If your house is located in a desirable area that is in demand, you will be able to get a higher price than you can for the same house in a less desirable area.
2. Condition: A house that has been better maintained and shows better will always sell for more than one that has had deferred (neglected) maintenance and needs work. Current colors, rather than outdated ones, will affect pricing. Something as subtle as odor, can positively or negatively affect value.
3. Desirable amenities: If a house has amenities that are currently popular in the marketplace, it will bring a higher price. Spacious kitchens and master suites, granite countertops, and great rooms are all features that currently sell well.
4. Accessibility: Homes that can't be seen can't be sold. Many a home has been ignored if the showing times are too restrictive. Vacant homes often receive a higher percentage of showings due to the ease of accessibility.
Last but not least, let's look at the common ways that pricing is actually set.
- Appraisal: Sellers may opt to obtain an appraisal before placing their home on the market. The typical cost for an appraisal is around $350. As an appraisal is "an opinion of value for lending purposes," appraisals can be above or below current market conditions. Oftentimes appraisals obtained by sellers in advance of a purchase contract will not be accepted by the buyer's lender at point of contract. As such, obtaining an appraisal for determining value may not always be in the seller's best interest.
CMA (Comparable Market Analysis): A Real Estate Agent can generate a CMA, usually at no cost to the seller. An advantage over appraisals is the CMA provides not just three comparable sales, but also market time, other homes for sale, and homes that failed to sell in their listing period.
Supply/demand analysis: One of the most basic economic principles affecting any commodity is the factor of supply and demand. Large increases in supply, accompanying a decline in demand will put downward pressure on pricing. Conversely, increasing demand with dropping supply will have a positive effect on pricing. It is critical that this component be examined in pricing.
Online evaluations:Sites like zillow.com or realestateabc.com, allow sellers to go online for value clues. The liability with these sites is the margin for error. Zillow's own promotion says that in 65% of the cases it will be within 10% of the actual value of the home. On a $300,000 home that is a $30,000 margin of error! Homeowners should visit these sites for fun, but be cautious in establishing market value by this method.
Russell Shaw began his real estate career in Phoenix