Pricing your Home to Sell
When a real estate professional performs an analysis aimed at providing pricing guidance to a homeowner, he or she will start by collecting information about the property, it's features and benefits, issues or factors impacting the sellers desire to sell, the seller's desired time frame and any community or neighborhood changes that could effect the desirability or value of the property.
MARKET TRENDS
The agent will next assess the broader real estate market conditions. Are we in a buyers or sellers market? Is it high or low season? Are prices in the market increasing, decreasing or remaining flat? What is the volume and time frame of transactions in the community or neighborhood? It is important for an agent to have an overall understanding of the current market conditions as a foundational base for the analysis and the agent should be able to demonstrate this to the client. A home priced above market will be "caught" by a rising market over time. However, in a declining market, an overpriced home will only become more so over time and will be unlikely to sell. Overpriced homes have the unfortunate impact of helping to sell more attractively priced competitive homes.
The second step in the analysis is to review recent market activity for comparable homes in the neighborhood or community. Ideally, the comparables selected for detailed review should have been on the market in the most recent six months. Sellers should be skeptical of agents who pull a suggested price out of the air without performing a detailed analysis. An experienced agent will have a general idea of the properties value, but no two pieces of real estate are identical, so a homeowner should let a professional do their analysis fully before expecting an answer to their question of "How much?" If an agent declines to give a premature opinion of price, respect this as a mark of professionalism.
Analysis of comparable homes will begin with selecting similar homes that are currently on the market, those sold in the last six months and those that failed to sell. Approximately one third of all listings taken fail to sell during their initial listing period. In over saturated market segments, this figure can be higher. In hot markets, this figure may be lower. The objective is to identify what amount of money will bring about a sale between a buyer and seller, and the recent history of comparable sold homes in the market is an excellent guide.
At a more detailed level, the agent will make adjustments for differences in sold homes features and amenities such as recent updates, square footage, etc. This data is combined and averaged to identify an expected average sale price.
Current competitive listings are also analyzed to determine how competitive the market is, current pricing and the pace of the market. Listings that failed to sell may give an indication of the market's "ceiling" price or unmet buyer expectations at a given price point.
COMPETITION
Sellers should realize that most markets offer a variety of possible home choices to a buyer and that they will select the property that most closely meets their needs and expectations for the amount of money they desire to spend. The seller's cost or investment in the property has no bearing on what a buyer wants, needs or will be willing to pay for. The value of any particular property or amenity to a buyer will be determined by the buyer's evaluation of substitute, or competitive properties. The classic example of this principal would be the case of two identical homes sitting side by side. Both homes are served by private wells. It cost one homeowner $10,000 to put in their well. The second homeowner had to drill deeper and their well cost $25,000. A buyer is unlikely to pay $15,000 more for the second house because the seller had higher out of pocket expenses for the well. The value of these homes is determined by what a buyer gets, (water), not what the well cost the seller.
NEIGHBORHOOD
Another principal that will be applied is the principal of regression and progression. Simply put, a large or more expensive home surrounded by smaller or less expensive homes will have its value negatively impacted by its neighbors. Conversely, a smaller or less expensive home surrounded by larger or more expensive homes will have its value positively impacted by its neighbors.
PRICE STRATEGY
Many times sellers think overpricing their home will produce the highest sale price. In a balanced market, a home overpriced by just 4-5% will struggle to find a buyer as buyers are able to find an acceptable substitute and the market time starts to drag on. Sellers may be reluctant to lower their price thinking that a buyer "can always make an offer". Unfortunately, in the case of an overpriced home, the right buyers may never see the home as it is in a price group with more expensive properties with which it is not competitive. Buyers in the correct price range are seeing and buying substitute homes. As time moves on, the seller may begin a series of price reductions, however, most of the market activity typically occurs when a listing is new on the market, so showing opportunities will be come fewer and fewer, and the price may be reduced again in an attempt to stimulate showings. Virtually every buyer as soon as they walk into a home will ask their agent, "How long has this house been on the market?" The buyer's agent will tell them. Homes that have languished on the market raise concerns with buyers who wonder what's wrong with the house. Ultimately, when an offer does come in on an aged listing, it is lower than average, reflecting the unease of the buyer. Overpricing generally leads to a lower sale price and a long and difficult listing period. Correctly priced homes will sell in a reasonable amount of time and for more money and with less inconvenience to the seller.
IF YOU ARE UPSIDE DOWN
Being upside down on your mortgage means that the expected proceeds from the sale of your home will not be sufficient to cover your selling expenses, which include commissions, closing costs and the payoff of your existing morgage(s). There are a number of alternatives approaches in this case.
1. You may be able to negotiate a "short sale" with your lender who may agree to take less than is owed on the loan IF your property is a candidate for a foreclosure. This negotiation can be long and difficult and a lender has no obligation to forgive any of the debt owed.
2. Making pre-payments on your mortgage principal to lower the debt over time may help you reach a point where you will be able to sell your home. If there is more than one mortgage, work on paying down the note with the highest interest rate first.
3. You may be able to "improve" your home with updates, completing unfinished space or doing an addition that will help boost the sale price to a level that will enable you to sell profitably. You'll need expert advice if you attempt to follow this path, taking market conditions into careful consideration. Generally, adding square footage, bedrooms, bathrooms or garage stalls will pay the biggest dividends, but remodeling dated kitchens and baths have good potential as well.
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