Setting the Right Price for your Home
Setting the Right Price for your Home
Perhaps, the most crucial factor when selling your home is setting the right price for your home. If you overprice the home, and if it does not sell in the few weeks of showings, you will want to lower the cost to attract more interest. The listing then loses its freshness, and it raises questions in the minds of potential buyers. If you underprice the home you may get low ball offers on the home.
A comparative market analysis (CMA) can be your best tool when determining the price at which to list your home. A real estate agent best completes a CMA with no emotional attachment to your home’s value. You can, however, do one yourself.
The Pricing Dilemma
Neither you nor a real estate agent actually determines the market value of your home. It is determined by what buyers are willing to pay for it. A CMA from a real estate agent should give you a range of prices that indicate how the right price of the home compares to similar homes that are or have been for sale in your area. Pricing your home too high can lead to many issues, pricing it too low is usually not a big problem. Often when a home is priced below market value multiple offers will be received that will drive up the price to the real market value. After all, the sale price of a home is really determined by supply and demand.
No two agents will likely provide you with the same CMA of price range to list your home. Different agents have different ways of preparing a CMA. Don’t be fooled into thinking that the real estate agent that says your home has a higher market value will automatically sell it for the most. The higher price does not mean it is the right price for your home.
Virtually all agents will be willing to prepare a CMA for you, but it is possible to do one yourself.
Find the Comparables
Simple logic says if you want to produce a Comparative Market Analysis for your home, you need to find the homes to compare with yours. It is an excellent practice to start your comparison with broad search criteria and gradually narrow it down.
First, list the features of your home. Write down the number of rooms, bathrooms, bedrooms, fireplaces, type of heating and cooling systems, the age of those systems, the types of appliances and their age, special features such as a swimming pool, or maybe a dock, think this through carefully.
Second, define your search area. Many people start with homes within a ¼ or a ½ mile radius of your home. Some may use zip code as their search area. In rural parts of the country, you may want to broaden your search to the county level. In suburban areas, you might want to limit the search to just a sub-division. In urban areas, it could be as small as a condominium building.
Third, look at homes in the area that have been listed for sale in the past year, then in the past six months, then in the past 90 days, and finally in the past month. What you are looking for in this step is pricing trends. Are home values based on the sales price of similar homes going up or down? Are there times of the year when homes sell for more? Look for the low price, the high price, and at what price similar homes do not sell.
Fourth, concentrate on homes sold in the past three months and homes listed for sale in the past month. Home appraisers generally only go back three months when determining a home’s appraised value for mortgage purposes. Homes listed in the last month will enlighten you about your competition in the market.
All of this helps you arrive, as close as possible, to the appraised value of your home that mortgage lenders will use. (This should never be confused with the tax appraised value of your home).
Pay attention to physical barriers, such as highways, town borders, railroads, hills, valleys, and neighborhoods. For example, the zip code I live in can quickly be thought of as three main areas, with many ways of dividing each of those. The street I live in is mostly single-family homes. One street away, the homes are all multi-family homes. This has a significant impact on the right price of a home in my neighborhood. Be careful not to use homes from “the other side of the tracks” in your comparison.
Compare square footage of homes and even the size of rooms, if possible. (Allowing for a 10% or so variance in size)
Compare the ages of homes as well. Does a Victorian home sell for more or less than a mid-century home in the area? These comparisons will help in determining desirability.
In summary, compare apples to apples and oranges to oranges.
Look for Sold Comparisons
Comparing the listed price of homes to the final sales prices will determine:
- Price reductions, if any
- The relationship of listing price to the final sales price
- Market direction. Generally, buyers’ market homes sell for less than list price, and in a seller’s market, they sell for more than list price.
Local assessors’ offices and even some newspapers publish the sales prices of homes.
Adjust the homes’ sales prices up or down based on features, number of rooms, lot size, square footage, etc.
Keep in mind that while a buyer may be willing to pay more for a view of the city skyline, the mountains, the ocean, or what-have-you, an assessor will not consider these things when determining the mortgage appraisal.
Withdrawn and Expired Listings: what to look for
The difference between expired and withdrawn listings is that an expired listing had a contract to sell, and the contract expired without the home selling. In contrast, a withdrawn listing was still under contract, but the seller changed the mind about selling.
Look for patterns that may exist. Was the listing price realistic? Was the home listed long enough to attract the right buyers? How many days was the property on the market? Were there any price reductions on the properties? Was there another factor as to why the homes did not sell? Was the home marketed sufficiently?
Put some thought into steps that you can actively take to prevent your property from becoming an expired listing. Think about what would cause you to withdraw your listing.
You will not know the exact sales price of a home until the transaction closes. That doesn’t mean you can’t call the listing agent or the sales agent to determine the sales price. Most won’t tell you, but some may. You could ask other questions, though. Such as, how did the listing agent arrive at the asking price of the home? Or perhaps, what did the buyers like about the home?
Keep in mind the home’s days on the market to help you determine how long it will take to sell your home. Also, look to see if there were any price reductions.
Current listings are your competition. Tour the homes if possible—experience how people view the home. Write down how you feel when you see the home. What do you see in the home?
An old song says, “Accentuate the positive, delineate the negative.” Do this in your home. Try to recreate the positive feeling you had when viewing the other home. Did it smell like chocolate chip cookies were in the oven? Then bake some. Did the door hinges need oil? Check yours. Was it neat and clean? Declutter your home. Could you picture your belongings in the home? Make sure buyers can envision their belongings in your home by removing some of your personal belongings.
The fundamental question to answer for yourself is why a buyer would prefer your home over another currently listed for sale.
Square Foot Cost Comparisons
As part of the mortgage process, the buyer’s lender will require an appraisal after you accept an offer. When you compare homes to arrive at a listing price, try to compare homes with similar square footage. Comparing square feet will help you come as to the back appraised value as possible. In general, appraisers prefer to compare homes within 10% to 25% of a given property’s square footage.
Suppose your home is 2,000 square feet. Try to use homes 1,800 to 2,200 square feet as comparable. Do not use homes of less than 1,500 square feet, nor more than 2,500 square feet.
Bear in mind that larger homes have a smaller square foot cost, and smaller homes have a larger square foot cost. You cannot simply take the average price per square foot of homes that sold and multiply it time the square footage of your home to arrive at an asking price.
Let’s say that after all your comparison, you have found three similar homes in the area that sold for $400,000 recently. Ask yourself if the market is going up, down, or staying flat. If it is a seller’s market, maybe you could list your home for sale at 10% more or $440,000. If it is a buyer’s market, you might want to list for 10% less or $360,000. Ultimately the choice is yours. You can ask whatever you wish for your home when you sell it, but there is no guarantee you will get it.
Think about which is most important to you, time, or money. If money is the most important and time is not an issue, you can often afford to wait for the right price. If time is critical and you must sell, then lowering the listing price may be your best option.
There are many free tools to help you with your comparative market analysis, including those offered from the Federal Housing Finance Agency’s website.
Your best choice may be to ask a real estate agent for a free, comparative market analysis. They are more than likely in touch with neighborhoods’ trends and may have valuable insights that you overlooked. They use their knowledge of the local real estate market to advise you on the right price for your home. Besides, determining your home’s comparative value is only the first step in actually getting it sold. You might be wise to let a real estate agent do it all for you. From caparison to marketing to contract negotiation, real estate agents are your best sources for getting your home sold.