A property is worth what reasonable, informed, non-pressured buyers are willing to pay for it. The buyers’ process of figuring out what they are willing to pay is different from the seller’s process of deciding what he will accept. By definition, the buyers’ process results in the more meaningful number. If a seller believes the value is higher than what reasonable, informed, non-pressured buyers are willing to pay, then the seller is in effect the highest bidder, and continues to own the property. We will help you price your home to get you the most money in the shortest period of time, and advise you if it is overpriced.
Property Valuation Methods
- Comparative Market Analysis, or “CMA”
- Buyer’s Property Comparisons
- History of Showings and Offers
- Tax Appraisal
- Online valuations, such as a Zillow “Zestimate”
- Wishful thinking
Comparative Market Analysis, or “CMA”
Broker selects a number of recent comparable sales in the area to get an estimate of market value. Based primarily on price per square foot, it is a rough estimate, and should be viewed as a guide to setting the initial listing price. A disadvantage is that you don’t see inside of the sold properties.
The more similar the homes are in the neighborhood, the more reliable the CMA will be. For example, if the subject property is in a subdivision with over 100 homes that are similar in size, age, and amenities, then the price per square foot among the homes in that subdivision will be fairly consistent.
Examples of properties where a CMA would not be as reliable:
- Homes in rural areas, not in subdivisions.
- Farm and ranch properties.
- Homes in a neighborhoods with some homes built in the 1960s, some completely remodeled, and some newly built.
An appraisal in an opinion of value given by a licensed appraiser, and usually costs around $400. The appraiser chooses several properties (usually 3) in the area that have sold in the past 6 months that are similar to the subject property. He adjusts the values of the comparable properties up or down based on various property characteristics and amenities. It is more accurate and detailed than a CMA, but still has the shortcoming of the appraiser not being able to see the inside of the comparable properties. Lender relies on the appraised value to make the loan.
Buyer’s Property Comparisons
This is not generally viewed as a valuation method, but it is the process buyers go through to decide what they might be willing to pay. Most buyers do their initial home search online, in the area they want to live, in the price range that they can afford. Then they look at how much square footage they can get for their money, and the quality of the homes based on the description and pictures. They narrow the list down based on preferences and price per square foot, and come up with a list of homes they would like to see. Some will try to contact listing agents for a showing, but most will give the list to their buyers’ agent who will show them the homes. In this process, they get a pretty good idea of what they need to pay for what they want.
An advantage of this way of estimating value is that unlike appraisals and CMAs, the buyer is actually going inside the homes on the market, and can see how they compare. A disadvantage is that the buyer only sees list prices, not what the properties ultimately sell for.
A buyer’s agent will often do a CMA to confirm the value before writing an offer. The agent may submit the CMA, or at least some comparables, along with the offer to justify the offer amount if the offer is significantly below list price.
History of Showings and Offers
When your property is listed on MLS, the number of showings and types of offers you receive can tell you what the property is worth. It is the reaction to your price by many independent, unrelated buyers who are all out there looking at properties and ascertaining values based on their own “Buyer’s Property Comparisons”, CMAs, and knowledge of the market. It is probably one of the simplest, most revealing indicators of value if you know what to pay attention to. For example, when there are few or no showings, the price is too high. When there are lots of showings, but no offers, there is something objectionable about the property. When there are an average number of showings for the area, then it depends on the number and amount of the offers. If there are more than 5 offers in the first 48 hours, the price may be too low. This tells you more than a CMA or any feedback. That’s why we say it’s pointless to do CMAs to figure out if you’re priced right once you have this kind of history.
The tax appraisal value of any property is public information and can be found by looking up the address on the corresponding county appraisal district website. It is usually less than real market value, but can vary widely and should not be relied on to ascertain value.
Online valuations, such as the Zillow “Zestimate”
Please ignore this. It is unreliable because Texas is a non-disclosure state, so Zillow cannot get the actual comparable sales data. They use various algorithms to make their best guess, which can sometimes be close, but is usually way off.
Sellers sometimes arrive at numbers based on what they paid, how much they spent to fix it up, how much they spent on their pool, or how much they need to buy their new house. None of these kinds of things matter. All the buyers care about is how much they can get a property for that is similar to yours.
General rules about home pricing
- A property WILL sell for full list price if it is worth full list price.
- You don’t need “negotiating room” if you are priced right.
- No matter what the list price is, agents will often offer something less – initially. This DOES NOT mean the buyer will not pay full list price.
- A property priced above what it’s worth will still sell only for what it’s worth, but it will take longer.
- You are more likely to get the full list price in the first 2 weeks of a listing, than the same price, after it is reduced to that price after 1-2 months. Reason: When it’s a new listing, buyers feel more pressure to offer full price due to fear that another buyer will snatch it up first.
- Even if a buyer agrees to pay the full list price of an overpriced property, there is a provision in the standard contract form that allows a buyer to cancel if the appraisal is lower than the contract price. In such cases, the seller usually ends up reducing his price to the appraisal amount.
- If you price your property too low, you are likely to get multiple offers that will bid up the price.
- Buyer incentives, such as offering to pay buyers closing costs, carpet allowance, repair allowances, etc., will not increase showings as much as a price reduction of the same amount without the incentives. Reason: The buyer normally doesn’t see the incentives until after he selects the property for a showing, and that initial selection is based on the list price.
- When a listing is 3-4 months old and hasn’t had a price reduction, it usually means (to agents) that the seller is not serious, or there is something wrong with the property. Many agents consider such listings a waste of time and won’t bother showing them.
- It makes no sense to accept an offer more than 5-10% less than your list price. You are smarter to reduce your price by 3-5% first and wait a few weeks because you may get a full price offer at the lower list price.
- It makes no sense to offer an agent bonus or a commission above 3%. The buyer decides which house he is going to buy, not the agent. And most of the time the buyer is selecting which houses to see in the first place. The commission amount does not enter into the decision. However, offering less than a 3% commission may cause the agent to avoid showing the home or tell his client it’s not available.
Suggestion: Price your home for what it’s worth, and don’t negotiate the commission with agents. You still have 3% negotiating room if we refer you a buyer without an agent.
- The larger the house, the lower the value per square foot compared to other nearby houses.
- The values of the most expensive or over-improved homes in a neighborhood will tend to be brought down by surrounding lower value homes.
- The values of the smallest and least expensive homes in a neighborhood will tend to be brought up by surrounding more valuable homes.
- New homes generally do not appreciate for the first several years.
Value of Premiums & Upgrades
When a lot is oversized or has special amenities, the home is worth more. To price a home with a premium lot, first determine what it would be worth if the lot were a standard lot based on price per sq ft. Then add the difference in lot value. If you have a big enough lot that can be subdivided, you will always get more by subdividing and selling the lots separately.
Converting a garage to living space generally does not increase the value of the home. To price a home with a garage conversion, first deduct the square footage of the converted space, then multiply the remaining square footage by the appropriate price per square foot for homes of similar size and condition in the area. The loss of value of not having a garage and the added value of the additional living space is usually a wash.
A pool that costs $30,000 to $45,000 to put in makes the average house worth $10,000 to $15,000 more. If you want a pool, buy a house that has one. Don’t add a pool unless you plan to be in the house long enough to get your enjoyment out of it, because you’re not getting your money out of it when you sell. When you’re pricing your home, add a maximum of 1/3 the cost of the pool to the value of your home, NOT what it cost you to put it in.
Resale Values of New Homes vs. Existing Homes
New Home buyers are paying a premium for having everything clean and new. If you try to sell a new home a month after you move in, you shouldn’t expect to get what you paid for it. The same way a new car depreciates the moment you drive it out of the showroom, a new home loses value the moment you buy it. If you are competing against the builder who is still building the exact same home in your neighborhood, you need to be priced 5%-10% below the builder’s price to be competitive. Buyers are willing to pay 5% to 10% more for a home that was never lived in so they can have a new germ-free home for their kids and can choose their favorite colors, finishes and upgrades.
When should I do a price reduction and how much should I reduce the price?
If your home has been on the market for over a month and you have limited showings and no offers, your price is too high. Price reductions should be between 3% to 5%. In fact, it is a mistake to make a price reduction for anything less. For example, a 1% price reduction doesn’t make sense because if the property was really worth 1% less than the list price, offers would have already come in because it’s the same price range. Modest price reductions give agents the impression that the seller’s agent is only trying to trick them by making the listing appear in the MLS list of new listings and price reductions. Real estate agents will tend to ignore a modest price reduction.
After completing a price reduction, don’t say “Price Reduced” in your listing or flyers. It’s like saying, “We’ve been trying to sell this house for a while for more money, but nobody wanted it.”
Also, avoid saying things like, “Seller Motivated.” Show your motivation with a lower price.
How often should I reduce the price?
No more than every 4 weeks. Every 6 weeks in slow markets or rural areas where things tend to move slower.
A few misconceptions
“I’m not getting any showings or offers, so I need a CMA to let me know what’s going on.” No, you don’t need a CMA. The market is telling you the price is too high. You need to reduce your price.
“We need to offer an agent bonus to get agents to show our house more.” No you don’t. Agents don’t search for houses based on commissions or bonuses paid, but they may rule your listing out if they notice you are offering less than 3%. If they do come across a listing with a bonus or commission over 3%, it’s after they already set up the showing. Take the amount of the bonus off the price of the house instead and you will get better results.
I need to price my home higher to leave “negotiating room.” No you don’t. If you are priced right, buyers will pay full asking price, especially in the first week of the listing.
“If these buyers think my house is not worth what I’m asking, why don’t they just make an offer of what they think it’s worth?” Buyers use the “Buyer’s Property Comparisons” approach to valuation, and eliminate overpriced properties from the list of properties they go see. If they see it and decide it’s out of range, they still tend to make offers on the ones that are in range first. If you are willing to take less, then that should be your list price.
“We need to have a broker open house or need to be on the broker new listing tour.” No you don’t. Agents who go to those things have too much time on their hands and not enough buyers. Busy agents with buyers use the MLS to select houses.
“We’re not getting showings because agents and buyers don’t know about our house. We need more marketing.” No you don’t. The MLS and all the public websites that display MLS listings ARE the real estate market, and are all the marketing that you need. Everyone looking for a house looks on MLS and MLS websites.
“We are being blackballed! Agents won’t bring their buyers because we are not paying 6%!” We can assure you there is no vast conspiracy among hundreds or thousands of agents to not show a particular property. Agents only care about getting their 3% and that the house is easy to show. As long as there are no showing obstacles and no FSBO sign in the yard, they will show it just like any other listing. Besides, we provide the same services as 6% agents, we just charge less, and not many agents even know what we do (not that it would matter if they did). Every time a seller was sincerely convinced that blackballing was the reason their house was not being shown, it always turned out that they were overpriced. If blackballing really was the reason for the lack of buyers, then they should be able to list with a 6% agent and sell their house for the same price, right? Well, this has never happened.
“We are hardly getting any showings and not getting any offers, and we are not overpriced. We know we are not overpriced because . . . (fill in the blank)”. No, your price is too high. When you are priced right, you will get showings. And if there is nothing drastically wrong with your house, some of those showings will become offers.
“I think we need to list our house with Betty Boop from Looney Tunes Realty. She has 3 listings in my neighborhood, and she is the only one who ever shows my house.” How many times has she sold it? Maybe Betty Boop is showing your overpriced house to make her listings look cheaper.