Determining the Value of Your Home
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A Comparative Market Analysis (CMA) is essential to determine the value of residential property. Location and characteristics of the property are the key elements in determining value, therefore the basis for valuation is similar properties in your area. The market analysis takes into account the amount received from recent sales of comparable properties and the quantity and quality of comparable properties currently on the market. The desired end result is to find a price that will attract a willing and able buyer in a reasonable time.
Once the value of your home has been determined, you can decide on an offering price that will achieve your goals. Generally, the price should not exceed the value by more than 5% or potential buyers may not even make offers. Naturally, if you want to sell quickly your asking price should be very near the value.
The following are a few things to keep in mind about pricing:
Realistic pricing will achieve maximum price in a reasonable time.
Your cost or profit desire is irrelevant; the market determines the price.
The cost of improvements are almost always more than the added value.
Houses that remain on the market for a long time do not get shown.
A house that is priced right from the beginning achieves the highest proceeds.
Click on this link to see the dangers of overpricing
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April 2, 2007 |
Low Ball Offers Are Back
by Bob Hunt
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Many parts of the country are currently experiencing an "adjusting" market. Such an environment tends to bring out low ball offers. Considering that many -- indeed, probably most -- currently active agents have only been in the business during the past five years, i.e. during the good times, low ball offers are pretty much a new phenomenon to them. They merit some thought.
First, we need to acknowledge that isn't likely to be any widely accepted definition of what constitutes a "low ball offer." Some would define it relative to asking price, others relative to value. More like the late Potter Stewart, Supreme Court Justice, said of hard core pornography, even if you can't define it, you know it when you see it. Also, we need to remember that, like beauty, what constitutes a low ball offer is in the eye of the beholder. This difference of perception frequently exists between sellers and agents.
Consider the following scenario: Mr. and Mrs. Sellers' home was worth about $575,000 a year and a half ago. Now, both they and their agent agree, its value is about $500,000 -- maybe somewhat less -- and they have listed it for $499,000. There are recent comparables to support that price. But the market is slow -- 15 percent fewer sales than the same period a year before -- and after two months on the market they have had no offers. Now, as a matter of fact, the Sellers, who bought the property for $150,000 some years ago, would be satisfied with a sale between $400,000 - $450,000, but why settle for so much less than value?
An offer comes in for $400,000. The buyer is financially strong, and all other terms are agreeable. What to do?
A variety of counsels might be offered to the sellers, and, to be sure, before doing so, one would probably want even more information than we have given. Some would say, "Go for a price you can live with. Try to get it done. Counter at $450,000 or maybe $460,000." Others might suggest, "No, don't give so much (potentially at least) away. Counter to them in the range where you think the value is, maybe $485,000 or $490,000." But, to that, others might argue, "Don't even bother to counter. If they really want the property, and they're willing to pay somewhere near value, they can come back with a price within reason. Right now, they haven't even given you a starting point for negotiations."
Don't counter at all? How can that make any sense? As a client of mine once put it, "If I counter to a low ball offer, I'm just competing with myself?" That is, he would be setting a top limit of where future negotiations (with that buyer) might go. He didn't see why he should do that before he even knew if the buyer was in what he considered a reasonable price range.
Needless to say, none of the above alternatives are the right one. They all have plausibility in their place. It will depend on the situation. Conversely, none is definitely a wrong one.
Nor is it easy to be the buyer's agent in a low ball situation. Some buyers will just go ballistic if they don't receive a counter offer. They need to be taught that a seller is under no obligation to make one.
Because agents generally don't know how high a buyer will go or how low a seller will go (sometimes the principals themselves don't realize this), it can be fruitful for an agent to work with a buyer who makes low ball offers. For some agents, though, at some point it is simply not worth the time and occasional aggravation. We just don't know. And it is those little surprises that are one of the things that make this business fun.
Bob Hunt has been a real estate broker in Orange County for more than 25 years. He has seen plenty of low ball offers. |
Copyright © 2007 Realty Times. All Rights Reserved.
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Pricing Methods |
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You can ask any price you want for your house. But your house won't sell until you find a buyer who agrees that it's worth the price you're willing to accept. Smart sellers know that although only one person sets a price, two people -- a seller and a buyer -- make a sale.
Adverse factors outside your control (such as a glut of houses on the market, high mortgage interest rates, or dismal consumer confidence) may negatively affect your sale price. Even so, you don't have to passively let the real estate gods crush you -- quite the contrary. Here are proven ideas you can use to create demand for your house no matter how poor prevailing market conditions are.
You can pick a price for your house in a hundred different ways, but in the final analysis, however, they're all variations of the pricing methods we discuss in the following sections. |
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Four phase pricing: prevalent but ineffective
The consequences of pulling an asking price out of the air are unacceptable for a smart seller. More likely, you may overprice your house, which results in an exhaustingly slow marketing process that ultimately lowers your sale price. Houses marketed by unrealistic sellers usually go through the four distinct pricing phases prior to sale.
Houses marketed by unrealistic sellers usually go through the following four distinct pricing phases prior to sale.
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Phase one: Sellers start by blithely disregarding any factual pricing method, such as checking comparable property sales. Other sellers think that their house is infinitely superior to those ticky-tacky comps. Either way, this misguided method generally results in grotesque overpricing. |
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Phase two: After several months of total market rejection, the sellers grudgingly make a tiny price reduction, which brings their asking price down from the grotesque level to merely absurdly overpriced. Fantasy moderated is, however, still fantasy. |
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Phase three: More lonely months pass, and then two things happen. First, the sellers typically get a new agent. Second, the sellers reduce their asking price to one that "leaves room to negotiate." Even though the revised price is still moderately higher than the house's probable sale price based on sales of comparable property. |
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Phase four: The sellers ultimately accept the validity of comps and reduce their asking price accordingly to a "let's sell it" level. After the sellers establish a good correlation between asking price and fair market value, their house finally sells. |
Ironically, instead of getting more money with this method, four-phase pricing usually stigmatizes a property and reduces the eventual sale price to less than it would have been with more realistic pricing, for the following reasons:
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The listing agent can't justify an indefensible asking price. If the asking price has no factual basis, the agent can't provide a good answer to buyers who ask, "Why hasn't the house sold after all this time on the market? What's wrong with it?" |
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The property is slowly but surely buried by new listings that come on the market. After several months, most buyers and agents either forget that your house is still on the market or belittle the house. In desperation, sellers are forced to slash their asking price to the bone to attract buyers. | | |
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Pleasure-pleasure-panic pricing: fast, top-dollar sales
You can sell your house quickly and get the highest possible price by using this method. The secret of success is to establish a very realistic asking price for your house when you first place it on the market. The correct way to establish an asking price is to analyze houses comparable to yours in size, age, condition, and location -- both houses that are currently on the market and those that have sold within the past six months.
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The secret of success is to establish a very realistic asking price for your house when you first place it on the market. The correct way to establish an asking price is to analyze houses comparable to yours in size, age, condition, and location -- both houses that are currently on the market and those that have sold within the past six months. Sale prices, not asking prices, determine fair market value. Here's how the pleasure-pleasure-panic pricing method works:
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Milt and Judy have spent the last three months looking at houses on the market in their price range. They're educated buyers; they know how to distinguish between a well-priced house and an OPT (overpriced turkey). |
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Judy and Milt nearly bought a great house a couple of months ago. It had all the features they wanted and was fairly priced, to boot. However, Milt didn't realize how well priced it was because he'd just started the education process. While Milt was haggling over the price and terms of sale, the seller accepted a better offer. Judy still blames him for losing their dream house. |
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They're spending today the same way they've spent the previous 11 Sundays, touring what seems like an endless series of newly listed OPTs with their agent. Then Judy and Milt trudge into your first open house and pleasure-pleasure-panic kicks into gear. |
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Pleasure Number 1: Judy and Milt love your property. It's the best place they've seen in the past three months. They could live in your house happily ever after. Their eyes start to sparkle. |
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Pleasure Number 2: Milt and Judy can't believe their eyes when they look at the asking price on your listing statement. By now, they know property values every bit as well as their agent. Your house is definitely priced to sell. Their hands start to tremble. |
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Panic: Judy and Milt see another couple entering your house. They've seen these folks at many other open houses during the past couple of months. That familiarity is not a coincidence. The other couple obviously wants to buy a house in the same neighborhood and price range. |
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Judy and Milt stare at each other in horror. If they love your house and know that it's well priced, so will the other couple. Their deodorants fail when they realize that if they don't act quickly, the other couple will snap up the house. Milt tells their agent to write up a full-asking-price offer. Judy kicks Milt in the shin and instructs the agent to go $500 over your asking price just to be safe. Milt agrees. He doesn't want to be a two-time loser. |
That scenario explains how pleasure-pleasure-panic pricing creates a seller's market even in the midst of a buyer's market. This approach puts intense pressure on buyers to perform quickly. Don't be surprised if you get several purchase offers, including some that are equal to or over the full asking price, as soon as your house hits the market -- if your house is priced right. After your property has been given broad, immediate market exposure, spirited competition forces buyers to pay top dollar for your house. This method works almost every time. | |
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Quantum pricing: an effective technique
Buyers use price limits, called quantums, to simplify house hunting. Pricing quantums are initially expressed in nice, round, easy-to-work-with numbers, such as $100,000 and $50,000, and then fine-tuned to $25,000 and $10,000 quantums. Here's a technique. Follow these steps to use price quantums to hone your initial asking price to razor sharp, pleasure-pleasure-panic perfection.
Put yourself in the buyer's shoes for a moment and imagine that you're buying, not selling, your house. If you're like most people, one of the first things you do is decide how much you want to spend. For example, you set your upper limit of affordability at $150,000. If you are working with a real estate agent, you probably tell the agent, "I don't want to spend more than $150,000," or "Don't show me anything that costs over $150,000." Why waste time looking at property you can't afford to buy?
Buyers use price limits, called quantums, to simplify house hunting. Pricing quantums are initially expressed in nice, round, easy-to-work-with numbers, such as $100,000 and $50,000, and then fine-tuned to $25,000 and $10,000 quantums.
Buyers from higher-price quantums occasionally look down into a lower quantum in their search for a house. However, they rarely swim up to a higher quantum (if they establish realistic affordability limits). Thus, for a house to sell, the price must drop down to the buyer's price quantum, because the buyer can't afford to swim up to the house. |
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Establishing price quantums
Follow these steps to use price quantums to hone your initial asking price to razor sharp, pleasure-pleasure-panic perfection:
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Determine your house's market value within the appropriate $100,000 quantum, unless you happen to live in an area where no house has ever sold for more than $99,999.99. |
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Use the comparable market analysis (CMA) method to define a general price range for your property. For example, if a CMA shows that five houses similar to yours in size, age, condition, and location sold within the past six months for $215,000 to $240,000, your house clearly belongs in the $200,000 to $300,000 quantum. |
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Adjust the price within the correct $50,000 quantum. Continuing with the same example, decide whether your asking price should be over or under $250,000. Because not one of the comps sold for more than $240,000, your price belongs in the $200,000 to $250,000 quantum. As problems go, still no head-scratcher. |
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Fine-tune your price to the closest $25,000 quantum. The more accurate your pricing, the more exacting your scrutiny. Deciding whether the price should be in the $200,000 to $225,000 quantum or the $225,000 to $250,000 quantum requires careful analysis. If, for example, four of the five comps sold between $215,000 to $225,000 and the fifth went for $235,000, you'd be wise to keep the asking price under $225,000. |
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Ultra-fine-tune your price to the nearest $10,000 quantum. This is the moment of truth. Now you must decide on the precise point between $215,000 and $225,000 to put your price. If the actual prices of comparable houses that sold under $225,000 were $215,000, $217,500, $219,500, and $222,000, three out of four sales point toward an asking price under $220,000. | |
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Copyright ? 2001 Hungry Minds, Inc. All rights reserved. |
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