Pricing Your Home

One real estate trainer jokes that nearly every client tells him that their home is better than others in the neighborhood because their home used the heavy duty nails instead of the regular nails. The sad truth is that we all have an emotional attachment to our homes, and many of us view our home as if it’s worth more than the reality of the marketplace dictates.

The most often heard line by real estate agents is “I don’t want to give my house away.” I know you don’t want to hear this, but houses are a commodity. The prices are set by the marketplace, based on what other homes are selling for. If you are planning to sell a Dodge Truck with one hundred thousand miles on it, and you know of twelve other trucks just like it for sale, and they’re all listed around $5,000, you will not get $8,000 no matter how well you advertise your truck or polish and wax it. It doesn’t matter that you upgraded the stereo seven years ago.

I accompanied one of our associate brokers, Tim Mahon, on a listing appointment a few years ago to a townhome in Allentown. The pricing of the townhome was relatively easy because several had sold in the neighborhood recently, and the unit directly next to this one had sold within a few weeks. The homes were identical. We met the owner, Randy, at the front door and walked through the home, noting that it was fairly typical of the townhomes in the neighborhood.

We sat down at the kitchen table, and Tim proceeded to outline pricing and explain that Randy’s home would likely sell very close in price to the next door neighbors. Randy leaped to his feet, offended that we would even compare his home with his neighbors. “My home is worth at least $25,000 more than his. Do you realize that the neighbor’s home still has all the rooms painted white? Mine has color! And the neighbor has regular closet bars. I had Creative Closets put in double racks in PVC. Also, I had a hose bib put on both the front and back of my home. The neighbor only had a hose bib put on the back. Plus, I’m planning to throw in the twenty-five foot garden hose.”  Tim completely lost all composure. I had never seen him laugh so hard.  “The garden hose is included? Wow.” He said.  “That’s got to be worth $5,000 to $10,000 in price. Why don’t we make this house $40,000 higher than the neighbors if you’re throwing in the garden hose!”  Needless to say, we didn’t get the listing.

Certainly, you don’t want to under price your home and give away your hard earned equity to the buyer. You want to maximize the return you get out of your investment in the home. On the other hand, you don’t want to overprice your home either. Overpriced homes can sit on the market for years, generate a negative feeling in the real estate community, and ultimately sell for less money than if they had been priced correctly initially.

“Well, Loren, I understand my home is only worth $225,000, but I’d like to try to start it at $350,000. After all, I can always come down in price, but I can never go up!” This type of thinking is a killer in the real estate industry. A slowing market is not the time to test the waters of pricing. Even in a stable or good real estate market, the most attention a home receives is in the first two to six weeks the home is for sale. An initial listing in the MLS and on the Internet is seen by far more people than homes that have been on the market for any significant period of time. Real Estate auto search programs sift and sort new listings and email them to prospective buyers. Buyers searching for deals seek out the most recent listings. The ‘for sale’ sign generates word of mouth in the neighborhood and with people driving by.

As a home sits on the market unsold, neighbors begin to talk about something being wrong with the house. Buyers searching on the Internet overlook homes that have been for sale for a significant period because they think that there must be something wrong with them.  Even as you reduce your price, the pool of buyers who may have interest in your home dwindles. Realtors who showed the house when it was overpriced still have a negative connotation in their mind about the property, even if the price has been reduced.

Determining price means investigating homes that are for sale or currently in competition with yours, similar homes that have sold recently, and homes that failed to sell. You may want to talk to several Realtors to collect their opinions of value, and you may want to have an independent appraisal done to obtain an unbiased professional opinion.
 

The Realtor’s Competitive Market Analysis

A Competitive Market Analysis is a comparison by a real estate broker or agent of your home against other homes currently for sale, recently sold, and homes that “expired” or didn’t sell during the initial listing term.

Home sellers immediately glom onto the currently available homes as the best comparison with their own property. The truth, however, is that the recently sold properties are a better indication of a property’s likely sales price. Sold properties show what buyers in the marketplace are willing to pay for a home like yours. Even when home prices are skyrocketing at 1% or more per month in hot markets, the best evaluation is to review sold properties and add a little for appreciation. In a slowing market, it is crucial to the sale to price the property perfectly.

Available properties are your home’s competition. Keep in mind that some of the homes currently for sale in your marketplace will not sell. Even in a hot market, where homes are selling in days or hours, some homes will not sell. Often these homes are overpriced, so you should not use them as an indication of your own sales price.

Unfortunately, like the Simon and Garfunkel song says “People hear what they want to hear and disregard the rest.”  I am consistently surprised by home sellers who only hear part of what I tell them about competing properties.

“Well, Mr. and Mrs. Grenada, there are currently six homes for sale in your neighborhood that are exactly identical to yours. The first two are both priced at $219,900. The third home is priced at $221,900. The fourth and fifth homes are both priced at $224,900, but both of them have brand new kitchens with granite counter tops, which is an upgrade from your home. The last one is priced, and you won’t believe this, at $289,900.”

The response is almost always the same.  “Yes, we saw that one. It’s on Frankfurter Street.  We’ve been comparing our home to that one, and ours is much nicer.  We have better landscaping and we dry-walled the garage. That one still had an open studded garage.”

You may chuckle, but the truth is that it is far easier to view another person’s situation objectively than to view your own objectively. Everyone wants to believe the best possible scenario, and some neighbor has probably told you that he knows something about value and your home is worth at least $50,000 more than it really is.

Of course, you also need to price your home competitively with other similar homes in the marketplace. This is hard because you must be completely objective. If you are pricing your property above the most similar homes, it is very unlikely to sell. Buyers viewing the property may have a positive feeling. They may even like your home the best out of the dozen or fifteen homes they view. However, they will most often make an offer on the home they feel is the best value. This is extremely critical in a slowing market. Fewer homes are selling, so you need to make every showing count. If only one in two homes being put on the market is selling, you will need to make sure your home shows better than your neighbor’s and is priced competitively. Over pricing your home leads to your neighbor’s home being sold at your expense.

Successful Realtors use a tool called a  Realtor’s Competitive Market Analysis form. When reviewing one with an agent, pay close attention to the homes that have sold recently in the area and their sales prices. These indicate what buyers in the marketplace are willing to pay for homes like yours. Also, when your home eventually sells, a buyer will be likely to take out a mortgage. The mortgage company will hire an appraiser to verify their investment in loaning money to the buyer. The appraiser will look at the same “sold” comparable properties and determine what your home is worth based on these comparables. If the appraiser feels the buyer overpaid for the home, the bank will not fully fund the loan on your home.

The second group of listings to review is the Available or Active listings.  These are homes for sale now that are similar to yours.  Remember that you are competing with these homes for the same few buyers in the marketplace at any given point in time.  If the market in your area is very slow, you will need to be one of the best “values” in the market in order to attract the buyers to make offers on your home rather than your neighbors.

The last group of listings is made up of those homes that “expired” without selling.  These were unsuccessful attempts to sell, and although they may have failed to sell because of marketing or staging, the most likely cause is generally that they were overpriced for the current market.