The Smart First-Time Home Seller's Guide (2015)

Chapter 4: Establishing The Asking Price



   Your home's first price should be its best price. The number one reason a home does not sell is because it is incorrectly priced. When putting your home on the market, especially if you are living in a region where prices are increasing and buyers are competing for homes, it can be a tempting thought to list at a high price to see if you can get it. This is not a good idea. Sale prices are not based on the owner's needs. When an owner is determined to sell for $300,000 to gain $100,000 to buy their next home, buyers want to know if it is a reasonable price. If similar homes on the market are selling for $250,000, the owner will not be successful. Experienced Realtors will tell you that pricing your home appropriately from the start is critical to selling quickly and for the best price. Most successfully sold homes stay on the market for mere weeks.


   Marketing statistics show that overpricing your home and then reducing the price repeatedly usually results in a much lower profit margin than you originally should have received. The longer a home stays on the market, the more discounted the price becomes. You have to price your home correctly. Many homeowners want to set their listing price based on what they originally paid for their home, the balance of their mortgage, or the profit they expect to make so that they can move into another home. In reality, your home is only worth what the market will allow.


   Price your home too high and risk buyers passing your property by or simply walking away without making an offer. Some sellers are tempted when selecting an agent to hire the one that suggests the highest price for their home, but this is a mistake. That agent is just telling them what they want to hear. When you price your home too high, you are helping sell other homes in your vicinity that are listed for less. After seeing your top dollar home, buyers may be tempted to get the better deal nearby, even if they liked your home better. A lot of buyers do their research, just as you do as a seller, and many will have a good idea of what homes in your neighborhood are worth.. 


   Homes ultimately sell at a price the buyer is willing to pay and the seller is willing to accept. If a property is priced low, a strategy that involves less risk, the seller might potentially receive multiple offers to bring the price up to market value. Sellers can also lose tens of thousands of dollars if they set the price too low. Follow your expert's advice, but keep in mind that you will need to leave room for negotiation for when the time comes to close a deal. Some sellers price too high in order to leave room for negotiation and run the risk of being overlooked by buyers on a more strict budget. Then there is no one to negotiate with. A lot of buyers enjoy the negotiating process and can be smooth talkers. Other more solid buyers appreciate and respect a home priced just right. Have realistic expectations of what your home will sell for, but remember to utilize your Top Agent to calculate the highest price possible in relation to the market.


   It is standard practice for a real estate agent to visit and evaluate your home upon request. Your Realtor will be able to provide the best comparative market analysis and explain exactly how your home should be priced. Your property will have the best chances of selling quickly and for a higher price.

   To further elaborate, a comparative market analysis (CMA) includes sales prices for similar homes nearby that have sold within the last month or so. Many Realtors also include prices for homes presently on the market to show you the competition, as well as homes taken off the market that were unable to be sold.


Other data Realtors use to determine a price range include how many days homes spent on the market at what price and the average difference between the listing prices and the sale prices on recently sold homes. The difference between the listing prices and the actual selling prices for homes in your region speaks volumes about the current real estate market. It is a strong indication of which direction the market is moving in. This will ultimately determine your asking price and whether you can get more than you originally anticipated or less. Remember that CMAs are not set in stone. Some agents will under value a home in hopes of creating demand. Others try to flatter clients with overly inflated estimates in order to get them to list but later suggest reducing the price. Conduct your own investigation so you know what to expect when your Realtor suggests a figure for your home upon further analysis. 


     If you want a second opinion, you can hire an impartial appraiser. An appraiser will help you pinpoint any updates you may have missed that could fetch you a better selling price. Valuating is not an exact science and every appraiser will have a different opinion. If you are selling to buyers who are getting a mortgage, which is the majority of buyers, the lender will need an appraisal. If comparable home sales over the past months and current market conditions do not support your listing price, then your buyer will not get the mortgage.


   It is critical that first time home sellers avoid inaccurate ways to price a home, such as using the home's assessed value or using an online valuation estimate like Zillow's “Zestimates”. It is impossible for an online website based out of a certain city to accurately establish the price of a home in a completely different region. Looking up the value of your home online can be confusing because each site may have a different estimate with no date to support how or why they chose that number. Online calculations may include short sales, bank owned sales, or homes not in the same condition. Values can vary greatly. When coming up with a listing price, you do not want to gamble or guess.


   The only true way to get an idea of your home's worth and what the list price should be for yourself is to compare your home with other homes in the area. Take on a buyer's perspective when scoping out other houses for sale or that have recently sold. You can use Trulia to familiarize yourself with what nearby homes are listed for and selling for. Just be sure to think of the information you gather as a ballpark guide rather than an exact number. Before you head out the door to visit open houses and compare your home with the rest of the town, you need to know what to look for.


   Every house is different, so analyzing comparisons will require some detective work. As a first time home seller formulating your own opinion, you will want to take note of what similar homes have that yours does not, as well as what your home has that others lack. Take note of square footage, as this is important to most buyers. When it comes to pricing, the bigger the house, the bigger the price tag. Note age and condition as well. Newer homes do not necessarily sell for more, but condition relative to age tends to factor into the price. Try to stay within a five-year range when comparing your home with others. The condition of a house can  make or break a deal, so you want pay attention to other homes' upgrades to assess how they affect value. Note all of the bedrooms and bathrooms in your home. The number of bedrooms and baths, and where they are located within the home, can have a radical affect on the price. Also, pay special attention to amenities. The more perks you have, the better. Walk-in closets, a gourmet kitchen, and an existing pool or spa add to the value of your home. Be sure to take note of lot size, as the precise acreage of your land correlates to price. Stay within 0.5 acres when you compare your lot with others.


   Location is another notable, multifaceted factor to assess. Location relates to your state, city, neighborhood, and the placement of your house on the street. Note whether it faces toward any eyesores or busy traffic intersections. Does it have a nice view? Is there a freeway nearby that produces noise, or is there a tranquil lake behind it to enjoy? You will want to take all of these location nuances into consideration.


   While compiling your own research, just observing what homes are not selling at what price will be a great help in determining your own home's approximate worth. You will be better prepared to discuss the analysis and valuation of your home with a professional. You will be more informed and more confident in your ability to follow all of the proceedings your real estate agent will lead you through when establishing an accurate representation of your home's value.       


   Your Realtor can help you estimate who might want to buy your property and what else those buyers are looking at so you can compare your price against the competition. A knowledgeable Realtor will be able to factor in all of these obstacles in the context of your local market conditions, including whether it is a “buyer's market” or “seller's market” and whether house prices are rising or falling. You can do your research on the side, but listen to your expert's advice so your transaction is more likely to run smoothly and quickly from the beginning. If you have hired a Top Producer, you can take comfort in the fact that you are in the best hands of the business. 


   Most people have heard of the terms “buyer's market” and “seller's market”, but few actually know what they mean and how they are determined. There are many factors that affect the real estate market, such as interest rates, investment growth, legislative changes, employment, and new construction. All of these factors influence the market and its behavior in some way or another.


   A market's absorption rate is the best way to determine whether a particular area is functioning as a buyer's market or a seller's market. The absorption rate is the rate at which homes sell in a given province. The higher the absorption rate, the faster properties are selling. Absorption rate is calculated by dividing the number of homes that have sold in the past month by the total number of homes listed for sale at the end of the month. If a region contains homes within two different price margins, you can determine the absorption rate specifically for homes within your price range. For example, if 6 properties sell in November for between $300,000 and $500,000, and 30 are still for sale at the close of the month, the absorption rate is 6/30, or 20%. If only 1 property sells and 15 remain, the absorption rate is 1/15, or 6%. This is the best method used amongst professionals to decide what kind market a house will be up against. Realtors refer to market types in terms according to who holds the advantage and how real estate is behaving.   


   A buyer's market is one in which there are more sellers and homes up for sale than there are buyers. Supply is greater than demand, so homes will have lower prices that are more attractive to buyers. This could be the result of high unemployment rates, fear of interest rate increases, or other factors that make people think twice about purchasing their first house or upgrading to a larger home. Buyers have the advantage in this market setting because they can typically take their time and explore all available options before buying. Buyers have more options because sellers are anxious to make a deal. Generally, prices tend to fall in a buyer's market. An absorption rate of 20% or lower is usually deemed a buyer's market seeing as homes sell relatively slow and the number of months of supply is high.


   In a seller's market, there are more buyers than there are homes for sale. Seeing as supply is less than demand, homes will have higher prices that are more desirable for sellers. The factors at play could be consistently low interest rates, high employment rates, or legislative changes that make it easier to purchase property. These conditions influence buyers to think it is a great time to invest in buying a home. The seller has the advantage is a seller's market. Typically, house prices will increase as buyers are quick to make an offer in order to secure the property. Sometimes buyers will compete or bid for a property, raising the price above the seller's expectations. An absorption rate of 20% or higher is typically deemed a seller's market since homes tend to sell quickly and the number of months of supply is low.


   Buying a home in a seller's market is a competitive affair. Multiple offers made on the same house are not uncommon. Many of these offers may be above the asking price. Buyers can improve their negotiating position by having their finances in order, getting pre-approved for a mortgage, being prepared to act swiftly, and making a strong first offer. However, they are still at the mercy of the market's escalating prices and bidding wars.


   If your home is for sale in a seller's market, this is the ideal time to reap the rewards of price appreciation. Generally, you will have more leverage in the negotiation process. However, keep in mind that, regardless of having a more favorable position in the market,  it would be wise to be realistic and remain open-minded when negotiating. A seller's market does not automatically mean that you will get full price, immediate sale, agreement to all terms, or instant satisfaction.


   A “transitional market” is one in which marketing conditions do not necessarily favor buyers or sellers. A transitional period occurs between moves toward either a buyers' market or sellers' market. The market does not change overnight. There is a transitional period in between while housing supply and demand are approximately equal and pricing generally stabilizes.

   A market cycle can last for any given length of time. Market conditions can last months and sometimes even years. It all depends on the driving forces behind the transition. Even for the best experts, predicting the timing and duration of changes is a big challenge. The only thing that is certain is that sooner or later the housing market will change. Neither parties can have the upper hand all the time, but accepting that change is inevitable and knowing what market you are selling in will give you an informed advantage as you price your home for the big sale.