What is bracketing and why should Realtors do it?

what's my home worth I spoke recently at a local Realtor group about how Realtors could “think like an appraiser”. By being on the same page as the appraiser I believe that there will be less value issues on the back end of the sales transaction. By following similar methods as appraisers to arrive at their list prices, Realtors can be proactive in their pricing strategy.

The method of bracketing sales is the topic I wanted to focus on today. Bracketing refers to the method of choosing sales comparables that are both inferior and superior to the subject property in various features and characteristics. For example, you may want to compare the subject to recent sales that are both bigger and smaller in square footage than the subject, not just one or the other. In addition, you could choose sales that are inferior and superior in updating or features.

The logic behind choosing comparables that are superior and inferior lies in how adjustments are made to the sales. If a sale is superior to the subject property a downward adjustment is made to the sale, and if a sale is inferior to the subject property an upward adjustment is made. So lets say you have one sale with a fireplace, while the subject does not have this feature. If the fireplace is worth $2,000 you would subtract $2,000 from the sales price of the comparable. If you have two sales that are similar to the subject in all but the two different features, one being superior and the other inferior, you can estimate the value of the subject by adjusting for the differences. In a perfect world after you adjust up on one sale, and down on the other sale, the adjusted sale price for each one would be the same, and that would be the indicated value of the subject. This is not exactly the case in the real world so there is a range in “adjusted values”.

While a Realtor would not usually go into such an in-depth analysis as an appraiser with the specific dollar adjustments, performing a simplified qualitative analysis that looks at homes that are both inferior and superior can provide a decent value estimate of the home that is based on actual market sales activity. By picking a sale that is superior to the subject you know what the high end of the range is, and the inferior sale would reflect the lower end of the range. This method also lends credibility to the Realtor who provides sales information to the appraiser. By including sales that are above and below the list or contract price the Realtor could not be accused of trying to influence the appraiser with only the high price sales. What method do you use for coming up with a list price? Leave me a message below, I would appreciate hearing from you about your methods.

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Comments

  1. Thank you so much for the excellent blog. There are two items I have observed in San Diego County that impact the amenity values for owned solar and swimming pools. Both seem to be driven by outside forces or Macro Economic forces and another by what I would term as a local Micro Economic force. As an example; Due to the high cost of electrical energy and the CA water shortage the market value of owned solar has increased, nearly matching the installation costs, while the value of a pool has typically diminished due to the high cost of water and local civic pressure, social pressure and fines to reduce water usage. So both solar and pools reflect the impact of Macro Economic issues. As pools have become less desirable in affordable tract neighborhoods pool values in estate or luxury neighborhoods have remain the same or increased. In high estate/luxury neighborhoods pools are considered a prestige necessity. You might call them Trophy Pools, the bigger the better. Thus estate/luxury neighborhood pool market values are driven by local Micro Economic Markets. Once again as you stated it’s all about the location. Your thoughts?

    • Those are great examples, Tom, It’s also a good reason for owners using local appraisers who know the market rather than an online service that do not know the nuances of what is going on. It goes to show you that an amenity in one area may not be as important to buyers as in another area. Thanks for sharing.

  2. Bob Marston says:

    Tom, When I am working with a seller to prepare their listing, I use this exact technique among a few others to establish a price range rather than an exact amount. I then explain how positioning the home at different points in that range will likely affect showing traffic and thus potential offers. Finally I ask the client(s) to make the final decision. For me this process utilizes the best approaches and techniques that I have learned from my mentors, including you, to serve my client from a professional valuation standpoint while making it clear which hat I have on, that of a Realtor not an appraiser. The final step also leaves the door open for discussions regarding price reduction should the need arise. How does this approach sound to you? Thanks for all you do especially going above and beyond the simplest description of you role in the real estate community to help us all grow and maximize our potential and that of our wonderful city!

    • Thanks so much for the compliments Bob, I really appreciate it. It sounds like you are doing a good job of using market data to develop an asking price. I think this is best in the long run because it will all be revealed during the mortgage appraisal. I believe doing in this way will lead to fewer appraisals coming in below the contract.

  3. Jana Woodruff says:

    How far back do you compare in todays market? Is 6 months still the right amount of time? Thank you

    • Thanks for the question Jana. Most lenders these days would like to see comparables within 90 days if possible. This is not always easy to do, so when none are available within that time frame we can extend the time of sales guidelines. One thing important for appraisers to keep in mind is whether there has been appreciation or deprecation, and if there has, then to make an adjustment for time of sale if you did use older sales and if it is appropriate.

  4. Tom,
    Thank you for such good information. I enjoy pricing homes to sell in the market. But, how do we know what values to assign to certain items? For instance, how is an agent supposed to know that a fireplace is worth $2,000? Often times, we have to go by sold price per foot to get our suggested price range. And, you know as well as I do that our tax records don’t always have the right square footage. My biggest fear is that we leave any money on the table for our sellers. Any suggestions? Thanks!

    • Great question Genny. Short of getting an appraisal I think the most realistic thing an agent can do is make sure the comps they do use are truly similar to the home being priced. Appraisers attempt to find homes that are similar in age, quality, amenities, style, and condition or upgrades. MLS provides very good data these days so that these types of features are easy to recognize. One thing I have noticed in the past is when a home may have been compared to another that did not have similar features such as finished basement or even a swimming pool. If you stick to homes that are as similar as possible, and in addition look at what is available for sale (which usually reflects the upper end of the range), you can get a pretty good idea. Sometimes it is even difficult for an appraiser to figure out he contributory of a feature, so I totally understand the challenge facing agents.

  5. Good post, Tom. I think you’re hitting on an important topic. Realtors and appraisers think differently about the same house, which can often lead to confusion. Good communication and education can close the gap though.

    • Exactly Ryan. I think if we are all on the same page then there could be less deals falling through. I also wanted to stress the importance of using market data for coming up with a list price. I have had so many Realtors tell me they listed a home at a certain price because that is what the buyer wanted out of it. That just doesn’t cut it in todays market though.

Trackbacks

  1. […] physical attributes of the home. These physical features of your home should be what you use to “bracket” the sales during comp selection because the features of a property are what drives […]

  2. […] home with finished basement then try and find similar sales with like features. I wrote an article “What is bracketing and why should Realtors do it” that explains the process appraisers go through that goes hand in hand with what I am writing […]

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