Why agents shouldn’t bracket by price alone

What happens when you bracket by price alone

Anyone that has read my blog for any length of time will know that I encourage real estate agents to bracket comps when arriving at a list price to sell. The practice of bracketing more closely resembles what real estate appraisers do and helps to prevent deals from falling through due to appraisals being lower than the contract price. Today we’re going to look at the problems that occur when you bracket by price alone.

What criteria do you use to price a home

Bracketing 101

If you’ll recall, the practice of bracketing involves choosing a prominent feature of the home and then choosing recent sales based on this similar feature. The easiest example of this to illustrate is using square footage, or gross living area.

If you are selling a home that has 2,000 square feet of heated and cooled living space then you should choose recent sales that have a little less square footage and a little more square footage. The idea behind this is that the smaller home will most likely sell for less and the larger home for more. The smaller home will be adjusted upward for its smaller size and the larger home will be adjusted downward for its larger size. The two adjusted values will then meet in the middle and give a better indication of value for the subject property.

When deciding on what features you should bracket it is good practice to choose features that you know are important to buyers. For example, when selling a home with a pool, you know that this type of feature is important for those that are interested in pools and not so much for those that don’t want one. Those buyers who want a pool will limit their search to homes with a pool, and you should do the same.

Action Plan

A good action plan when pricing a home is to look at 3-5 of the most important features that the home has and focus only on sales that have these features. The features should be ones that you know the majority of buyers are willing to pay more for.

Knowing your market and what buyers are looking for is important in being able to do this. Keep in mind that you are looking at what the majority of buyers are looking for because it is their behavior that has a direct impact on the prices that are being paid for homes.

The next step is ranking these top features in order of importance and then focusing only on sales that have these features. The ideas here is to attempt to choose the most similar and recent sales that have occurred because their sales price will give you a better idea of what the home should be listed at.

This is what happens when you only bracket by price alone

When you start out to price a home and bracket by price alone you are starting off with a preconceived notion of the value of the home. If you think that a home is worth $150,000 and then choose sales around this price you’ll always come up with support for your price.

Agents should not practice this type of comp selection because it does not provide the most accurate indication of the market value for the home. The sales that you choose based on this criteria may be bigger/smaller, have superior/inferior features or be different in other ways and give a very different indication of value after these differences are accounted for.

There are two categories of search criteria that should be used when looking for comparables. The first category consists of those factors outside of the property, namely location and time of sale. As you have always heard, real estate is all about location, so looking within the subject subdivision should be the first priority. If no recent sales are available then moving outward and further away is acceptable.

The date of sale is important also because the most recent sales will reflect what is going on in the market now and not 6 to 12 months ago, which in some areas can be substantial. Using the most recent sales will also increase the likelihood that these sales will also be the ones the appraiser will use once the home goes under contract.

It’s important to keep in mind that the search should be limited to what is considered a competitive market area. This area consists of neighborhoods and communities that the buyer for the subject property would also look at and will have properties that are in similar schools systems and municipalities.

The second category of criteria includes physical features of the home. Within this group it is a good idea to always include age and gross living area. Searching for homes both newer and older as well as smaller and larger will give you a more realistic group of sales that your subject property will fall within.

After the exterior locational features and basic physical features criteria are included you can then add the 3-5 features you came up with that are key features of the house that the majority of buyers are looking for and place value on. You should keep in mind that if your search comes up short you may need to revise your search criteria in order to find sales.

Some agents may think that they cannot use this method for pricing homes because they don’t know how to come up with dollar adjustments for their sales comps. If you use a qualitative analysis rather than quantitative you can use these methods with reliability.

Question

Does it make sense to  you that when you bracket by price alone that your list price may not be as accurate as when you use the criteria I’ve outlined above?  Please leave a comment below and let’s keep the conversation going. As always, thanks for Reading.

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Comments

  1. Great advice Tom. I like your note about picking the three to five most important features. Thank you for sharing. Hopefully some lenders (not just agents) will read this post. If an appraiser has bracketed the most important three to five features, it is sometimes silly for lenders to ask an appraiser to bracket something insignificant like a fireplace. Sometimes I joke that lenders even want appraisers to bracket the color.

  2. Amber Curran says:

    It makes perfect sense! I usually have an idea of value in my head when I start but wipe it from my mind when starting the valuation. I find my preconceiving pricing was off based on the comparables.

    • Thanks Amber, I appreciate your take as an agent. Appraisers can be guilty of having preconceived notions about value as well that is why it is important to follow these guidelines, which hopefully take out our personal biases.

  3. Good info for the agents, Tom.

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