5 Mistakes homeowners make in pricing their homes
Appraisers measure market value, and market value is defined as the following:
Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
- buyer and seller are typically motivated;
- both parties are well informed or well advised, and each acting in what he or she considers his/her own best interest;
- a reasonable time is allowed for exposure in the open market;
- payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
- the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
It’s important to know this definition if you want to price your home in a competitive way so that you will get maximum value and sell it in a reasonable time. During my 25 years as a real estate appraiser I’ve noticed some common mistakes homeowners make in pricing their homes and I want to share them with you today.
Setting list price based on what you want to get out of the house
On first glance you may ask what is wrong with pricing your home based on what you want to get out of it. What you must take into consideration is how this amount compares to what other similar homes are selling for in your market. Let’s say you owe $150,000 on your home and have a second home equity loan for $25,000, for a total amount of $175,000. Now let’s say that other similar homes in your market are selling for around $160,000, but you want to price your home at $175,000 because you need to pay off both mortgages.
Do you think that pricing your home at $175,000 would be wise just because you want to payoff both mortgages ? It wouldn’t be wise because you would be pricing your home out of the market since all of the comps indicate a lower value, and this is what would be reflected in the mortgage appraisal.
Base the list price on the cost they have in the house
This is a common problem I see all the time. I’m all about education and this is one area I strive to help homeowners understand. The value that a feature in a home contributes is not the same as what the feature costs. It can be similar but it is not a given.
A good example of this principle is the renovation of a kitchen or bathroom, which are popular home improvements. These types of projects can be quite expensive, however you should be ever mindful that a $50,000 kitchen upgrade may not add $50,000 in value to the home. Because real estate is location specific, some areas will provide a better return on you investment. Knowing the property values in your neighborhood, including the high values, will help you make a smarter decision about how much to invest in the renovation so that when you go to sell you don’t have to price your home out of the market to pay for the improvements.
They go on hearsay
When trying to sell and list your home you need to base your price on facts. I’ve done numerous appraisals for sellers who have had their homes listed for an extended period of time with no luck. One situation that comes to mind involved a seller who set a list price based on what they thought their neighbor sold their home for. Gossip about what the person had sold their home for spread through the neighborhood quickly, and by the time it had gotten to my client the number turned out to be higher than the true amount.
My client took this number and reasoned that if that house could sell for that amount they could sell theirs for slightly higher. The inaccuracy of the true sale price of the neighbors house resulted in my client’s home sitting on the market and not selling. Not until they hired me did they find out the correct sale price, which as you might expect was lower than thought. The moral of this story is that if you want your house to sell you need to base your list price on accurate information.
They don’t compare apples to apples
This is sort of related to the previous point. Have you ever heard someone say “John Smith down the street sold his house for such and such so I know I can get that out of mine since our houses are similar”. The previous point focused on the sale price being accurate but now I want to focus on the physical attributes of the home.
You may have gotten the sale price correct for John Smith’s home but do you know how his house compares to yours? Maybe his home had a finished basement and your basement is unfinished. Many people do not take these physical differences into consideration, however they do have an effect on the home’s overall value. While it would be ideal to use only homes with unfinished basements as comps for this property this may not be possible, so it is necessary to adjust for these differences like an appraiser does in their reports. By comparing properties that are as similar as possible, and then making adjustments for the differences, you will get the most accurate value estimate for your home.
They don’t follow the advice of an appraiser
A pre-listing appraisal can help you establish a list price for your home by gathering accurate data about recently sold homes and comparing them to yours. This type of appraisal typically considers recent sales as well as active and pending sales because by looking at both past sales and active listings you will be able to get a better indication of value.
Even though some homeowners pay for a pre-listing appraisal some may not use it because they are under the impression that listing it higher will not hurt their chances of selling, and they can always drop the price. This could not be farther from the truth. Not paying attention to the appraiser and listing the home for a higher amount can of course result in the home staying on the market longer than necessary. Even when the price is dropped this can give the impression to potential buyers that something is wrong with the property and result in it being on the market even longer before it sells. It is best to go with the value opinion from the appraiser because it is based on market data and will give the seller the best chance to sell for an amount supported by the market in a reasonable amount of time.
Question
Can you think of anything I’ve left out? I’d like to hear your take on the matter so feel free to leave a comment below and as always thanks for reading.
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Great blog post Tom. I can add one reason that maybe falls under “apples to apples.” I hear agents and homeowners talk often about using price per square foot to set a price. Price per square foot is a useful metric, but it is not very good for estimating a value unless the comparable home that the price per square foot comes from is very similar in site size, improvement size, condition, and quality. A smaller home will often sell for a much higher price per square foot, even if other factors are quite similar.
Thanks for bringing this up Gary. I could have added this as a bonus sixth point! Pricing your home solely on price per square foot is dangerous. It must be considered in the whole context for the very reasons you mention.
Nice job, Tom. Like Gary said, I was going to mention how easy it is to miss value when basing a list price on the price per sq ft of another sale. The price per sq ft of that other sale may or may not be a good comparison for the subject property. Yet this is one of the mistakes that is most often made in real estate.
I guess this is a widespread issue since it happens all over. Price per square foot should not be the final word as there are so many other things to look at. Thanks for your perspective Ryan.
All excellent points Tom. Appraiser’s are not only experts in determining the final market value of property, they are also experts in identifying the individual elements of contribution for residential property in a specific location and estimating the contributory value of those individual items through methodology such as paired sales. All neighborhoods have a range of values and determining the reasons why any given property sells for more or less than others is what appraisers have been educated and trained to do. Homeowners would also be wise to hire an appraiser in a consulting capacity when considering make major improvements such as room additions, pools, kitchen and bath remodeling etc. to complete a cost benefit analysis to determine the contributory value of the for planned improvements versus their cost.
You make an excellent point Tom about hiring an appraiser in the capacity of a consultant. For the modest price of an appraisal the homeowner could possibly find out if they are overbuilding for their area and in so doing save thousands of dollars.
Tom, THANK YOU! THANK YOU! THANK YOU! for writing this candid article to help sellers understand pricing their home for a listing. I see so many owner’s list of updates list with 10’s of thousands of dollars and that’s the reason they want to list at X amount not realizing how much they’ve over improved their home for the neighborhood. I’m sharing in multiple places online. Thanks again!
Thanks Bill. Glad you found it helpful and I hope it helps the people you share it with understand what goes into pricing a home to the market instead of what you want to get out of it.