After looking over a weeks worth of real estate sales data I have found a trend in some market areas. That trend is the increasing gap between what a house was initially listed at and the final sales price. This is one of the statistics appraiser’s look at, and this week in one area I was working in, I found it to be larger than typical.
Let me first explain what I am talking about. For example, if a house is listed at $100,000 and it sells at $90,000 then the sales price to list price ratio is 90% ($90,000/$100,000). Houses that are priced based on market data (recent comparable sales) sell for a price closer to their list price and they sell quicker. The best case scenario would be for this ratio to be as close to 100% as possible. Buyers are not stupid, and they know what homes are selling for in this market. The internet has made it easier for them to look up this information. They will not pay more for a house than what other similar ones are currently selling for or are listed at.
It is very important for FSBO sellers and Realtors to do their homework to come up with a reasonable list price based on recent sales and current listings. In order to do this you must pick homes that have sold recently and are similar to yours in age, style, appeal, size, etc. I have seen so called “comparables” that were much bigger than the subject property, or maybe they were much newer or had superior amenities (ie: swimming pool, more land, updated kitchens and baths, etc) than the subject property. In addition, older comparables that sold more than 3-6 months ago do not reflect what is current occurring in the market. I thought I would explain how appraisers pick their comparables so that owners or agents will know what they are looking for and maybe this can help in making the sale price to list price ratio closer to each other. If this happens, then hopefully we will have less problems with deals falling through due to homes not appraising for contract price.
When doing research for comparable sales appraisers base their searches on recent sales that have physical characteristics of the home such as
age, size, bedroom/bath count, etc. In addition to similar physical characteristics we look for “comps” that are in similar areas and that are affected by similar economic and external influences. If a home is affected negatively by being located next to an airport then it is best to try and use sales comparables that were also affected by these same influences. We also look for homes in similar school systems. One of the situations I encountered recently involved the use of a comp in a Realtors market analysis that was very different than the subject, which was a one story slab home. The comparable had a finished basement and an in-ground swimming pool. It also sold more than 12 months ago. By picking comparables that are as similar to the subject as possible, the total amount of adjustments made to the comps is reduced and the value estimate is more accurate. By following this process and using several sales you can get a pretty accurate value estimate from which to determine a list price for your home. Do you follow a similar process when coming up with your list price? Can you see where following a similar process that appraisers use might help reduce deals that fall through? I would be interested in hearing your opinion.
If you have any real estate appraisal related questions you can call me at 205.243.9304, email me, or connect with me on Facebook., Twitter, or Youtube.
I do think getting an appraisal is WELL worth the money. In many markets, the cost of an appraisal is often less than the cost of having the house sit on the market for even one week longer than necessary (due to not being priced at or near market value).
That is so true about the cost of the appraisal. I always compare it the additional marketing costs if it has to stay on the market longer.
Hi Tom,
I would say that even when the listing agent nails the selection of comps, many (most) sellers have an unrealistic idea of the market value of their home and aren’t particularly impressed (or swayed) by actual data. Couple that with agents that want the listing regardless of the likelihood that the listing will sell at the seller’s preferred price, and you get listings that get stale and then sell for less than they would have had they been priced right to begin with.
It is a lousy way to sell a listing, or to TRY to sell a listing – over price it, then cross your fingers and hope hope hope someone will make an offer – and we all know what happens when the contract price isn’t supported by the comps!
It is a HARD lesson to learn as an agent – either get the listing on the market at the right price, or walk away and let someone else spend their money marketing something for 6 months only to lose the listing to another agent (who, ironically, can’t get it sold either unless the seller is ready to accept the realities of the market).
Alison, I agree with you about the homeowners having an unrealistic idea of their homes true market value. I think that is a business decision a Realtor has to make. I know some take on these listings but in the long run I don’t think it is a good idea. I have a Realtor friend that does some marketing to these homeowners after the house wont sell and then they are ready to do what is necessary to get it sold, like get and appraisal to set a realistic market derived price. I do think though that if enough Realtors did not take on listings then maybe homeowners would get the idea, or maybe not! 🙂
Well said, Tom. I think sometimes it’s easy to forget that “comp” does actually stand for “comparable”, which means it should resemble the subject property. I have seen the same thing you’ve seen before. Of course sometimes there really aren’t any great comps out there, but other times there are and the most similar ones should be used. Good post.
Good point Ryan on what “comp” stands for. It is not a mere bracketing of the hopeful list price but a braketing of the physical characteristics of the home taking into consideration its location, appeal, and other factors.