Pricing Your Home
Most buyers do their initial home search online, and make their selections based on what they can afford, value (price per square foot), and pictures. After they look at a number of homes, they make an offer based on the home they perceive as the best value. If one home is the same price but not as nice, or similar but more expensive, they will usually rule it out. They don’t tend to pick a lesser value home and make a much lower offer. The strategy of listing high with the intention of coming down or negotiating is foolish because the right buyers for your house are looking in a lower price range, so they’ll never see your listing.
The most common mistake sellers make is overpricing their home. The result of overpricing are lack of showings and wasting time on market without any offers. Even if a buyer comes along who is willing to agree to the high list price, eventually there will be an appraisal for what it’s actually worth. Then the buyer will most likely cancel if the seller doesn’t come down to the appraised value. The result of underpricing a desirable home is multiple offers in the first few days of the listing, and buyers offering above the list price.
Comparative market analysis (CMA)
If you are listing a home and are not sure what the list price should be, and you have no showing history from a previous listing, the first step is usually a CMA, or in some cases and appraisal.
Also referred to as a Broker Price Opinion (BPO), a CMA is typically performed by a real estate agent, and is generally an estimate of value based on recent per square foot sales prices of similar homes in the area.
The more similar the homes are in the neighborhood, the more reliable the CMA will be. For example, if the subject property is in a subdivision with over 100 homes that are similar in size, age, and amenities, then the price per square foot among the homes will be fairly consistent.
Examples of properties that a CMA would NOT be very reliable:
Homes in rural areas not in subdivisions;
Farm and ranch properties;
Homes in a neighborhoods with some homes built in the 1960s, some completely remodeled, and some torn down and new houses built.
Another limitation of a CMA is that you cannot see inside the homes that are being used as comparables. The actual value can be more or less depending on condition and features that you have no way of knowing.
If your property is in an area of inconsistent home values, the smartest thing to do is invest in an appraisal. Appraisers do much more work to zero in on the right comparables, and make numerous adjustment to come with a more accurate opinion of value.
What a CMA is NOT:
It is not an appraisal. Appraisals can only be done by a licensed or certified appraiser.
It is not a determination of value. It is an estimate based on comparables.
It will not tell you what your house will sell for. Only the market can tell you that.
One CMA is included in all of our listings. We provide you with the most comparable sales in your area from the MLS, but do not actually visit your home. You must take the condition of your home into consideration when looking at the comparable sales. The purpose is to guide you to an appropriate list price. Once a property has been on the market for 1-3 weeks, a CMA is totally unnecessary. The showings traffic and offers (or lack thereof) will tell you if you are overpriced or underpriced, and by how much, better than any CMA can.
If a CMA is indicating a certain price, but you are still not getting the traffic or offers, then you need to act based on the lack of traffic, not the CMA.
If you are not getting much traffic and you are convinced it’s not the price, another thing you can do is actually go out and look at some homes close by that are your competition. What would you think if you were a buyer and saw those homes as well as your own?
A few misconceptions
“I’m not getting any showings or offers, so I need a CMA to let me know what’s going on.” No, you don’t need a CMA. The market is telling you the price is too high. You need to reduce your price.
“We need to offer an agent bonus to get agents to show our house more.” No you don’t. Agent’s don’t search for houses based on commissions or bonuses paid, but they may rule out your listing if they notice you are offering less than 3%. If they do come across a listing with a bonus or commission over 3%, it’s after they already set up the showing. Take the bonus off the price of the house and you will get better results.
“We need to have a broker open house or need to be on the broker new listing tour.” No you don’t. Agents who go to those things have too much time on their hands and not enough buyers. Busy agents with buyers use the MLS to select houses.
We’re not getting showings because agents and buyers don’t know about our house.” The MLS and all the public websites that display MLS listings ARE the real estate market. Everyone looking for a house finds houses on MLS and MLS websites.
“We are being blackballed! Agents won’t bring their buyers because we have a flat fee broker!” We can assure you there is no vast conspiracy among hundreds or thousands of agents not to show a particular property. Agents only care about getting their 3% and that the house is easy to show. As long as there are no showing obstacles and no FSBO sign in the yard they will show it just like any other listing. Besides, we provide the same services as 6% agents, we just charge less, and not many agents even know what we do (not that it would matter if they did). Every time a seller was sincerely convinced that blackballing was the reason their house not being shown, it always turned out they were overpriced. If blackballing really was the reason for the lack of buyers, then they should be able to list with a 6% agent and sell their house for the same price, right? Well, this has never happened.
“We are not getting many showings and not getting any offers, and we are not overpriced. We know we are not overpriced because . . . (fill in the blank)”. No, your price is too high. When you are priced right, you will get showings. And if there is nothing drastically wrong with your house, some of those showings will become offers.
Basics of Pricing
The higher the square footage of a house, the lower the price per square foot.
Values in neighborhoods of older homes tend to be more variable because some homes will be updated, and others not.
The values of the most expensive homes in a neighborhood will tend to be decreased by surrounding homes.
The values of the smallest and least expensive homes in a neighborhood will tend to be increased by surrounding homes.
New homes generally do not appreciate for the first several years.
Online Property Valuations don’t work in Texas!! Texas is a “Nondisclosure” state, which means home sale prices are not public information and therefore not available to property valuation websites. They all use their own formulas to derive values, and none are reliable. In other words, when you look up a Texas home value online…the property valuation sites are usually making it up.
Pricing your Premiums & Upgrades
When a lot is oversized or has special amenities, the home is worth more. To price a home with a premium lot, first determine what it would be worth if the lot were a standard lot based on price per sq ft. Then add the difference in lot value. If you have a big enough lot that can be subdivided, you will always get more selling the lots separately.
Converting a garage to living space generally does not increase the value of the home. To price a home with a garage conversion, first deduct the square footage of the converted space, then multiply the remaining square footage by the appropriate price per square foot for homes of similar size and condition in the area. The loss of value of not having a garage and the added value of the additional living space is a wash.
A pool that costs $30,000 to $45,000 to put in makes the average house worth $10,000 to $15,000 more. If you want a pool, buy a house that has one. Don’t add a pool unless you plan to be in the house long enough to get your enjoyment out of it, because you’re not getting your money out of it when you sell. When you’re pricing your home, calculate a maximum of 1/3 the pool cost added to your home value for the pool, NOT what it cost you to put it in.
Avoid non-relevant factors
Don’t base pricing decisions on what you want or need or what the home cost you. Buyers don’t care how much you paid, or what the remodel cost you, or how much of a down payment you need for your new home. Value is determined by the market.
When should I do a price reduction and how much should I reduce the price?
If your home has been on the market for over a month and you have limited showings and no offers, your price is too high. Price reductions should be between 3% to 5%. In fact, it is a mistake to make a price reduction for anything less. For example, a 1% price reduction doesn’t make sense because if the property was really worth 1% less than the list price, offers would have already come in. Modest price reductions give agents the impression that the seller’s agent is only trying to trick them by making the listing appear in the MLS list of new listings and price reductions. Real estate agents will tend to ignore a modest price reduction. Also, avoid saying things like, “Seller Motivated.” Show your motivation with a lower price.
After completing a price reduction, don’t say “Price Reduced” in your listing or flyers. It’s like saying, “We’ve been trying to sell this house for a while for more money, but nobody wanted it.”
How often should I reduce the price
No more than 4 weeks. Every 6 weeks in slow markets or rural areas where things tend to move slower.
12 simple truths about pricing your home for the MLS.
- If you are having fewer showings than normal, and no offers, the property is over-priced. If there are a lot of showings and no offers, it means there is something wrong or undesirable about the house. There are no exceptions (assuming there are good pictures online and no showing obstacles).
- The lower the listing price, the more showings and offers you will get.
- A property will sell for full list price if it is worth full list price.
- You don’t need “negotiating room” if you are priced right.
- No matter what the listing price is, agents often offer something less, initially. This DOES NOT mean the buyer will not pay full list price.
- A property priced above what it’s worth will still only sell for what it’s worth, but it will take longer.
- Buyer incentives, such as offering to pay buyers closing costs, carpet allowance, repair allowances, etc., will not increase showings as much as a price reduction for the same amount without the incentives. Reason: The buyer normally doesn’t see the incentives until after he selects the property for a showing, and that initial selection is based on the list price.
- You are more likely to get the full list price in the first 2 weeks of a listing, than the same price, after it is reduced to that price after 1-2 months. Reason: When it’s a new listing, buyers feel more pressure to offer full price due to fear that another buyer will snatch it up first.
- Even if a buyer agrees to pay the full list price of an overpriced property, there is a provision in the standard contract form that allows a buyer to cancel if the appraisal is lower than the contract price. In such cases, the seller normally reduces his price to the appraisal amount.
- When a listing is 3-4 months old and hasn’t had a price reduction, it usually means (to agents) that the seller is not serious, or there is something wrong with the house. Many agents consider such listings a waste of time and won’t bother showing them.
- It makes no sense to consider an offer more than 5% less than your listing price. You are smarter to reduce your price by 3-5% because you may get a full price offer at the new price.
- It makes no sense to offer a bonus or a commission above 3% for the buyer’s agent. The buyer decides which house he is going to buy, not the agent. And most of the time the buyer is selecting which houses he will go see in the first place. The commission amount does not enter into the decision. However, offering less than a 3% commission may cause the agent to not show it or tell his client the house is not available.
Suggestion: Price your home for what it’s worth, and don’t negotiate the commission with agents. You still have 3% negotiating room if you get a buyer without an agent.
Resale Values of New Homes vs. Existing Homes
New Home buyers are paying a premium for having everything new. If you try to sell a new home a month after you move in, you shouldn’t expect to get what you paid for it. The same way a new car depreciates the moment you drive it out of the showroom, a new home loses value the moment you buy it. If you are competing against the builder who is still building the exact same home in your neighborhood, you need to be priced 5%-10% below the builder’s price to be competitive. Buyers (usually the female half of a couple is the primary decision-maker) are willing to pay 5% to 10% more for a home that was never lived in so they can choose their favorite colors, finishes and upgrades.
The chart above illustrates what is generally the case when comparing resale values of new and existing homes. In the short run, you are ahead with an existing home; in the long run you are better off with a new home. (What is not depicted in the chart is that new homes tend to require less maintenance, and builders generally have warranties which can also reduce maintenance costs.) Remember: If you are buying an existing home or building a new home in Texas, don’t forget about our 2% buyer’s rebate. Click here for more information on the 2% buyer’s rebate on new home builds in Texas.
The Short Sale Option
What are my options when the realistic market value of my home is LESS than the total of the mortgage, sales commissions, and closing costs?
This is common, especially if you recently bought the house new or got 95% to 100% financing. Most people don’t realize that there is an alternative other than being stuck with the home or coming to the closing with a big check. We often help sellers in this situation complete a “Short Sale”, where we get the lender to reduce the mortgage amount sufficiently to get the house sold, and the seller doesn’t have to come up with any money at closing. For more about this option, see Short Sale Solution.