Above, Below and In-Between: How Real Estate Agents Price Properties

Every homeowner wants to get top dollar for their investment when they go to sell, and most feel they have some sense of what "top dollar" is before they even invite a real estate agent into their home. The problem is that while many sellers have realistic expectations and accurate information to support their estimates, others allow emotion to enter the process and are disillusioned when an agent suggests a less-than-dazzling list price. With the recent downturn in the real estate market many sellers have been left wondering how low their prices need to be in order to sell. Understanding the process agents use to price a property and the factors that are typically considered when evaluating comparable homes can prevent reverse sticker shock.

1. Consider which you would prefer - top dollar or a fast sale.

It's wonderful when these two goals coincide in a sale, but as a general rule, the higher your home is priced, the longer it will stay on the market. If you need to sell your home before a specific deadline, you need to make sure the price is competitive. You'll also need to decide which terms, besides price, may be important, such as settlement date, inspection requirements and whether the buyer accepts the property "as-is". If you are in a situation where you need a two-month rent-back, for example, it might be worth sacrificing a few dollars in the asking price if you manage to find a buyer that is amenable to your timetable, since such offers can be difficult to attract.

2. Take into account the time of year in which you'll be marketing your home.

Generally, spring and fall are the most active periods of the real estate cycle. Summer often offers steady buying and selling activity, but may be slowed by family vacations, hot weather, and holidays such as the Fourth of July. Do not expect much activity at all from Thanksgiving to New Years Day. While it's true that lightning can always strike, it is also true that demand drives the market, and periods of slower demand generally cause sellers to lower prices as an incentive to buyers.

3. Consider overall market factors.

Market factors will largely determine your pricing strategy. The national housing market is perhaps most sensitive to changes in interest rates but responds to other factors as well, such as increases in the cost of living, housing demand, unemployment levels, and changes in tax legislation. These, however, are factors on a macroeconomic scale. Individual neighborhoods have their own microeconomic factors to consider as well. Changes such as a new manufacturing plant to be built or changes in local zoning regulations can occur at any time. The key is for the agent to stay on top of the changes and for the seller to remain flexible and open to changes in strategy. Ultimately, your pricing method will depend largely upon your personal goals and comfort level.

4. Include active listings as well as sales in your evaluation.

Comparable active listings in your area are your direct competition and the finger on the pulse of the local market. Not only do you need to know their asking price, you need to watch the changes in price over time and the number of days that the property stays on the market. Information on active listings should be updated and your strategy reevaluated weekly.

5. Choose the relevant geographic area to find comparable sales.

Start looking for comparables within a five-block radius or if you are in a subdivision, start with homes in that subdivision first. Gradually expand your evaluation outward, depending upon whether you are able to find an adequate number of comparable listings. You should, however, avoid comparing properties in different counties or states, even if they are near the border as differences in county and municipal tax assessments can affect home values.

6. Choose the relevant time frame to find comparable sales.

The more recent the comparable sales, the more relevant it is to the property you want to list. I try to avoid going back further than 6 months and tend to place greater weight on sales occurring in the three months immediately preceding the search. In areas with low turnover, however, an agent may be forced to look further back. In either case, the more recent the comparable sales, the better.

7. Be realistic about which properties are "comparable" sales and which are not.

Generally, detached homes should not be considered as comparable sales for evaluating townhomes, nor should end-of-group townhomes be used as comparables for interior units unless a price adjustment is made. Other caveats apply as well. For example, before using a three-bedroom house to price one with two bedrooms and an in-law suite, consider how local multiple list rules will allow the property to be listed. Few sellers realize that local multiple list systems have specific criteria that must be met for a room to be considered a "true" bedroom and listed as such. Architectural styles also determine which properties are comparable. For example, it may not be realistic to value a rancher on the basis of the two-story colonial next door. The bottom line is to make sure your comparables are as "alike" as possible.

8. When evaluating comparable sales, focus on the major determinants of value.

Number of bedrooms and bathrooms, the size of the kitchen, the presence of a garage, the degree of updating, the total square footage and the overall condition of the property rank high on most buyers' list of important factors. The closest comparables will have these things in common. Surprisingly, lot size is not always a major determinant of value in the residential market, as buyers' preferences for lawn maintenance vary considerably. Since not all listings offer interior photos, you might consider attending open house events for comparable homes to determine whether a home is truly comparable.

9. Don't forget to factor in seller subsidies offered in the comparables.

The sales prices posted for public view on consumer websites usually do not include seller contributions or subsidies that are distributed at settlement. Your agent, however has access to this information through the multiple list system. For example, a consumer website might show that a house sold for $200,000 when in fact, the seller contributed $10,000 to the buyer at closing for repairs and closing costs, making the actual sale price of the house $190,000. Having this kind of information will help you determine if you too would benefit from offering an incentive to buyers. In communities or subdivisions where several similar units are for sale at any given time, such subsidies can have a profound effect on the length of time your house remains on the market.

10. When you've isolated the price range of your comparable sales, begin comparing details to determine where your home falls within that potential range.

Details to consider include any recent "updates" or repairs, additions, and any "trendy" items that may draw buyers in the current market. Many sellers are unaware that, much like the fashion world, the real estate market goes through trends in home design and decoration where certain styles and features are more favored than others. Features such as Jacuzzi tubs, outdoor kitchens, stainless steel appliances, exposed brick, granite countertops and even certain colors fall into this category. Be aware, however that home design trends, like all fashions, change. Be ready to accept when your trendy feature is outdated, and adjust your price expectations accordingly.

11. Don't be tempted to attribute additional value to factors that are already reflected in the prices of comparable sales.

You might think your home merits a few thousand extra based on the high-ranking school district or its proximity to the best shopping in town, but unless that shopping mall popped up after your neighbor's house already sold, you're really dealing with the same level playing field.

12. Don't assume that a pricey new development nearby will automatically increase property values in your neighborhood.

This is a frequent faux-pas among hopeful sellers, and while it does happen, such potential price adjustments and the magnitude thereof, must be evaluated on a case-by-case basis. It is important for sellers to avoid inflating their expectations and to recognize that in most cases, a home will be priced based upon its own merits and shortcomings, regardless of the new construction around it.

13. Be realistic about characteristics of the home that might detract from its value.

Dated bathrooms and kitchens, unusual or hard-to-alter decorating styles, or the need for major system repairs should be factored into the list price. If buyers don't notice repair issues right away, they will during the home inspection, and you'll look foolish trying to get top dollar for twenty year-old appliances and your dark- paneled, harvest-gold themed kitchen that Mom decorated circa 1970.

14. Remember the "Two Week Rule."

Statistically, the largest number of serious potential buyers appear during the first two weeks after a property is listed. Ideally, you should "price to entice" this group of individuals with the goal of getting the largest crowd possible. Getting them through the door, however, is only half the battle. Your agent should also be actively requesting feedback. As the seller, you need to be mentally prepared to take action immediately as these initial reports come in. If the crowd isn't large enough and the interest serious enough in that two-week trial period, you probably need to drop the price.

15. Remember that a comparative market analysis is NOT an appraisal.

While an agent can give you a ballpark estimate of your home's market value, your home's selling price may ultimately be influenced by the appraisal conducted by the buyer's lender. The purpose of an appraisal is to protect the lender from loaning an amount that is greater than the actual market value of the home. Thus your buyer's mortgage cannot be greater than the appraised value of the home. If an appraiser returns an appraisal that is lower than your asking price, you will usually have to either lower your asking price to match the appraised value, or the buyer will have to pay the difference in cash (which they may not be willing to do). If an appraisal seems wildly out of kilter with other values in the neighborhood, it might be worth it to ask the lender to get a second opinion. However, this decision is really up to the lender and buyer as it may involve additional fees. Appraisals underscore the need to properly price a property from the outset. Unfortunately, when appraisal problems arise, it is very likely that the same problem will arise with subsequent buyers if the price is not reduced.

Properly pricing a property begins with three things: a clear understanding of your goals, correct and up-to-date information, and an experienced, proactive agent who can keep you abreast of changes in the local and regional market. Flexibility is also key, as markets, seasons, and economics change. If you trust your agent (and you should, if you took the time to interview and hire him or her), be open to suggestions, and be sure to communicate when concerns arise or goals change. Most importantly, sellers must remember that agents don't have crystal balls. While we can provide all the tools and sound advice to effect a sale, no agent can say with certainty when, or even if, a property will sell under particular market conditions. Ultimately, the market itself will price your home, but with proper positioning, you'll be in the right place at the right time to end up smiling at the settlement table.