Pricing a home is a complex issue. Obviously you want the highest price you can get. Remember, though, the best price, takes into account your bottom line, which doesn’t always correlate with the highest list price. I know that doesn’t seem to make any sense, but stick with me and I’ll explain what I mean. First, a little tutorial on how the pricing process works:
How Professionals Determine Probable Sales Price
During the sales process, buyers, sellers, appraisers and lenders all have a vested interest in the accurate pricing of your home. But the truth is, putting an exact number on probable sale price isn’t as easy as it sounds. When an agent or appraiser compares your home to other comparable properties (we call these “comps”) that have sold recently, unless you live in a neighborhood with very limited floor plans and features, a house almost exactly like yours simply doesn’t exist.
So we have to choose the homes that are most similar, and then make adjustments for the differences in features between your house and the comparable homes. For example, if your home has 3 bedrooms and 2 bathrooms, and the comp has 3 bedrooms and 3 bathrooms, I would subtract the value of a bathroom from the price of the comp to give me a price your home would probably sell for.
Comparable Property 3 BR, 3 BA
Sales Price = $350,000
Your Property 3 BR, 2 BA
Suggested List Price $345,000
Determining the Value of Individual Features
But it gets tricky when the value of all the different features come into play. How much is an outdoor fireplace worth anyway? And what about a swimming pool? Or custom wood floors milled from a rare species of hardwood tree in Europe?
Are you paying attention? Because this next bit is important.
What it cost to build or install the pool, fireplace or custom floors in your home has no effect on it’s value. Value is determined by what a buyer is willing to pay for the features, or more importantly, what a bank is willing to lend on it. Cost does not equal value.
The Principle of Scarcity
Sellers sometimes mistakenly think that because they have a feature in their home that is rare, that automatically means it is of greater value. And scarcity is a basic economic principle known to drive up prices. However, the item must be both scarce and valued by the buyer pool.
Winter coats might be scarce in Florida stores, but that doesn’t mean they fly off the shelves when stores stock them. The same effect applies to swimming pools in North Carolina. You don’t see them in many homes here, but then, not many people really want them so the value applied to them when selling a home is usually much less than the cost to install them. (So, if you really want a swimming pool, buy a home that already has one or take the $30k+ loss when you sell your home.)
Sometimes sellers believe that, even though many people aren’t interested in their unique features, they just need the right buyer to come along, and then they will pay top dollar, because they want that rare thing so much. Actually, what a seller needs to get top dollar is competition, not rare features.
The Price Spectrum
So, once your agent or appraiser has compared your home to other similar ones and made the adjustments, they will then have a price range in which your property will fall. For example, if I select 5 homes to compare your property to, and make the adjustments, each one of those homes likely sold at different prices. I might tell you that your home will likely sell between $550k and $565k.
Where Does Your Property Fall on the Price Spectrum?
The price variations are determined by a few things.
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Condition ~ Homes with similar features, will not sell for the same price if one home is immaculately kept and the other has an overgrown yard, and/or heavily worn or damaged floor and wallcoverings. Also, updating older homes to modern standards can have a positive effect on price.
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Features ~ While not all features are desirable in a home, there are also many features that make a home much less desirable. Or in other cases, if a home lacks a certain feature it will command a lower price. For example, a home with only 1 bathroom has a much smaller buyer pool than a home with 2 or more bathrooms and therefore will sell for less and likely take longer to sell than an identical home with 2 bathrooms.
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Micro-Location ~ Even properties in the same subdivision may have price variances based on proximity to through streets, backyard privacy, views, etc.
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Marketing ~ Excellent marketing brings a higher number of buyers to a home, which positively influences sales price due to competition. Beautiful photos, professional staging, appropriate timing, widespread coverage through digital advertising all make the property more known to buyers and increase competition. However, even the best marketing can’t overcome a home that shows poorly due to distasteful smells, or being unkempt, or is priced too high. If your home is getting plenty of showings, but hasn’t sold, something is wrong with the price and/or the property.
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Time on the Market ~ Sometimes a home might take a little longer to sell if it’s priced at the top of the spectrum. If your agent is confident that the comps support the price, and your home does have similar enough features to be comparable to the highest priced homes, this is an effective way to get a few more dollars if you can wait a few more days.
Could a Higher List Price Mean Less Money in the Seller’s Pocket?
The answer to this is: sometimes. Psychology is a funny thing. If buyers perceive that there is something “wrong” with your home (which they will if no one else wants it) offers will be low.
This is how that might play out: Buyer A decides to “test the market” and initially prices his home higher than recommended based on the market analysis. The buyers that walk through his home are viewing other homes at similar price points, but the other homes are larger and/or with better (more desirable) features. The buyers ask themselves, “Why would I pay this much for house A, when I can get House B, C or D (bigger/better) down the street for the same price?”
And so homes B, C and D sell and House A sits. And time goes by. The buyers who are monitoring the market and know that the average home sells in 7 days start to wonder what’s wrong with that house. And new buyers come into play and they see that there are 10 other homes that just came on the market, going under contract, but this one isn’t moving. Why doesn’t anyone else want it?
Remember that idea of scarcity? Something similar is going on in this scenario.
Buyers start to think that the seller must be desperate because the home isn’t selling. And they start wondering how much of a discount they should ask for.
The majority of homes that dropped their price after listing in Cary, then sold at a discount of the adjusted price.
Testing the market usually has financial ramifications. If you are really unsure if your list price is accurate, it’s best to get an appraisal before listing.
Are you ready for a market analysis for your home? Call (919) 725-1885 to schedule an appointment. You can also fill out the Market Analysis Survey to receive your probable sale price via email.
