How To Price Your Home to be ”Sold”In a Bad Market!
First you should obviously determine if you really want or need to sell. If you aren’t motivated enough to accept the current lower value compared to what your home was worth in 2006 or what the Tax Assessor’s records say its worth (which it typically isn’t now), then don’t sell now. As an aside here in Montrose Colorado ours assessed values will be way overvalued this year based on sales from 2006 (the peak). People should protest (not in the streets but through the process allowed at the assessors office). I will try to get a post up soon on this…
OK if your still reading then you probably want or need to sell regardless of the market.
Obviously there are lots of reasons to sell, relocation due to job or family, marriage, divorce, death, new kids, grown kids, elderly parents moving in with you for your turn, elderly parents taking over daycare of their kid’s kids, upgrading lifestyle, downsizing, and of course the normal goal of creating net worth by cashing out equity or trading up to take advantage of the compressed market. All of these have their own motivating factors and only YOU the Seller will be able to determine your true costs of not selling relative to your particular situation. The realtor can help you break down and analyze factual holding costs like, mortgage payment, taxes, insurance, utilities, outside management or services, etc. The Realtor can discuss with you but can’t ever completely understand the more emotional or non-quantifiable costs of not selling.
In a Bad Market it is obviously harder to make a lot of money or get top price right now, because the market is flooded with Foreclosures and REOs (Real Estate Owned by banks), this is what propels the values downward. These properties often get run down and end up selling for half of what the non-foreclosed home “For Sale” next door is priced at.
What do you think that will do to values?
Even one “Rough” house functionally similar in close proximity selling for a substantial discount will drag down the value of an upgraded nice home with, nice carpet, upgraded appliances, light fixtures, knobs and doors granite etc. All of these upgrades are “real”, cost ”real money” and have a “real additional value” that should make the nice home worth a lot more than the ugly one next door. The problem is the “real additional value” gets further discounted by the market because of the low comparable sold properties and or the ugly homes. This is called Regression.
Of course the opposite is true as well. The ugly house in an otherwise nice neighborhood is worth more than the same ugly house in a neighborhood full of ugly houses. Thus the term Progression - nice things around it bring up the value of an otherwise not so nice or lower valued property.
Thus the standing suggestion to always buy the ugliest smallest home in the nicest neighborhood you can respectively stand and afford, fix it up and the “real additional value” of the said improvements would be worth much more than fixing up the same house in a neighborhood full of ugly houses.
This is something you usually have no control over and neither does your Realtor. It is just the market in that area. The market operates at a pretty high level of efficiency these days due to the Internet and the flood of information available to all, Buyers and Sellers, Realtors, Appraisers, Lenders, etc.
The homes that are selling now and in the last 3-6 months, do dictate the “real values” of all the homes in the area. This is true whether we like it or not. So its best to just understand it, admit it and make your decisions accordingly.
Your realtor should help you assess the “real value” of your home in your market. They typically will do this by preparing what is commonly called a CMA (Comparative Market Analysis). As a general rule this should usually include at least 3 sold and 3 active properties most similar to yours and the Solds should be within the last 3-6 months to be most relevant.
Some markets won’t have that many comps (comparable sales). Or the house may be in an area that is incredibly unique in a good or bad way. Appraisers will adjust values of comps adding to or deleting value to make the comparable properties “like” the property they are appraising.
Realtors kind of do the same thing as an appraiser when trying to value a property but are not licensed to truly “Appraise” a property.
Appraisers are kind of like more on the number crunching side of things and must be able to prove (like a mathematical proof) how they got their values. They will weigh market value based on recent comparable sales, replacement cost factoring in relative age and any deferred maintenance or damage to the property and in the commercial realm they will almost always look at income to determine the value and thus must look at that commercial rental market as well (i.e. market vacancy, market rents, etc.) Obviously there is a lot of leeway for appraisers to adjust a value.
There is even more leeway to “adjust” value for a Realtor. We are kind of like the Psychic as compared to the Scientist (I believe all those good “psychics” probably do their research before they share their vision, feelings or advice and/or are trained in knowing the “market” of predicting the future by vaguely wording things, using probable outcomes, and reading the reactions of the listener…)
If your Realtor is a good one they know there is no benefit to them or you to try to price above what they realistically think the home will sell for. Unfortunately though, some do think that by taking a listing at a higher price and working down it will land them the listing over the competition who was honest or at least more accurate in their guess. Don’t fall for this trap!
You should feel that they have explained the market and their opinion of value to you and that you agree with them based on your own knowledge and new found understanding of the market. You should feel you truly know and understand the market value of your home. If your a FSBO ask a Realtor to give you a CMA for your property and come out and explain it to you. Its best to be honest and tell them that you don’t intend to list at this time, but you might in the future. They will usually gladly plant this seed and gratefully accept your invitation to begin a relationship.
In general a Realtor wants to help you maximize your price and net profit or minimize your losses while accomplishing your goal of actually selling the home. It is without a doubt a mixture of art and science. if you are in the unfortunate situation of being upside down (see other posts for more on this). Why do they want this, because if they sell it for more, typically they make more as well, but more importantly they want you to be happy with their services and refer them to your friends! That’s how we roll! It is our best form of lead generation.
Typically if a Realtor doesn’t sell your home, they don’t get paid. So Realtors often struggle to get the home owner to understand that there is little to no advantage of overpricing the home in any market but especially a down one.
Still Realtors do a very streamlined and less scientific method of what appraisers do and then they give an opinion of value. The opinion and often a written description of how it was formulated are included so the document stands alone and sometimes the realtor will just bring raw data and then discuss it with you.
Either approach can work just fine.
I like the “range method” and like to start at the top and work down to the bottom in steps on my “Net Back Sheet”, which is a spread sheet that shows the sellers how much money they will put back in their pocket (approximately of course) based on the different range of prices, commissions, costs, etc. By doing this I can discuss and weigh their motivation and my guess at time on market against the relative costs and benefits or where to enter the market.
I personally prefer to provide more data and less glitz on my CMA requests unless it just has to look pretty for some reason. The data I like to include is not currently easily, quickly or automatically inserted into the pretty cma-file and I have no assistant at this time, so I prefer the just the facts method with an in person explanation of the alternatives, risks and rewards.
I am sure many Realtors would disagree with me and would think this overwhelms the client. I agree it might, but if I am presenting in person and they seem overwhelmed then I can always get them a cleaned up or clarified version if they want or need it after I have personally toured their home with them. This allows me to better formulate my opinion of value.
I also like to examine some additional data that isn’t included in the traditional CMA.
The trending direction: Upward, Flat or Downward.
The speed or momentum of trending direction: Is the market moving quickly or slowly. This is a little more difficult to specifically measure, but can be seen by numbers and frequency of price reductions/increases and/or the overall volume of properties being sold and the gap between ask and sold price. In my personal opinion if sales are slow and there is a big gap forming between the ask and the actual sales price, then there is pent up pressure to accelerate the fall (in this case) or the opposite in an increasing market (i.e. sold prices higher than or closer to asking price, people bidding them up - just fuels the upward momentum).
General Market Statistics: Absorption Rate, Average Days on Market (similar and overall market or broken down by categories), Avg Sales Price (similar and overall), Average Discount on Price (similar and overall market) - The speed or momentum of the trending direction addresses and incorporates some of this data but it is worth a discussion with your Realtor about these things to see if they know what they are doing and to formulate your own opinion of these things and/or have them further explain them to you if necessary. There are tons of online dictionaries that will define these terms further for you.
I don’t always have time to completely present all these items, and frankly some clients I know well really don’t care, they want what they want and if I think it is worth it I will take it if not I will say no thanks but this is usually based on a built up relationship and trust.
So how much free work can you get out of a Realtor? I personally determine the amount of time I am willing to invest based on my opinion of how likely the client is to list with me now or in the future and how likely the house is to sell within the listing period (at my price). Just another reason I would rather go armed with as many of these raw data facts which are easier and faster to produce and have the knowledge and ability to discuss as I would to have a 3-12 page pretty flyer with pictures and nicely formatted and massaged data just to find out we are way apart on our concept of appropriate price.
If we are way off, then my goal or mission is to advise and educate as to why I believe that is the case and then politely recommend they get someone else for the job until such a time that they decide I was right (or closer to it) and then I would love to help them sell it.
Again unless the Realtor is trying to buy your home for him or herself or sell it to their best friend, cousin or brother, they typically would have no motivation at all to lie to you about their opinion. However, one of the most common mistakes Realtors new and old make is forgetting to look at the facts the numbers, at least periodically (minimum of quarterly I would suggest) to ensure their opinion isn’t skewed by optimism, pessimism or some other emotional belief they have formulated for whatever reason.
Its like a checks and balances system to study the market and the trends and use this to create the supporting documentation for the normal CMA.
The media is now preaching and filling us with thoughts of huge further declines, the end of the American Dream, a depression like we have never seen etc. This is the “sex” that sells right now. Remember though, when the market was losing steam, peaking and starting to fall, most the media said everything was Rosy and going to come right back stronger than ever.
Gee does “Wrong Again” come to mind. It does for me. Often I like to take the contrarian view and try to look outside of the media paradigm to examine the issue. I don’t get TV stations at my house, hardly ever there, so I am pretty out of touch with the actual TV News programming. I just got fed up with the spin. But I still hear a lot of chatter about them selling doom and gloom so I don’t really need or miss it.
In my opinion I would say the odds of it going either way are probably stacked downward at least for our area (Montrose, CO in Feb 2009) particularly for more expensive homes. On the lower end there is not as much downward pressure, because there is still pent up demand for affordable housing. I like to call this compression of the market where the high end falls faster than the low end and it squeezes the market into a smaller range than it was before. In light of all the dodm and gloom I think most everyone is tightenting their belts (at least a bit), so fewer and fewer poeple are upsizing right now if they don’t need to.
OK enough background information (sorry I am such a long winded blogger). So what to do?
How do we price our home to be SOLD?
If the market is going down,you want to obviously maximize your sale price, but you don’t want to miss the market when it is headed downward either so I think the best strategy is to price at, or just ever so slightly above or below “the lowest” most recent comparable sold property (out of 3 or 4 similar). Remember that you want your house to be the next one SOLD or picked off in the growing inventory of homes and in this climate people view houses more as a commodity than a home. So the soft benefits and upgrades take a “bath” on “perceived value”. “They like granite but they don’t need it”, would be an example and it definitely doesn’t add much if any more than the cost of installing it. Same with Carpet, Tile, Fixtures, Decks, Kitchens. Obviously all the same rules apply as in any market, sell whatever you can and hope it grabs someones emotional trigger to make them make an offer. Still don’t expect to make a killing. Don’t think that by spending $5,000 on granite you can add $20,000 to the price of the home and expect to get it. BTW I like granite, etc. (this is just an example) and I am not suggesting people quit remodeling (labor and materials are cheaper right now, just don’t spend foolishly, research, plan, shop, get bids and weigh it against your goals and your budget).
If the market is flat, I would suggest starting at the middle most comparable sold property and then reduce based on actual activity. Try to sell the fact that your home is worth the top end but you are motivated to stand out and only charging the middle…
If the market is rising,I would suggest starting at the top most comparable sold property or slightly below and really pushing the “soft benefits” and then following activity. If it is a bidding war environment raise prices, if its a little slower, gauge activity and feedback and adjust accordingly. Wouldn’t that be sweet right now!
Hope this helps! If you have comments or questions please bring them forth. Thanks to all that have thus far, encouragement does help me get motivated to get back here and post my ramblings more often.
