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March 26, 2013

The Truth about Home Pricing

Fair Market Value

Neither agents nor sellers determine a property’s market value: Fair market value is determined by that (highest) price a qualified, reasonably knowledgeable buyer is willing to pay at a specific point in time, after the home has been properly exposed to the market.

An agent’s comparative market analysis (CMA) attempts to estimate today’s fair market value by an honest assessment of the property’s location, size, condition, amenities and emotional appeal, in the context of current market conditions and trends, recent sales, competitive listings and properties that did not sell.

The purpose of this analysis is to price the property appropriately to maximize market response and the final sales price.

Buyers – for any product, including homes – don’t find the issues of what a seller wants, needs or has invested germane to fair market value, so those issues shouldn’t play a role in a CMA or pricing the property.

Older appraisals or refinancing appraisals performed by appraisers not intimately acquainted with the property’s specific market area often do not accurately reflect current fair market value.

Pricing and Buyer Dynamics

The vast majority of buyers and agents will not make offers on homes they consider significantly overpriced. Almost all home sales in San Francisco sell within 3% to 5% of the last asking price (including any price reductions).

If priced outside that range, the listing is generally ignored by the market and generates no offers, regardless of the quality and appeal of the property.

Well-priced homes create a sense of urgency in the buyer/broker communities to act quickly with strong, clean offers—and help produce the competitive bidding situations that generate the highest sales prices.

The Effects of Overpricing

Overpricing wastes the optimum period of buyer and broker attention: when a listing first comes on the market. This level of attention cannot be recaptured or recreated later.

Overpriced homes kill any sense of buyer urgency to act and spend much longer periods of time on market, on average 2 to 3 months longer, than well priced properties. This significantly reduces perceived value in buyers’ minds and makes competitive bidding unlikely.

This sample breakdown of San Francisco home sales below illustrates the large discount off original list price and the big increase in days on market, as well as the significant proportion of listings that don’t sell at all, when the listing is overpriced to begin with.

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“Ironically, instead of getting more money… [Over-pricing] usually stigmatizes a property and reduces the eventual sale price to less than it would have been with more realistic pricing.”

Brown & Tyson, House Selling for Dummies

Overpricing actually helps sell competitive listings—which stand out as good values in comparison.

Choosing a Listing Agent

In order to win the listing, some agents suggest a list price considerably higher than what they believe market conditions and comparable sales justify—believing this is what the seller wants to hear. This dishonesty is a violation of both the Realtor Code of Ethics and agents’ fiduciary duty: they are putting their interests – winning the listing – above the client’s interests, i.e. achieving the best price and terms within a reasonable period of time.

Do not choose an agent based upon how high he or she is willing to price your home. That’s analogous to choosing a stock broker by whoever quotes the highest value for your stock portfolio. In both cases, the market alone — what a buyer is willing to pay — determines value.

Choose an agent based upon experience, references, the quality and honesty of counsel delivered, the comprehensiveness of marketing and preparation plans, his or her transactional and negotiating skills, and the explicit commitment to work hard to protect your interests.

Whatever the market conditions, the quality of agent representing you in the large and complicated financial transaction of selling real estate can make a difference of tens or even hundreds of thousands of dollars in your net proceeds.