Homeowners
Estimating Your Homes Market Value
By Roselind Hejl
Oct 23, 2005, 16:51

Estimating Your Homes Market Value

Professional appraisers sum it up in three words -- buyers make value. Ultimately, the value of your home is what a reasonable buyer is willing to pay within a reasonable time. Setting an asking price for your home requires that you anticipate what most buyers would be willing to pay. This requires a close look at comparable home sales in your area, as well as making an assessment of the state of the real estate market itself. Pricing correctly is fundamental to the successful outcome in the sale of your home.

Market Analysis

Homes listed for sale and recent closed sales in your area will usually provide relevant comparable data for pricing your home. Closed sales show market confirmed prices, while listing prices indicate the current trend in pricing. Later, when your home is appraised for the buyer's loan, the appraiser will only consider recent closed sales. Asking prices will not be considered. A sales price that is solidly based on recent sales of similar homes will not have a problem when the price is later reviewed by an appraiser. If your home is superior or inferior to most homes in the neighborhood, or if there are few or no nearby sales, then anticipating the responses of potential buyers will be more difficult. In this case, a trial and error strategy may be necessary. This is a sensitive area and requires a realistic assessment of your home and its market. For example, one very nice home was continually rejected because it had the master bedroom upstairs, and it was located in an area where most buyers were over the age of 45, with older children.

Real Estate Market

An important aspect of pricing is an assessment of the state of the real estate market. The market may favor buyers or sellers, or be in balance. An indicator of the quality of the market is the number of months of standing inventory in your market and price range. Consider your market area to be all neighborhoods that offer competing choices for your potential buyer. Here is how to do that:

Count the number of sales in your market area and price range for the past 12 months.

Divide the number of sales by 12, to get the number of sales per month (sales rate).

Count the number of homes on the market now.

Divide the number of homes on the market by the number of sales per month (sales rate).

This will show you the number of months it will take to clear the current inventory.

Seller's Market

Less than 6 months of standing inventory is considered a seller's market. In a seller's market the number of buyers is large in proportion to the number of homes for sale. The demand for homes is greater than the supply. Buyers must compete with each other for the available inventory. There may be multiple offers received shortly after a property goes on the market. Buyers will submit the highest possible price and terms that the market will support. Prices will trend upward. In a climbing market, pricing slightly above recent sales is appropriate.

Buyer's Market

More than 8 months of inventory is considered a buyer's market. In a buyer's market the number of buyers is small in proportion to the number of homes for sale. This situation can be created by high interest rates, employment decline and excessive building. A low number of buyers equals a lower price. Sellers must compete with each other for available buyers. Prices trend downward. In a falling market, prices should be set at the lower end of the range, because time works against you. In six months prices may be lower. This may be difficult to do, especially if your home was purchased at a higher price.

Price Per Square Foot

Dollars per square foot is often used as tool for comparing homes of varying sizes to determine a list price. When price per square foot is used, it is important to keep in mind that you must make a sliding scale adjustment from larger to smaller homes. In other words, the larger the house, the lower the price per square foot for comparable homes. This is because the core square footage of a home has a higher value than the peripheral area. For example, the price per sq. ft. on a 1,000 sf home will be much higher than a 5,000 sf home, with other things being equal. We usually graph the neighborhood prices per sq. ft. to get a visual picture of the market in the neighborhood, as well to see how much the price per square foot declines from smaller to mid-sized to larger homes.

Should you price high, and hope for an offer?

Houses should not be priced over the market. This is not the best way to position your home for several reasons:

Your home will be shown to the wrong group of buyers, from whom you need an aggressive negotiator - someone who will make a low offer.

You will inadvertently help to sell the competition. Your high price will convince buyers that another home is a good value.

Your days on the market is evident to buyers, and is a subtle but important factor in their decisions. Your best leverage occurs during the early marketing period.

How will you know if the price is correct?

The best affirmation of correct pricing is second looks from buyers. This indicates that your home appeals to buyers in your price range. There may be a few nibbles before a buyer comes forward who is ready to act. It helps to get feedback from Realtors and potential buyers. Keep in mind that they will often be reluctant to say negative things. The summary of feedback is more important than what they say. Are you getting nice rejections or are you getting second looks?

How will you know if the price is incorrect?

You may have steady showings, but lukewarm responses. This indicates that are buyers, but they have other choices with more competitive prices. Or, you may have very few showings. In this case, the buyer pool for your area, or for the style or condition of your home is small. This will require a strategy of more competitive pricing and a longer marketing time. Remember that a small buyer pool, for any reason, is a "buyer's market" and requires more aggressive pricing.

How long should you market a home at a given price?

There is no uniform time frame for marketing at set price. I think about 8-10 showings is a reasonable number for feedback regarding the price. This usually corresponds to about 2 - 6 weeks for an average home in a balanced market. About 30 days marketing time for a given price could be good a rule of thumb. However, this may be too short for your home if you have an unusual or very high end home for which there is a small market. Or, 30 days may be too long for your home if you need to move fast.

What happens if your home does not sell in a reasonable time?

If your home has been on the market for months with no offers, you have been given a clear message that the price is set too high. This is particularly true if showings have slowed down and there are few prospects coming to see it. What you do at this point depends on whether you really need to sell. If you're not really motivated to move soon, you can always wait for the market to catch up to the price you want. It would be best to take your home off the market and wait for better conditions. Buyers become suspicious of a house that's been for sale for a long time. If you need to sell, consider a schedule for dropping your price until it reaches a level that attracts buyers. There's no reason to say, We simply can't sell our house. Houses will sell if the price is right.

How can you get top dollar for your home?

Although buyers will not pay more than market value, they will pay a premium for homes that are in excellent condition and well presented. With good condition and presentation, you can reach the high end of the price range achievable for your house. We will work with you to "create value" before your house goes on the market. When it goes on the market, we will make sure that your home is show beautifully to a wide audience.