One of the biggest decisions you’ll make when you decide to list your home or property for sale is setting your asking price.
What To Avoid – The Dont’s
Over and over, I see sellers making similar mistakes. Let’s start analyzing how to price your home to sell by reviewing what not to do. Make sure you:
- Don’t use asking prices, even ones for very similar properties, to justify a high asking price
- Don’t rely on property tax valuations
- Don’t base your price on what you paid for the property
- Don’t rely on online valuation estimates
- Don’t engage in wishful thinking
An asking or listing price is just that, a request. We all know that in life, not all requests are granted. If you base a high asking price on the asking prices for similar properties, you’re assuming that the those sellers got this important decision right. In effect, you’re letting your fate ride on the soundness of a potential stranger’s decision, and that’s rarely a good thing to do.
When you rely on high asking prices, you’re ignoring a problem that is far too common in the real estate business: real estate agents “buying a listing.” Real estate agents can “buy” a listing without ever exchanging money simply by providing an unrealistically high asking price and letting you think you have a chance of getting that price. After all, a real estate sign might bring calls about other business that has nothing to do with selling your home. Your neighbor may have been persuaded by an unsupported price opinion, but you shouldn’t be. Since I spend my hard-earned money marketing your home before it sells, I have no desire to suggest an unrealistic asking price.
On the other hand, you do have to give weight to asking prices when they’re below past sales, because that could be an indicator that market conditions have taken a turn for the worse. These other listings represent your property’s competition, so if you’re property is priced above them without offering compelling advantages, it will get less interest in the market. Less market interest translates into fewer showings, fewer offers, and a longer sales cycle – all of which are the things sellers dread.
Property tax valuations are 1 measure of a property’s value. Most of us know the property tax valuation of our homes; for those that don’t, the information is as close as the last property tax bill. Property tax valuations are easy to learn, but they’re among the least reliable indicators of current market value. According to Fairfax County, its assessments are the result of a “mass estimating process, not individual property appraisals.” Tax assessors don’t enter and compare homes on a regular basis. Tax assessments are often not effectively linked to property improvements that enhance a property’s value or to circumstances where a property has fallen into disrepair. In declining real estate markets, tax assessment may be above market value, because there is a lag for falling prices to be reflected in the assessor’s data. On the other hand, in rising markets, tax assessment may be below market value because the assessor’s data doesn’t reflect the higher prices buyers have paid.
Another common pricing error is to consider the price you paid for the property, or your historical cost. In most respects, your historical cost is similar to ancient history; it makes for interesting conversation or academic study, but it’s not relevant to today’s real estate market. When you’re trying to determine a selling price for your home, you’re out to determine a current market price. That price is what a qualified, willing buyer will pay in an arm’s length transaction. That buyer has no interest in the price you paid, and that buyer’s lender has even less interest. Properties marketed based on the seller’s cost are examples of bad marketing, because they’re appeals without a foundation in today’s property values.
It seems that just about everyone uses online tools for real estate searches, and in an effort to build traffic most of the big online sites offer a valuation estimate. Let’s take a look at Zillow’s ZEstimate® as one example. Zillow gives its estimates a rating from 1 to 4 stars depending on its view of the accuracy of the Zestimate® in a particular area. As of June 2011, the Washington DC market gets 4 stars, the highest rating. That’s the good news. In our area, only 45% of homes actually sold within 5% of the Zillow valuation estimate, and the median error was 5.7%. More locally, in Fairfax County, almost 24% of all Zestimates® were not within 10% of the eventual selling price. Even worse, the estimates come with a big range. On one of my recent listings, the price range in the estimate was 20% from high to low compared to the valuation estimate. That’s a huge swing, amounting to tens or hundreds of thousands of dollars. Would you trust an automated online tool to value your home when the swing could be hundreds of thousands of dollars? I’ve yet to meet the person who would do that.
Any effort to rely on pricing tools other than current sales that close is just an attempt to justify wishful thinking. As a seller, avoid wishful thinking the plague. If you want to rely on property tax assessment, historical cost, or online valuation tools, just ask yourself a simple question: Is the property tax assessor, the party to whom you paid your historical cost, or the online website presenting a written, solidly-financed offer to buy your property at those values? If not, they are not participants in the current market, and their opinions don’t matter.
Steps You Should Take – The Do’s
With an understanding of what not to do, let’s look at the steps you should actively take to price your home to sell. You should:
- Be a good listener
- Be objective
- Focus on recent closing prices
If we could somehow convert the so-called real estate experts into usable energy, we could solve our country’s energy crisis virtually overnight. The supply is pretty abundant. But many of the experts are expert in appearance only. You have to quickly learn to separate a strong, fact-based assessment of the real estate market from unsupported speculation. Separating the wheat from the chaff requires listening and thinking. Likewise, being a good listener means that you don’t want to cling to your own opinions if facts take you in a different direction. The real estate market is dynamic, and unless you’re active in the real estate market on a daily basis, you’re better off at least listening to the guidance of a qualified professional.
Just about every source on real estate pricing encourages sellers to be objective, and there’s a good reason for that. Being objective is the thing that sellers find most difficult to do. We all develop strong attachments to property, especially to places where we’ve lived for a long time. We grow to treasure aspects of a home, even the quirky aspects, and imagine that others will value the same things. Buyers bring their own set of wishes and wants, which is understandable since they bring their own money – or at least their own lender’s money. Because it’s difficult to break free from emotional attachments, helping you be objective is one of the biggest services I provide.
Recent closing prices of comparable properties, or “comps” as they are commonly described, are the best source of pricing information. However, figuring out the true closing price of a transaction has become more complicated in recent years, because of the rise of the seller subsidy. A seller subsidy is effectively a discount that the seller has passed along to the buyer at closing, but it’s not typically included in the sales price reported in the land records. As a real estate professional, I have access to seller subsidy information. When you base your pricing decision on true closing prices that take into account seller subsidies, you’re using the best information available to price your home.
Almost universally, sellers want short sales cycles and high closing prices. Your best chance of achieving those 2 objectives is to stay away from my list of “don’ts” and stay squarely focused on the “do’s”.
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