Table of Contents
- 🤔How to Determine List Price
- Online Estimates of Home Values
- Criticisms of Online Valuation Tools
- Additional Problems With Online Home Valuations
- The Market Determines Values
- The Appraiser Doesn’t Determine a Home’s List Price
- Buyers Determine What a Home is Worth
- A Buyer’s Agent Knows an Overpriced Home
- The Agent with the Highest List Price
- How to be 100% Sure?
🤔How to Determine List Price
Q: How can I really determine what my home is worth? An online estimate website says my property is worth $350,000, but my agent says it’s worth only $300,000! I’m listed at $325,000, and my price is comparable to other similar listings. What’s your input on how to determine list price?
This is a great scenario to answer all the issues that come up when we talk to potential home sellers about how to determine a list price. One of the most important points we like to make about selling a home is that it is always best to get the home priced correctly from the start. Since it is a critical aspect of home selling success, let’s discuss how to determine a home’s value.
Online Estimates of Home Values
Online value estimators and virtual appraisals have limitations. There are several online valuation algorithms, but Zillow is the most well-known, with the most website traffic of all the similar websites. Zillow publishes statistics that disclose to the public that their estimate is limited and very generalized, even though they claim they are as accurate as any other valuation. They use mathematical algorithms based on public data.
Does anyone remember the class-action lawsuit against Zillow a few years ago? Buyers and sellers sued because of inaccurate “Zestimates”, believing that they had suffered financial loss for selling their homes for less than they were actually worth because of Zestimates.
Zillow Zestimates have been the topic of many blog posts and news articles. The Washington Post published an article in 2014 following an in-depth study by McEnearney Associates, of Washington D.C. They found that
“The Zestimate is within 5 percent of the actual sales price roughly half the time. As real estate agents, if we got within 5 percent of the value of a home that infrequently, we’d be out of business. So if consumers want to base their valuation of a home purchase or sale on what they find on the Internet, we suggest they take out a coin and flip it. Heads — that value is within 5 percent (high or low) of what the home is actually worth. Tails — that value could be 10 percent, 20 percent or more off target. ” ~ David Howell, executive vice president and chief information officer at McEnearney Associates.
Criticisms of Online Valuation Tools
- Transparency: Zillow’s Zestimate algorithm is a “black box”, meaning that it is not publicly known how the algorithm works. This makes it difficult for homeowners and real estate agents to understand how the Zestimate is arrived at, and to identify and correct any errors.
- Bias: Online estimates have been accused of being biased against certain types of homes, such as those in minority neighborhoods. A study by the University of California, Berkeley found that Zestimates were lower for homes in minority neighborhoods than for similar homes in white neighborhoods.
- Impact on home prices: Zestimates have been criticized for potentially impacting home prices. Some homeowners have reportedly used Zestimates to set their asking prices, which could lead to homes being overpriced. Additionally, some real estate agents have reportedly used Zestimates to convince sellers to list their homes at lower prices.
Additional Problems With Online Home Valuations
- Online estimates are based on historical data, so they may not be accurate in rapidly changing markets.
- Online estimates do not take into account the condition of the home, or any improvements that have been made.
- In our experience, online estimates do not take into consideration the differences in neighborhoods. For instance, comparing a home on 5th Street in downtown Frederick, to a Home on 2nd Street. Even though they are 3 blocks away, the values of the homes are vastly different. An algorithm could not make that distinction…at least not yet.
The data can give us a general idea of a home’s value, but cannot be used as the sole basis in a discussion about how to determine list price. Any data is missing the local nuances that can only be applied by local neighborhood experts.
(These websites have lots of value for consumers, I’m not disparaging them in any way, they just don’t take the place of a local, trustworthy and experienced Realtor®)
The Market Determines Values
The real estate market determines the price of a home for sale. In very general terms, the market determines the value of a home through the interaction of supply and demand. When there are more buyers than sellers, the demand for homes is high and prices tend to go up. When there are more sellers than buyers, the demand for homes is low and prices tend to go down. We often use the terms buyer’s market and seller’s market.
There are a number of factors that can affect supply and demand, including:
- Economic conditions: When the economy is strong, people are more likely to buy homes, which increases demand. When the economy is weak, people are less likely to buy homes, which decreases demand.
- Interest rates: When interest rates are low, it is more affordable to borrow money to buy a home, which increases demand. When interest rates are high, it is less affordable to borrow money to buy a home, which decreases demand. We have just seen the effects of very low interest rates over the last several years, and now we are witnessing the effects of higher rates on demand. *If the inventory were not so low, we would see even more of a difference in the supply/demand effect.
- New construction: Generally, when there is a lot of new construction, it increases the supply of homes, which can put downward pressure on prices. When there is less new construction, it decreases the supply of homes, which can put upward pressure on prices. *However, this has not been the case with new home construction through the pandemic, because the demand still outweighed the supply.
- Demographics: The age and composition of the population can also affect demand for homes. For example, if there is a growing population of young families, there will be more demand for homes with more bedrooms, less demand for smaller homes.
- Local Economics: If business is declining in an area, companies are moving to other location, or some other economic factors are causing people to move away from an area, this could put a downward pressure on home values.
The market value of a home is constantly fluctuating, as the factors that affect supply and demand are constantly changing. It is important to keep an eye on these factors when you are thinking about buying or selling a home. Here are some additional things to keep in mind about how the market determines the value of a home.
The Appraiser Doesn’t Determine a Home’s List Price
The market value of a home is not always the same as the appraised value. The appraised value is determined by a professional appraiser, who considers a variety of factors, including the location, size, condition, and recent sales of similar homes. Lenders typically require an appraisal before they will approve a mortgage loan. This is to ensure that the property is worth the amount of money that the borrower is borrowing.
A home appraisal can help you determine the fair market value of your home. This information can be helpful in setting a listing price that is likely to attract buyers, but alone, it is not always the full picture. It depends on what is happening in the local market.
An appraisal is based on recent sales. In a market where prices are escalating rapidly, sometimes an appraisal can be lower than what the market will bring. It is an accurate number of what has happened in the recent past, but not necessarily what is happening at the moment.
Even if you price your home in a comparable range with others on the market, this does not guarantee your home is properly priced for the market. The real evidence of what a home will sell for is in the recently sold homes, not in the homes that are currently listed. Although those list prices are important to take into consideration, they don’t tell us what the homes actually sell for.
If you are thinking about buying or selling a home, it is important to get an understanding of how the market determines the value of a home. This will help you make informed decisions about your real estate transaction.
Buyers Determine What a Home is Worth
This is sometimes an uncomfortable truth. What a buyer is willing to pay has the ultimate effect on what your home is worth. If you price your home based on anyone’s opinion, a Realtor, an appraiser, your own gut, or the competition… and you don’t get an offer from a buyer… your home is not worth that amount in the current market.
The willing buyer-willing seller principle is the idea that the price of a good or service is determined by the amount that a buyer is willing to pay and the amount that a seller is willing to accept. In the case of a home, the value of a home is determined by what a buyer is willing to pay for it.
If you overprice to have negotiating room, that strategy may cost you more in the long-run, depending on your local market conditions. Buying and selling real estate is not at all like buying and selling other commodities. It’s not like haggling over items at the flea market. There are many more issues that go into the negotiations when buying a home.
As well as the purchase price of the home, buyers and sellers may negotiate closing costs, repairs or improvements requested after the home inspection, the inclusion of certain appliances or furniture, the timeline for closing, contingencies such as home inspections or appraisals, and any potential concessions from the seller such as covering some of the buyer’s costs. It’s a complex transaction, and probably the most expensive item most people buy and sell int their lifetime.
A Buyer’s Agent Knows an Overpriced Home
Sellers should remember, buyers are looking at homes with a local buyer’s agent, who knows the values of homes in your area. The buyer is getting advice from their agent, and they will be aware if a home is overpriced.
Home buyers are looking at homes in a price range. As they view other homes in the same price range as an overpriced home, they will come to the conclusion that the list price is too much compared to similar homes. Overpricing a home is the best way to sell your competition’s home instead of your own.
Realtors have been helping people buy and sell homes for over 110 years. We have lots of statistics. One pertinent metric is this: For every 11 showings, a house that is correctly priced for the market will receive one offer. This is a generalization, of course. In a hot seller’s market like we have been experiencing, a well-priced home in great condition will receive multiple showings and multiple offers.
The house that is overpriced will sit on the market without showings or interest and the homeowner will get frustrated and blame the agent.
The Agent with the Highest List Price
Sometimes seller’s will interview several agents and choose the one with the highest list price. In some markets that can be the best choice, in other markets it can be detrimental. Sellers will benefit if they can understand the local market and how a home is valued in their market.
It’s not in any agent’s best interest (not to mention the seller) to get a listing by promising a higher price than what they believe the market will bear. It happens, but it’s not very wise. When the seller experiences the market forces and the home doesn’t sell, it engenders a lack of trust in the agent.
Here is my favorite explanation: If I get someone to list a home for $10,000 more, I would make an extra $250 to $300 in commission, that is IF the house sells. In truth, I’m not willing to sour the relationship when the seller finds out, and they eventually will. Not for a promise of $300, that probably will not materialize.
“If I give you stellar service and you are happy, you’ll might tell 2 people about me. If I give you bad service, you’ll probably tell 10 people about it!”
Not worth it. At the Highland Group, any given year, 75% to 80% of our business comes from referrals and repeat clients. A good reputation is worth so much more than $300:)
How to be 100% Sure?
The only way be 100% sure of what your home is worth… is to sell it. I know…not what you wanted to hear. Some homes are very easy to find comparable sales: homes that are one of many in a neighborhood and of which there have been several sold in the recent 3 to 6 months. But for homes that don’t have close comparisons or that haven’t had many comparable homes sell in recent months, pricing the home correctly for the market takes local experience, and some savvy.
Your real estate agent should do a comparative market analysis (CMA) taking into account lots of local data…recent home sales, current listings, market trends, current supply and demand, and other factors. This is why you want to list with a local agent, not an agent who is not familiar with the market in your area.
The best way to position your home on the market is to think in terms of a range, from a top price to a lower price. Then you have to be flexible, listen to the feedback from other agents and their buyers, and adjust the price strategically. You don’t want to linger out on the market too long with an overpriced home.
“That’s why we say “selling or buying a home is a process, not an event.”
Sometimes a home that is truly unique will need to have an appraisal to derive a range for the list price. Even then, sellers must remember that a home is only worth what a buyer will pay for it. The best valuations still need to be tested in the market. Determining the right list price for a home is integral to the entire marketing strategy. It often takes more art than science. It takes experience.
Once you have a good understanding of the market value of your home, set a realistic price. Be prepared to negotiate with buyers. And finally, market your home effectively to reach as many potential buyers as possible.
Pricing your home correctly is essential to selling it quickly and for the best possible price. By following the tips in this blog post, you can increase your chances of success.
Does your agent have the experience or the resources of an experienced team to help you sell your biggest investment for the best price and in the least amount of time for your market?
If you’d like a CMA, Comparative Market Analysis, to find out what your home might be worth, no obligation, contact us, Chris Highland has more than 30+ years of experience in the Central Maryland area and is happy to help.
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