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How do Realtors Price a House?
A broker prepares a presentation where they offer a CMA (Comparative Market Analysis) to the house owners. The CMA outlines the proposed selling price for the property, the reasoning behind the proposed price, and a comprehensive marketing plan covering the processes that the broker will use for selling the property.
In the past, CMAs were little more than modest write-ups that property owners received from brokers. Today, however, CMAs are generated using specialized software. These software programs can analyze recent sales, as well as similar properties that are currently on the market.
In addition to that, the CMA programs can provide other crucial in-depth information. This information includes median and average sales price, adjustments in prices, local maximum and minimum sale prices, the number of days that a particular house remained on the market, the number of closed sales, properties that were on the market but ended up remaining unsold, the ideal selling time, and the effects of overpricing.
According to the 2017 data compiled by the NAR (National Association of Realtors), 74% of homeowners contacted just a single broker before placing their properties on the market. That is hardly a smart move. Just like with any major service (such as mortgage) or purchase, it is always a good idea to shop around a bit, and make comparisons between multiple service-providers. You can also negotiate with regards to commissions.
Appraisals and BPOs:
In order to help clients sell and buy homes, brokers regularly recommend possible values as part of the CMA. Besides, lenders or any other parties might ask the broker to identify property value using BPO (Broker Price Opinion).
BPOs are not like appraisals. Unlicensed appraisers are prohibited from preparing an appraisal, which is an independent value estimate. Certain jurisdictions do not permit brokers to even offer a BPO, let alone charge a fee for it.
Similarly, CMAs can also not be equated to appraisals. Certain states, such as Maryland, demand CMA disclosure statements. These statements must explicitly state that the service being offered is not an appraisal. Brokers need to mention that the purpose of the CMA is only to help sellers or buyers (or prospective sellers or buyers) to decide the sale, offering, and listing prices of the actual properties.
Often, less-reputable agents come up with CMAs that mention unrealistically higher prices, so that the seller is lured into hiring the agent. The aim of such agents is to first obtain the seller’s listing and then, after a couple of weeks or so, convince the seller to settle for a more realistic selling price. Hence, it is vital to remember that, just because an agent is telling you that your property is worth the moon and the stars, does not mean that they are right.
Objectives of Competent Real-Estate Agents:
As far as reputable brokers go, there are several objectives that they want to meet through the property’s listing price.
For one, they do not want the home to stay on the market for too long. Properties that languish on the markets for long periods tend to reduce in value – not to mention that it is impossible to earn a commission on an unsold property.
Secondly, competent brokers want to make sure that the property is not underpriced, as this will damage the interests of their client (the seller).
At the same time, brokers also want to avoid overpricing. Placing an abnormally high selling price is likely to repel prospective buyers, forcing the property to stagnate on the market. Often, owners look for higher prices because they think that the listing price will reflect their value. Hence, establishing a selling price requires a firm understanding of much more than the brick and mortar involved in the property.
Our homes are an extension of our personalities and, therefore, are concerned with our images, prides, egos, and a number of other subjective qualities. This is why a seller might want a specific price for their house, and is unwilling to budge. Although the seller might not feel that this price reflects their value. Rather, they want this price because a competitor or a neighbor managed to get that price for their property.
Comparing a Property to Neighboring Properties:
While placing a value on a property, brokers often make various price adjustments. For instance, while your property is 2,000 square feet, a neighboring property is 2,200 square feet. Similarly, you have two bathrooms, but the other property might have three.
There are some variations which cannot be considered pricing adjustments from the perspective of features or square footage. Seasoned local brokers are aware that past transaction prices are not precise.
For instance, even though the neighboring house might have sold for $600,000, but that does not account for the fact that the seller needed to buy some expensive culinary equipment in order to get a higher selling price. Similarly, the selling price will not reveal the 3% ‘seller contribution’ paid by the owner in order to close this deal. Awareness of the actual sale negotiation process is the difference between rookie and experienced brokers.
Mortgage Lenders will Also Consider Pricing:
The selling price should, indeed, be right in order to lure buyers. However, it also needs to be right once a buyer has been found and the selling process is underway. For example, a lender finances a property based on the lesser of the appraisal price and selling price.
This means that an abnormally high selling price can create problems at both ends. For instance, either the buyer will have to come up with additional cash, or the seller might be forced to accept a significant reduction in the price at which the house is eventually sold. Of course, both these problems might also happen simultaneously.
This begs the question: how well does a proposed selling price eventually work out? According to the NAR figures for 2017, 60% of all listed properties during the year were sold without any changes in prices. 22% listings, meanwhile, required just a single price revision.
As far as real estate goes, every property is different and unique. Even two homes which might appear outwardly alike, such as two seemingly-identical townhouses, will have certain distinctions.
With residential properties, the process usually involves an assessment of any nearby houses either currently on the market or those that have been sold recently. While this comparison might seem simple enough, that is far from the reality.
For one, properties surrounded by attractive landscapes manage to attract higher prices and more buyers. Appearances certainly matter in residential real estate.
Secondly, a modernized house is perceived to be more valuable than a house in its original state. Modernized homes often come with lower operating and utility costs, which is a major incentive for any potential buyer.
The aim of a broker is to help buyers imagine living in the seller’s house. Strange furnishings and garnish colors tend to be obstacles in this regard. In other words, the more personalized a house is, the harder it will be to sell.
Condition is vital. A house where investments have been made in upkeep, paint, and overall maintenance, are easier to price and sell.
Obtaining Better Prices:
Both, listing brokers and the sellers want the highest possible property prices. This can certainly become a lot easier and possible if the house is in a ‘show-able’ condition. This means that the house should be clean, painted, and repaired, and the flaws should be minimal.
Besides, to make your house seem bigger, you can get rid of any items that you will not take with you. Trash pick-ups, yard sales, or donations and charities can help with this.
Tips for Pricing your Own House:
1) The ’99’ strategy:
Have you ever visited a shopping mall and noticed an item priced at $4.99 instead of $5? This approach is referred to as psychological pricing, and it makes the item seem cheaper than it really is. You could use the same tactic while pricing your house. Of course, pricing a house at $499,000 instead of $500,000 might not make much of a difference to you or the buyer, since the amount is large. However, if you could price your house at, say, $480,000 instead of $500,000, you might be able to make your property appear that much more attractive.
2) Leverage the ‘herd mentality’:
Speaking of making your property more attractive brings us to our second tip. Considering the very high stakes involved in real estate purchase, a buyer will doubt a property that is not drumming up interest from elsewhere. In other words, a buyer will be more interested in buying a property that has several other potential buyers. So, building up from the previous point, you could decide to price the property at the lower end of your value range. This way, you could draw interest from several other buyers, and leverage what is referred to as the ‘herd mentality’. In addition, this can also be an excellent strategy if you need to sell the house off quickly.
3) Keep the asking price simple:
Sellers often want to trigger their creative juices while pricing properties. For instance, a seller whose house has a value between $500,000 and $600,000 might place a price of $567,777.
Such odd figures draw negative attention to themselves, much like houses painted dark green. Seeing such a figure prompts the buyer to find out the reason behind it. This, in turn, prompts the buyer to find more about the seller.
Ideally, the seller should be as far removed from the picture as possible. This is the reason so many brokers ask sellers to remove all their personal belongings (such as diplomas and pictures), and decorate the home using neutral colors and shades.
The objective is to display the house and not its seller. In addition, the wider the audience, the better it is. Going quirky with the selling price completely contradicts this tried-and-tested approach.
4) Remember that prices are not set in stone:
If you have a listing agent, it is best to listen to their pricing strategy – after all, they are paid to be aware about the things that work (and things that don’t). Remember that you will need to have ongoing pricing discussions with your agent.
You cannot simply place a price on your home and forget all about it. There are numerous factors involved in buying and selling a house, and many of them are impossible to predict. The more flexible you are to new information or any market changes, the more you increase your chances of obtaining the best-possible price with the least number of roadblocks.
5) Consider unsold comparables:
If your house price is identical or similar to prices of unsold properties, then it is probably a good idea to bring the price down a notch. Similarly, if there are several similar properties available, you should keep your asking price on the lower side in order to make the property more attractive.
You can also go through the unsold inventory indexes in order to obtain information regarding the ongoing demand and supply in the market. These indexes use the current rate at which houses are selling, and use this rate to determine the approximate amount of time it will take for every listed property to be sold.
6) Consider online calculators:
There are many free, easy, and quick online calculators that you can use while pricing your property. In fact, making a few clicks can even let you know if you should sell your property right now or wait for a better time. While valuing your property through the internet, use sites that not only provide an estimated price, but also link the price to the property address. Additionally, since there are considerable differences in online price estimates, you will do well to get at least four to six prices. This will allow you to eliminate any prices that seem excessively low or high, and then calculate an average using the remaining ones. However, do remember that, even though these online calculators are quite useful, they can only provide a start. This is because the data that they provide is extremely generic, such as square footage, baths and beds, and nearby comparables.