Common Mistakes On Your Home’s Initial List Price
Of all the decisions that go into selling a home, from pre-listing repairs to choosing an agent, the most important and often the most easily flubbed is the question of how to set your home’s initial list price. Home owners are in total control of the most important variable that goes into the real estate transaction – the list price. Many agents will suggest three prices: the market price, the make me move price, and the I needed to move yesterday price. Sellers who stick close to the market price usually find success within the current average days on market. While the motivations to sell can vary, home owners who want the highest price can sometimes take their calculations beyond the market and into uncharted territory. The forces of supply and demand have been favorable to home sellers in Charleston over the last few years, but there are listings in popular Charleston neighborhoods that have languished out there for months with their lonely looking for sale signs. These listings haven’t moved, they’ve been on the market many months longer than the median average and this lack of movement is often due to common pricing mistakes that have caused the ready, willing and able buyers to pass them up.
Pricing to Unsold Active Listings, Rather Than Sold Listings
The easiest mistake to make when pricing a home is to base the price on what is for sale, not what has been sold. Analysis of current market is usually based on two types of properties: homes that have sold and homes currently on the market. While it is important to consider both types, you have to look at them differently. Comparable properties that have sold will give you an idea of what your home is worth, while active listings give you a sense of the competition. Unfortunately, some sellers ignore the solds and price their home according in line with active competition, some of which have had for sale signs in the yard for several months. Why would you price your home based on properties that haven’t sold yet?
The most accurate price is the market price – what has already been sold. The only reason you need to look at active listings is to figure out what you need to do to beat them out. It is usually a better strategy to look like the bargain on the block. If your home is priced according to the market, the overpriced homes that you are competing with will make your property look more desirable in the minds of buyers, because your correctly priced home will look like the better deal. Like most places, the Charleston market is transparent and buyers and their agents have access to local homes sales data. More than ever, buyers can quickly assess this information themselves to decide whether a home is overpriced. In the back of most buyer’s minds, the scars from the great housing recession are still fresh. And those who have to finance the majority of their purchase are leery of sticking their necks out too far, especially if their offer is dependent on the home appraising.
The Ownership Effect – Overvaluing the Fixtures, Finishes, & Equipment
Another mistake sellers make is that they put too much stock in the value of the selections they made for their home. For example, the Italian white carrera marble, the limestone counters, the high-end appliances and the fill-in-the-blank-with-your-cool-stuff-here. It is true that buyers have certain aspirational ideas when they fantasize about their next home and there is definitely a value proposition to leverage in many instances. The mistake sellers can make is in overvaluing the things they selected and purchased for their home. It’s actually a common tendency psychologists refer to as “the endowment effect”, which basically states that people attach more value to items that they own. In general, most of us are loss-averse, meaning that we often don’t want to let go of things that we have worked hard to purchase. Unfortunately, sometimes these material objects do not retain value over time the way we had planned, and they usually don’t add enough value to make a major difference in the overall price of the home.
The main factor influencing real estate value in Charleston, like anywhere else in the world, is the property’s location. The town and neighborhood is where the analysis should begin, followed by the property’s style, condition, and lot quality. Then factor in other elements like the home’s amenities, the home interior, and any unique exterior features. So while the fixtures, finishes, and equipment may move you slightly up or down within the neighborhood’s general price range, they won’t move you up to a new one.
Attempting to Recover Full Cost of Improvements
This mistake is also related to the ownership effect. Here’s an example. The year before last a seller spent $10,000 to add a wood deck onto the rear of their house. They bought the home five years ago for $250,000 so even if the house hasn’t appreciated at all, it should now be worth at least $260,000, right? They put in $10,000 worth of improvements, so in theory, shouldn’t they be able to recover that money at the sale? Unfortunately, it is unlikely they would ever get 100 cents on the dollar for the improvements they put in.
The Hanley-Wood company specializes in this kind of analysis, and they put together annual estimates on how much a new kitchen, deck or roof can add to the value of the home. In the case of a new wood deck that costs $9,539, they estimate it will add $8,334 in resale value, with a cost recouped of 87.4%. This type of improvement actually was one of the highest in costs recouped, most average around 60 to 70 percent. Unfortunately, home improvements are somewhat like cars and the other objects previously mentioned, they depreciate over time.
Setting A Price Based On The Seller’s Next Purchase
Sometimes sellers that are looking to move will base their asking price on how much cash they need in order to buy the home they want. For example, a seller owes $150,000 on their current home, and needs a $100,000 down payment for the new home, so they decide to price it at $250,000. This approach has not one thing to do with market realities, the harshest one being that buyers don’t care about what seller’s need. A seller who is upset by that insensitive kind of mindset shouldn’t be. There is no crying in baseball either. In fact, chances are that if those same sellers are now the buyers looking for a nicer home they would not care one iota what their move-up counterparty needs to make on their next purchase.
The real estate market is open and transparent, and it is usually pretty obvious to most what is going on when they see a home that is priced way above the market. Buyers will make their offers based on the price at which similar properties have sold. Sellers wouldn’t give a discount based on need, so they shouldn’t expect a premium either.
Relying on The Zestimate
The company Zillow has a tool they promote that supposedly gives an accurate prediction of what your home is worth. It is based on an algorithm created by Zillow that processes data inputs from local housing market, county tax office, and other resources. Sellers often see a high Zestimate and decide that is what they should list it at. Conversely, if they feel the Zestimate is too low, they assume it must be a hiccup in the algorithm. Unfortunately, the Zestimate is more often wrong and even Zillow admits it, claiming a national median error rate of 8 percent. So by Zillow’s own admission, if you had house Zestimated at $500,000, Zillow’s margin of error would mean that it would sell 50% of the time somewhere between $460,000 to $540,000, and the other 50% of the time it fall above or below that range. Sellers would not accept that level of competence from a real estate agent, and they shouldn’t accept it from a marketing company like Zillow. It’s fun to look at for kicks, but you shouldn’t take it seriously.
A better way is the CMA. At the most basic level, sellers can make a quick study of the most recent comparable home sales via a Comparative Market Analysis (CMA). The CMA is a handy tool that I bring to presentations that uses the most recent, local sales data from comparable home sales to help clients determine what their home is valued at in the current climate. Like most areas around the country, the real estate market around Charleston, Summerville, and Mount Pleasant is transparent and information is readily available about the price at which these “comps” have sold. It is a much more precise method for sellers to base their pricing decisions.
Don’t Set It and Forget It
So you have avoided the these common mistakes and set a price based on comps within your local real estate market, what then? It is important to be engaged in the process and listen for the subtle market cues that can help you get under contract with a ready, willing and able buyer. You will never know for sure how the market will react until after it is listed. The initial price is an educated guess, and the market will often make a correction. It is therefore important to listen to the feedback from agents and buyers. It’s important to ask what people think, see what the traffic comes through, and then track how many showings and offers come through. Then also track the competition and see what else has been put under contract or sold and how much they sold for.
Clients often try to test the market out at a higher price than what they know is the market price. Sometimes this strategy works if the market has been hot. However, it will become obvious if you have listed too high when a few weeks go by and you do not receive any offers because buyers are taking a pass until the price comes down. If it is priced too low in today’s market it is possible to wind up presiding over a bidding war which could drive the price over it’s list figure. Either way, you have a better chance to reach a true market price if you are engaged and actively listening to the market.