When I am asked to meet with a potential seller to discuss listing their home for sale, the first thing I need to understand is their motivation. Why are they selling? Could it be there have been changes in the family or changes in employment? Perhaps it’s as simple as the desire for a different location, amenity or maybe it’s health related. The second thing have to do is to research the property because I am going to have to give an opinion of value. Keep in mind that an opinion of value for selling is not the same as appraised value. My opinion is designed to get the home sold for the highest price, in the shortest amount of time, for the least amount of hassle. An appraisal is designed to give the bank a general sense as to the value of the security (the home) for their investment (your loan.) So how do I approach this process?
The obvious starting point is to look at the structure size and the property size and to find homes that are similar in nature. This is called finding comparables or finding “Comps,” as you will often hear them referred to. Comps are tricky business because no two homes are ever the same. Still, it’s all we have to go on. Thus recently sold homes form the backbone of our property value assessment. Closed sales however, only tell part of the story.
Circling back, we need to consider the motivation. Why? A seller’s motivation has a direct impact on the value of their home. Huh? Let me explain… If a seller is not in any kind of hurry, our approach to pricing is going to be different from a seller who needs to sell quickly. Naturally I will argue that every seller needs to sell quickly since the faster sale invariably achieves the highest sales price. That said however, a seller that is willing to wait indefinitely for that “Buyer that just loves my home,” may find that in fact if they wait long enough, “The One” will come along and pay the asking price. Most sellers don’t have the benefit of time, or at least don’t have the desire to see the process extend over months or possibly years. So motivation does have a direct impact of the value in the context of selling.
The next thing we have to consider are the pending sales. These are the properties in escrow. These are the sales that have taken place in the past 45 – 60 days. They are important for the obvious reason that they are the most recent sales. The problem here is that we don’t know how much they were negotiated for, rather only the asking price. The number of days on the market will help us to guesstimate the sales price. If a home is in escrow and sold in 5 days, we can assume fairly safely that the agreed price was at or possibly even above ask. If that home on the other hand sat on the market for 120 days or longer and has already had several price reductions, it is fair to assume it did not go out at asking.
Next I will consider the competition. How many homes might be an alternative to the one I am selling? This is significant because the more choices a buyer has, the more compelling my pricing has to be. Remember in the context of selling, competition (or absence thereof) will influence our pricing approach.
Once we have analyzed closed and pending sales and evaluated our competition, it’s time at look at absorption rate. Absorption rate is found by taking the average time on market divided into the number of homes available; ie: 12 homes sold in 3 months, 12/3 = 4 are selling per month. In other words, how quickly the homes for sale are being absorbed by the buyers gives us vital insight into how we will price ours. For example if the avg. number of homes selling per month is 2 and there are 18 homes available, there are 9 months’ worth of inventory (18/2 = 9). If like the earlier example the avg. per month is 4 then with 18 homes on the market the absorption rate is 4.5 (18/4 = 4.5). It will take 4.5 months to sell all the homes on the market. If our goal is to be sold in less than 60 days and the average is 135 days, we need to be priced lower or offer more than our competition. By the way, the National Association of Realtors deems a balanced market, one not favoring buyers nor sellers, to be 6 months’ worth of inventory. In our area I believe that magic number closer to 3 months. California must always me in a state of perpetual shortage or else the value of Malibu wouldn’t be any higher than that of Dallas. Notice that nowhere do I consider the “I need to get this much out of my home to sell,” in this discussion. The “Need” discussion rarely has any relationship to the market value of a home, nor what it will eventually sell for. That’s not to say it’s not an important consideration, it is, but it is not connected to my opinion of value.
By now I imagine by you’re about ready to stop reading and hire a Realtor, which is exactly what you should do. As a Realtor I do all this analysis for you and more. Because it’s not just comps and absorption rate that determines how to price a home for sale, but also understanding the overall market, buyer demands and amenity/condition evaluation. Putting all these elements into a blender is basically how you figure out a sensible, approximate price, but putting that approximate pricing estimate together with a marketing strategy is exactly why you hire a professional.