What if you were told it was the best milk in town? Tasted like no other! In my home we consume about a gallon of milk a day, so my answer would be a resounding no. I would not pay that price, in fact I go out of my way to buy milk so I pay a price that fits my budget and that I think is reasonable. Now, I understand that pricing a home is not the same as a gallon of milk but bear with me.
Lets establish the meaning of simple terms for the purpose of understanding how the pricing of a home is determined.
- Price: The amount of money asked for a home. Price may or may not reflect the market value.
- Value: is an estimate of the price of ownership. The question is who estimates the benefits or the value of a home? This is done by potential buyers and not by the Realtor or seller. As a homeowner I can understand that a home has more value to an owner than what anyone else may want to pay for it. Many times we may confuse the affection or emotion attached to it with value. I know I have been there. But when we try to sell it, your home becomes a product and as such it should be appealing to the most number of buyers.
- Market value: Market pricing is the most probable selling price at a specific time based upon the current market conditions. Homes can and do sell for less or more than market price depending on individual situations. However, homes priced significantly above true market price usually stay on the market for an extended period of time.
- Regression and progression: The principle of regression determines that over improving a home beyond the general price range of the neighborhood will typically not be financially justified. In other words, as a seller you will not be able to sell your home for much more beyond the top of the neighborhood value range, regardless of the cost of your expenditures. Conversely, the lowest priced home on the block or in the neighborhood is often the quickest to appreciate, as the presence of more expensive homes nearby tends to increase its value. This is the principle of progression.
- Conformity: This principle states that homes in a neighborhood should reasonably conform in terms of style, price, range, size, features, etc. Although there are few exceptions to the rule, homes that do not match the neighborhood usually are more difficult to sell and sometimes sell for less than their square footage may indicate.
- Contribution: The value of an item in a home may decrease as the number increases. A large home with just one bathroom may be hard to sell. Two baths may contribute more value, but four or five would not improve the value than two or three. Components in a home cannot be judged individually but on their contribution to the whole.
Now that we have all the terms out of the way, lets explore a little more about how we get to a market value price. It is very important to understand current market conditions in order to arrive at a fair price. There is no such thing as one value for a home. Each home might reasonable sell within a small range and this is depending on many factors such as:
- Availability of credit
- Employment conditions
- Inventory
- Sold properties in the neighborhood (usually appraisers consider homes sold within a mile and within the last 3 to 6 months).
- Appraisers
Other conditions that affect the market value of a home are:
· Location
· Condition of the home
· Homes for sale in the neighborhood (homes that are going to be competing with yours for buyers).
· Supply and demand
· Sellers and buyers motivation
The fact is that homes that are priced at a Fair Market Value tend to sell faster and sometimes with multiple offers than those priced at above market value. Pricing your home higher than comparable listings may help other homes sell faster than yours!
How many buyers will see your home according to how it is position on the market?
Fair market value: 60% of buyers
At +5% above market value: 30%
At +10% above market value: 10%
Below –5% market value: 80%
Below –10% market value: 92%
Case study: A home is placed on the market for $310,000 when it should have been $289,000 to $280,000 (asking price), for a market value of $265,000 to $275.000 (selling price). After being on the market for an extended period of time and lowering the price multiple times to keep up with the market, the home went under deposit for $250,000. I am very curious to see what the selling price will be.
Conclusion: The seller could have potentially sold the home for $10,000 or $15,000 more had it been priced competitively from the beginning
How many buyers saw the home when first put on the market? May be 10 to 20% of them? Probably even more but then they compared it with others on the market and went on to buy someone else’s.
And because the way buyers search for homes online (to narrow the searches a window prompts you to fill up the maximum price, square footage, etc) if a home is above market value, it may just not come up on a buyers search at all!
What are the benefits of pricing your home at a fair Market Value?
- A potential faster sale
- Less inconvenience
- Exposure to more prospects
- Cleaner and/or higher offers
Corrections in markets that experienced exorbitant home prices appreciations are expected, although in my opinion are needed. Otherwise, very few people could afford to buy home.
The good news!
1. If you want to trade for a bigger or smaller home, you may sell yours for less but you will also buy the next one for less.
2. Interest rates are still low so the cost of borrowing money is more attractive.
3. If you can afford to make a long term home ownership commitment, then it is always a good time to buy or sell.
Now going back to the gallon of milk analogy. Given the same/similar product, would you pay the higher price? Wouldn’t you shop around for other options that suit your budget?
Conclusion: A value of a product (and a home becomes a product) is determined by how much someone is willing to pay for it.
If the price of milk reaches $10 a gallon, I would seriously consider buying a cow!
