What is your home worth in today’s market?
Today we’ll address some key topics around the subject of home value, often called Fair Market Value. We will warn you about a common trap that sellers can fall into which will cost them lots of money in the long run. And we’ll go over home appraisals and a real estate agent’s market analysis.
The list price and the home’s likely market value
When you are ready to sell your Silicon Valley home, you must determine the “asking” or list price, ideally with with your agent’s professional advice. This may or may not be the true value of your home, and is frequently a compromise between the fair market value and the price that you hope to get or believe that it’s worth, depending on your market conditions and strategy.
Once you determine this number, plan to adjust it to leave room for negotiation with prospective buyers. Although this might sound like we are telling you to expect to negotiate down the sales price, in some markets you may get the opportunity to negotiate up. (This is especially true in our prolonged sellers market where most homes are still being bid well above list price!) Unlike many other purchases in this country, real estate prices will often be negotiable.
Something to know is that if a listing agent and you are able to generate a multiple offer situation, the ultimate sale price may go well above “market value”. When that happens, the property may not appraise to the sale price, so home buyers without an appraisal contingency can be making some risky choices if they overbid and have no appraisal contingency. For sellers, of course, it’s a dream!
Home Worth and Fair Market Value
An experienced Realtor® in your area will often know by looking at your home and providing you with a market analysis approximately what it can expect to sell for in the current market, or what it should be worth. It’s always approximate because;
- inspections haven’t been done, so the property condition could move the probable buyer’s value up or down
- the buyers haven’t yet offered, and the home’s worth may be slightly adjustable for one type of offer versus another, such as an All Cash with a fast closing versus an FHA backed loan with a long escrow
- the economic climate could change between when the listing is signed and when the home goes on the market, such as when interest rates rise and fall
Not only might they know the sale prices of similar homes that have sold in the neighborhood, but your Realtor® may know the homes’ original listing prices and how much sellers in your neighborhood have been willing to negotiate on price and terms. (Some of this isn’t published, but real estate agents will contact each other to learn details of sales after the close of escrow. Most listing agents do cooperate.)
When hired, your agent will pinpoint pricing even further with more detailed data, sometimes calling the listing agents of nearby pending sales to see if anything can be learned..
There are two predominant ways to determine a home’s fair market value: an appraisal and a comparative (or competitive) market analysis. What you should expect to learn through either process is the approximate worth or value of your home if it were to sell today. However, the reality is that until your home actually sells, there is no way to determine exactly what your home will fetch on the open market! In the business, we say that your home is worth exactly what someone pays for it.
An appraiser will tell you that a home’s value is equal to an amount agreed to between an able and willing buyer and an able and willing seller, when neither person is unduly influenced by outside forces.
Beware of Buying the Listing
A word of caution here on pricing and choosing a Realtor®. It is important to choose a Realtor® because of their experience, referrals, marketing plan, and so on, and not because they tell you a price you want to hear, especially if it’s a price that is far higher than what is reasonable!
While most agents will do their very best to give you an honest valuation on your home based on up-to-date trends, some may offer an inflated price in hopes of winning the listing, only to later insist on many price reductions until the home is within current range. This is called “buying the listing”. If a home needs to be reduced several times before it sells, it will most likely sell for far less than it’s really worth or what it could have sold for had it been positioned correctly from the beginning.
Choosing the agent who tells you the number you want to hear, when that is simply not feasible, will not benefit you in the long run. Honest real estate professionals will tell you that they have “lost listings” by telling the truth when the seller did not want to hear it. So first hire an agent with a solid background you can trust, then work together on a realistic price. Pick an agent with integrity and you will both be successful!
Home Appraisal
Although an appraisal is usually ordered by the buyer’s lender to satisfy lending requirements, it can sometimes be a worthwhile investment for a seller, particularly in very unique cases where there don’t appear to be any really good comparable sales recently. Appraisals are commonly seen as the best way to determine your home’s most precise value. In California, a home appraisal should only be done by a licensed appraiser, and your Realtor® or lender can usually provide a referral to a competent one.
The appraiser reviews various factors to determine the approximate sale price of your home. These factors include looking at historical records of the property and the area, looking at the property’s prior sales performance and reviewing the current condition of the property. For more detailed information on how appraisals work, contact the Appraisal Institute at 875 Michigan Ave. Suite 2400, Chicago, IL 60611, or www.appraisalinstitute.org.
There are also ways in which you as the homeowner can ensure that the appraisal looks out for your best interests in any circumstance, whether you are getting an appraisal to support your list price or are in contract with a buyer with an appraisal contingency.
First, you should make sure that your house is in the best possible condition. Appraisers are only human, so make sure your home leaves a good impression!
You should also make sure that the appraiser is both licensed and qualified. Some states have few or no requirements regarding who can appraise homes; therefore, there are some appraisers who will incorrectly value your home due to inexperience. Don’t be afraid to ask the appraiser how long they have been working in the profession and how many homes they have appraised in your area in the last few months. And lastly, if your Realtor is able to provide strong comps they should offer them to the appraiser, although not all appraisers will use them.
Real Estate Comparative Market Value or Competitive Market Value
The most common method used by Realtors® to determine the sales price of your home is a comparative (or competitive) market analysis (CMA). A CMA is an estimated value of your home, based on the sales price and similar attributes of other properties in the area. CMAs may be less precise than appraisals, but they are generally a reliable method for determining the asking price of your home.
While less reliable than a local Realtor® who is familiar with your market, another source for obtaining a CMA are internet sources.
There are now many on-line companies that will analyze sales information of residential properties, and for a nominal charge or at no cost at all will value your home based on sales prices in your area. However, online CMAs often only search public geographical records to determine a home’s value, so they can not take into consideration the condition or precise location of a home. In the end, they can be far from the actual selling price, and will probably be within 5–10 percent of your home’s sales price if your online CMA is done by a local agent.
Most often cited are the Zillow Zestimates, but please remember that the goal there is 80% of the time to be within 20% of the value of the home – so not close at all! Realtor.com has a valuation which can include up to three other online sources, so I find that more helpful.
It will also help if, with your Realtor®, you look at other similar homes currently on the market in your area and compare their commonalities and differences. Are they in a similar condition to yours? How are the locations different? Do they have the same features as yours? This will help you decide the list price of your home, and help you see exactly who you may be competing against for that perfect buyer.
Pricing Your Home to Sell
We generally recommend looking for a range for pricing.
Some agents would suggest that you can start in the high end of that range if you are not in a hurry to sell, and you are more interested in maximizing your profit, or net return. You would list in the low end of that range if your goal is to sell quickly.
In Silicon Valley, as in most places in California, homes that sell fast – within 2 weeks or so – tend to sell for the best price. If a home is on the market for a long time, it actually tends to sell for less than what it is worth! If your price is a little low, a competitive, inventory-short housing market will likely adjust the price up. But if your price is significantly high, the home will stay on the market far too long and become a bargain down the road for a patient buyer.
Remember that regardless of what list price you choose, the actual sales price may be higher or lower. Keep in mind that even if you stage and price the home correctly, if you make the home difficult to be seen, it will not likely sell for the best price because you’ll have cut traffic to the home significantly! If for some reason your house is not selling, and it has been well staged, easily accessible for showings, and well marketed, you and your Realtor® should consider lowering the asking price.
Beware of having your mind set on some magic number given by a CMA. Remember that these are only approximations of the real value of your home. The economy, and the market, can actually change in relatively short periods of time. In addition, no matter how you try to determine a price, your home may have peculiarities that are just not present in any other home.
Mary Pope-Handy’s knowledge of the needs of her clients has enabled her to become a highly respected Realtor®. She helped me find a home that fit my needs in a very short period of time. It has been a pleasure working with her.
—Joyce Evans
