By now, you’ve probably seen a home listed for sale that was either significantly more or less than you expected. Ever wonder how real estate agents price homes around town? In our continuing commitment to bring you the whole truth about real estate, we will tell you EXACTLY what goes into determining the list price.
You know that expression that goes something like, the sausage is delicious but you don’t want to see it being made. This expression is often used to describe politics and the political process of creating policy. Coming up with the correct list price for a residential property, especially in Charlotte’s current market, is a bit like making sausage. There are so many factors to consider when pricing a home for sale that no two real estate brokers would describe the process of pricing a property in the same way.
However, there SHOULD be a general consensus on the goal of pricing. The goal of pricing a property for us at 5 Points Realty is to find the highest and best price for our sellers while staying within fair market value.
Let us break that down a bit more. First, we care about market value because we care about the property being able to stand up to the appraisal. Most sellers have their best buying power via a federally backed bank loan. A bank will lend on either the Purchase Price or the appraised value. If the appraised value is lower than the purchase price the bank will concede to the appraised value. This means there is a gap between the purchase price and appraised value. Who covers the gap? The gap has to be covered by either the buyer out of pocket, the seller by lowering the purchase price, or a combination of these two remedies. This is a situation both buyer and seller want to avoid, at least that’s how it used to be. Say what? More on that later.
In a perfect, balanced world where buyers and sellers have an equal footing, pricing works like this. Mr. and Mrs. Seller are ready to put their lovely 100-year-old bungalow on the market in the beloved Charlotte neighborhood of Elizabeth. Cassee Cunningham, our 5 Points premier Elizabeth neighborhood agent is the perfect person for this job. Now, Elizabeth is not an official historic district but it is home to many individual historic properties and is very well-loved and watched over by its residents. BUT, Elizabeth is not an easy neighborhood in which to price homes. Each home is unique, and there is a diversity of housing. Elizabeth has it all, condos, apartments, and single-family homes. Check out these two listings next door to each other that have recently been on the market.
So what does Cassee do?
The first step is to try and find comparables. The idea is to choose homes that have sold that are as much like the home you are pricing as possible in these important ways. It is best to have at least five solid comps sold within the last six months. The property you are pricing for is known as the Subject Property.
When it comes to comps, we consider four variables.
- Location is the key component. You wouldn’t want to compare Elizabeth to other surrounding neighborhoods with their own personalities unless you have to. Location can be stretched if more comps are needed stylistically.
- The type of home is the second most important variable in finding a comp. For this variable, we look both at Era and Style. New construction will price differently than a 100-year-old bungalow. A ranch, two-story colonial or a modern/contemporary property also weighs differently.
- House size and amount of land
- Updates. If all other aspects of comps are satisfied, real estate agents can adjust pricing for updates or lack thereof.
Ok, so that’s how agents price homes in a perfect, balanced world where buyers and sellers have an equal footing. Now forget almost everything you just read for pricing in today’s market.
5 Points Realty, of course, always still looks at the market and prices accordingly. However, values are going up almost with each home sale, meaning there isn’t a bedrock of value anymore from which to start your pricing.
Here are a few ways today’s market is impacting pricing strategy.
- The 6-month time frame for finding comps does not apply anymore. Meaning in 6 months the prices have already changed. So, it is now recommended agents find comps within two months prior to the subject property listing.
- Appraisals are becoming insignificant to this market. There are so many buyers paying cash (if a lender isn’t involved there is no appraisal) or buyers are willing to go on record that they will pay any appraisal gap between the purchase price and appraisal price.
- Appraisers seem to be appraising at the purchase price.
Needless to say, pricing is not an easy subject. Like all things real estate, 5 Points Realty is transparent and wants both their seller and buyer clients to be educated and aware of the real estate process. And now, you know.