My House is Worth What?
Imagine you're a contestant on The Price is Right. The announcer has asked you to "come on down," and you've correctly picked the right value for a bottle of hand soap and a brand new washer. Now, Drew Carey (or Bob Barker, if you favor the reruns) pulls up door number three to reveal...your house! Could you correctly identify its value?
Most sellers think they know at least a ballpark figure for their house, but most are way off, especially in a volatile market. It's important to know what your home is worth without the rose-colored glasses before you decide to sell, and then learn strategies that work to get it sold.
Part 1: Weigh the options to find your home's value
Guessing the value of hand soap on a game show isn't all that dicey, but throwing a random number on your "for sale" sign is risky if you're trying to sell. Before you settle on a price, try one or more of these valuation methods:
Automated Valuation Methods
The Process: Automated valuation methods (AVMs) are online programs that use public home sale records, demographics and property characteristics to find your home's value. You key in your home's information, like the location, square footage and number of bedrooms and bathrooms, and the software returns with an estimated value.
Pros: AVMs are quick and easy, and many are free. AVMs are a great way to watch trends in value, because they gather statistics from public records.
Cons: "It's just software, so if you have a home that's next to the freeway, or if your neighbor painted his home purple, which detracts from your home's value, there's no way it can know," says Jay Thompson, designated broker at Thompson's Realty in Phoenix, Ariz.
The software isn't great at nailing the specific value of your home -- it might tell you your overall value is decreasing, but it might not get the actual value correct. Areas with fewer sales will be even less reliable because the pool of data is smaller.
Also, national AVMs often aren't as reliable as local software. "They're actually a complete waste of time in New York. What we do have are Property Shark and StreetEasy, which are local to New York," says Wendy Sarasohn, senior vice president at Corcoran in New York, N.Y. "These two services are affiliated with the different brokerage companies, so they're getting actual closing prices."
The Process: The first step of an appraisal is a property inspection, where the appraiser takes notes about what the property has and what it's lacking. For example, says Leslie Sellers, president-elect of the Appraisal Institute and appraiser in Knoxville, Tenn., if a home has two bedrooms and the market for the area usually demands three bedrooms, that would negatively affect the home's value. Appraisers also look for defects in the home that buyers typically ask to have fixed before they sign on the dotted line.
Then the appraiser sits down and crunches the numbers, comparing the house to others that have recently sold or are for sale in the neighborhood. "If it's bigger than a house that sold, we might adjust the price upward...if it's smaller, we would adjust it downward," explains Sellers.
Next, the appraiser gives the homeowner the facts: Information about the homes in their area competing for buyers, a list of things that may add value and appeal to the abode and, of course, a recommended listing price.
Pros: "Appraisers are disinterested and objective," says Michael H. Evans, a Fellow of the American Society of Appraisers and owner of Evans Appraisal Service in Chico, Calif. "A broker is trying to get a listing, whereas we'll tell you the truth whether you like it or not."
Appraisers can also discover problems that could delay a sale before you put your home on the market. For example, if an appraiser notices you've added square footage without a building permit, they'll send you to the building department to resolve the issue before you sell.
Cons: No appraiser is going to assess your home's value for free. The home review will cost between $200 and $500, depending on what part of the country you're in.
Also, not all appraisers are created equal -- people that are inexperienced or new to the area might not have the breadth of knowledge necessary to pinpoint your home's value. When looking for an appraiser, be sure to look for someone licensed at the state level and accredited by a national professional organization, like the American Society of Appraisers or the Appraisal Institute.
Comparative Market Analysis (CMAs)
The Process: After looking at the house, agents usually start the process with a look around the neighborhood for "comps," or comparable homes that were recently (usually in the past three months) sold in the area. In suburban areas, comps usually come from the half-mile radius around the house.
In especially dense areas, like New York City, where a $25 million pre-war co-op could be a block away from a building full of $2 million dollar post-war apartments, comps typically come from inside the apartment building, says Sarasohn.
In a falling market, it's equally important to look at pending sales because they are the future comps for the house. "Sometimes the agents will tell you the sale price, sometimes they won't, but you can use a median of the sale prices to see where things are going," explained Elizabeth Weintraub, broker associate at Lyon Real Estate in Sacramento, Calif. You can then adjust down a percentage based on the softer market.
In a foreclosure-heavy city, that can also play a part in the agent's recommended sale price. "One other foreclosure in the neighborhood doesn't really affect your price, but when 4 out of 5 sales in the neighborhood is a foreclosure...those are the comps," says Weintraub.
Sarasohn also asks six or seven colleagues from other firms to price the home. "Sometimes I'll say whoever gets closest to sale price gets some kind of award, like house seats to a Broadway play or gift certificates, so there's an incentive to think about what they're saying," she says.
Pros: CMAs are typically a free service, and you can (and should) get the numbers from multiple agents before you choose a listing agent. Agents have access to the same information and records as appraisers, but typically don't provide as much detail in their report, says Dee Hake DeMolen, a broker and realtor in Dover, Del.
Cons: Real estate agents have a motive for doing a CMA for free -- they want to list your home. As a result, some will recommend you list your home at a price higher than the market rate in an effort to get your business.
"I always encourage sellers to list the apartment where we think the market is, but sellers make the mistake of saying, 'Well, another broker said could get me X amount.' No broker can determine what they can get -- the market determines that," cautions Sarasohn. To avoid this, get estimates from three agents at three different companies, and don't necessarily choose the highest offer.
Also, some agents are better at doing CMAs than others. To make sure you're getting the right information, ask each agent to explain their process so you can understand how they're crunching the numbers.
Part 2: To FSBO or not to FSBO?
Even if you use an agent or appraiser to determine your home's value, you can still pick a price and sell on your own -- "for sale by owner" or FSBO.
You'll avoid agent commission if you sell on your own, and dodge the risk of wasting money on a lackluster agent. Nancy Spearrin, a seller from Solon, Maine, decided to sell on her own after two bad experiences with agents. When she and her husband first listed in 2007, their first agent told them to list their 2-home property at $249,000. After they signed a 3-month contract, he started dropping the ball, waiting three weeks into the contract to even list the property. After no showings and a lackluster open house, they took their home off the market.
The Spearrins tried again in 2008 with a different agent, this time with even worse results. "When the agent finally listed our house on his Web site for $209,000 three weeks into the contract, all he put in the description was 'These homes share a septic system!!' No listing of the landscaping, pool, custom kitchen, nothing!"
Frustrated, they ended their contract and decided to go it alone. "I am convinced that I am more motivated and willing to work at selling it than any agent we have worked with," says Spearrin. They researched what homes had sold for in the area over the last year, and settled on $189,000 for both their homes. The homes are still listed on Craigslist.org, Zillow.com and Postlets.com.
But despite their troubles with agents, Nancy admits it's frustrating to price and sell on your own. "It is very hard to find comparable homes in our area, since we have the unique fortune of having 2 well-maintained homes on one in-town lot." She also says it's difficult to keep her home in "show shape" and deal with no-show viewings.
Selling on your own can be especially challenging in a down market. "In a better market, they might have a chance, but sellers are often clueless about pricing, marketing tools and presenting," says Sarasohn. "When I sold my apartment, I hired a broker. I were a doctor, I wouldn't attempt to self-diagnose myself if I were sick -- I would go to another doctor. It's the same thing."
FSBOs also don't get noticed as much, says DeMolen, because most buyers work with a Realtor and mostly visit homes listed in the Multiple Listing Service (MLS). That means even if you price your home with the market, it might not get much foot traffic -- and even fewer offers.
The bottom line: Agents get a commission for a reason: Selling is a lot of work. Get pricing advice from several experts, and be ready to work for your savings on commission if you go it alone.
Part 3: Fix before you list
House hunters are often willing to fix cracked concrete or a doo-wop era kitchen when the pickins' are slim, but when the market is flooded with competition, it's more important that your home be in tip-top shape.
"Buyers don't need to buy a home that needs paint when they can go down the street and find one that doesn't," says Thompson. And many buyers are willing to pay a premium for a home that's in mint move-in condition.
To make buyers believe your home is worth the list price, get recommendations from your agent or appraiser, or try these simple staging ideas:
Small improvements make a big difference. "The three Ps -- purge, pack and paint -- are the most effective, least expensive things people can do," says DeMolen.
Even if your staging budget is, well, nonexistent, eliminating extra furniture, knick-knacks and clutter makes your space look larger. "Take one piece of furniture out of every room. Take down personal photos, remove valuables and clean out all of the closets," recommends Weintraub. If you need someplace to stash your stuff, rent a storage unit.
Also, consider throwing in the furniture. Offering a furnished space will make your home seem more move-in friendly, and could help you fetch a higher price.
Spruce it up or slice the price. "If you don't have time to paint or redo the floor covers (and they need it), you should reflect that in your list price," recommends Gaye Atherton of Atherton Appraisals in Knoxville, Tenn. It's amazing how the right price will make a home's imperfections much less noticeable.
Part 4: Name your price
Take a deep breath -- your Price is Right moment is here. You can listen to the chanting crowd of friends and family, agents and appraisers, but ultimately the price to put on the "for sale" sign lies with you. Consider this advice before making your decision:
Take emotion out of the equation. Your home has sentimental value to you, which counts in your family album but not necessarily on the listing sheet. Facts, not feelings, should take charge when determining the price.
Pricing too high will probably cost you. If your home has lost some of its value, it can be difficult to face reality when pricing your home. But don't get mad when your real estate expert suggests a low number. It could actually cost you more to price it too high.
One of Thompson's clients insisted on listing at $250,000 when the market value was about $225,000. More than a year later, the "sellers have been chasing the price ever since, about every three months, they drop the price, but they're still four or five months behind," he says. Buyers will be able to sense your desperation after you've lowered the price a few times, and will likely make a lowball offer.
Forget the home prices from three years ago. Forget what the house down the street sold for three years ago. If you have to sell in a down market, you're going to sell for less than your neighbors did when the market was booming.
Don't price to wait it out. "People say, 'We're not in a hurry, we can stay on the market for a little while -- so we can ask a higher price and wait it out.' In this market, prices are dropping, not increasing, so you may actually lose money by waiting," says DeMolen.
Consider variable pricing. Variable pricing, or picking a range of prices, allows your home to be exposed to a larger number of buyers. If you choose a range from $149,000 to $169,000, you'll attract buyers at both the high and low ends for viewings. However, the range can be confusing to some buyers. "Buyers say 'if it's $250,000 or $200,000, I'll give you $200,000," cautions Weintraub. "In the end, all prices are variable. You're throwing out your fishing line and hoping a bunch of fish come fight over it." Consider the options with your agent.
Adjust as necessary. No matter how much research you back up your price with, your home is only worth what buyers will pay for it. "If buyers aren't biting, find out why," recommends Weintraub. "Your agent should get in touch with all the agents showing the property and ask them what people thought about it and what they thought of the price. Find out what they didn't like and change it."
Get it right and claim your reward. If you price your home right for the market, it should sell within three months. But instead of getting a chance to spin the giant prize wheel or picking up a cruise for two to Oahu, you get another kind of reward: A chance to move on to the next chapter of your life. And hey, if you price it perfectly, a trip to Oahu might not be out of the question, either.