This is the second article in a six-part series about Selling Your Home in a Buyer's Market. In the first article we described the characteristics of a buyer's market. We will now talk about pricing your home to sell in today's buyer's market.
IT'S NOT ABOUT YOU
The most important thing to understand about pricing a home to sell is that the market determines the price. The market doesn't care how much you paid for the home or how much money you put into upgrades or repairs. Your home will sell for the price that buyers will pay for comparable homes. If you price your home too high, even if a buyer comes along who is willing to pay above market value for your home, the mortgage company will whittle the offer down to the market value during the appraisal process, so you might as well price the home right from the start.
If your home stays on the market for several months and prices decline, you may have to revisit the list price and adjust it to changing market conditions. If you make an adjustment, make it large enough to get ahead of a declining market. You don't want to trail the market in your price reductions. You'll get the most showings during the first few weeks on the market from buyers already looking for a home. After that you'll be getting showings as new buyers come into the market, so showings will slow down. Your best chance of selling your home is to price it right for the first wave of buyers, when you have the most showings and the property is new to the market.
COMPARE YOUR HOME TO OTHERS
The first thing you will want to do is compare your home to others which have sold and currently on the market. Properties that have sold within the past six months give you the best information about pricing your home. You will want to compare your home to homes that sold in terms of location, square footage, bedrooms, bathrooms, style, and other amenities.
A real estate professional can prepare a CMA (Comparative Market Analysis) for you which provides this information in the form of a report. Make sure the real estate professional has seen the interior of the homes being used as sold comparables, otherwise they may be relying just on the information provided in the MLS listing, which can be misleading. It is also important that they know the community well, since in some market areas, there can be as much as a $50,000 difference between comparable homes from one street to the next. The CMA is only as good as your real estate professional's knowledge of the homes in your market area. Ask your agent how many homes he/she has sold in your market area in the past year and whether he/she has been inside the homes shown in the CMA report.
DO YOUR OWN RESEARCH
Forget Zillow and Homegain for determining market values unless you live in tract housing. An automated valuation system can't take into account the differences in comparable homes. Go to Open Houses in your market area to get a sense of the differences between your home and the competition in your price range. Look at these homes through buyers' eyes. You'll begin to see that some sellers are just unrealistic in their prices and if you price your home properly, the competition drops away. When you've seen comparable homes on the market, you'll have a sense for where you want to position your home in terms of price. Ideally, your home will be priced to offer the best value in your price range.
CONSIDER APPRAISAL ISSUES NOW
When you get to the point where you have a buyer, about 1-2 weeks after contract signing , your buyer's lender will send out an appraiser to determine the value of your home. If the appraised value of your home is less than the sale price, you could find yourself in the unpleasant position of having to negotiate with the buyer over how to make up the difference.
Sometimes the buyer cannot come up with more cash to cover the difference because they just don't have it or don't want to pay above the appraised value as determined by the lender. As a seller you may need to decide whether to lower the sale price or let the buyer walk away from the sale. However, unless there are other comparable sales about to close at higher price levels, you may run into the same problem with the appraisal with the next buyer.
This is why it's important to think about appraisals at the time you are pricing your home before it goes on the market. In determining your list price, take into account recent sales (within past six months) of comparable homes within a mile of your home. If your list price is much higher than the comparable sales, you should be prepared for potential appraisal issues, and question the wisdom of pricing your home at this price point. Ask your listing agent about potential appraisal issues if your home were to sell for full list price or anywhere close to it. While your listing agent can't predict what the lender's appraisal will be, he/she can look at the comparable sales the appraiser would use if your home sold at this point in time and let you know whether there might be a problem.
PRICE YOUR HOME TO SELL
You don't want to leave money on the table by pricing your home too low, but in some areas of the country, such as Manhattan, sellers deliberately price their properties slightly below their true market level to generate multiple offers, even in today's buyer's market. They know that having a number of buyers bid on a property will cause their home to stand out and give them a better price and a faster sale than waiting for a single buyer to make an offer once every two months. I'm not recommending this as a strategy, because it can backfire, but the point is that you want to get as many buyers as possible to see your home in order to generate offers.
Buyers will ignore overpriced listings and may never even know your home exists, if they are looking in a certain price range, because your home won't turn up in their search results. It's not true that if buyers want a home, they will ignore the price and make an offer at a level they can afford. Most buyers look within the price range they can afford and if you price your home out of their range, they will never even see it. If you want showings and offers in a buyer's market, you need to price your home to sell.