How to properly price your home
Here at the Rodgers Real Estate Group, the first thing we do when pricing a home is to gather a lot of information. When we arrive at the home, we'll tour the exterior of the home and we’ll also measure the exterior to determine the total square footage. The old MLS sheets and property record cards at the county courthouse are not always correct and a lot of pricing is based on the size of your home so it's very important that we're working with the correct square footage.
I could remember a couple years ago, I listed a home in Bartonville and that home had expired with another agent. The first thing I did when I went out there is I measured the home, and what I determined very quickly is that the home was 3,600 square feet, but when it was previously listed with another agent, the agent was advertising the home as 3,000 square feet. There's a big difference there, and I'm assuming that agent probably just relied on a property record card or an old MLS sheet. It is very important to make sure that we're dealing with the proper square footage.
Also, we've had situations where we'll go in and measure a home and maybe we feel that the homeowner's taxes are higher than they should be. We had a situation in Washington where I thought somebody's taxes were close to double what they should be. After I measured the home, I determined that the county thought their home was like 1,500 or 2,000 square feet larger than it was. Once we could prove that the home was not as large as what the county was assessing it at, we were able to get their taxes cut substantially. It is very important to know the square footage of your home. I would even recommend if you're purchasing a home, don't rely only on the MLS sheet or the feature sheet. If you're really serious about purchasing the home, I would even recommend that you measure the home to make sure you know what you're buying.
Once we measure the exterior of the home, we'll also measure each room of the interior, and we'll measure the basement to determine how much basement square footage there is, and of that basement square footage, how much is finished and how much is unfinished? As we're touring your home, we're also going to be taking a lot of notes on the condition of your home, and we're going to be jotting down what we feel are the best-selling features of your home. We will also ask you the ages of the furnace, central air, exterior, windows and the roof. All that information's very helpful when we go to price your home. If you don't know that information, we can get by without, but the more information that we have, the more accurate we can be when pricing your home.
We're also going to ask you what you think are the best-selling features of your home. The reason we do this is that we as real estate agents can walk through your home, take a lot of measurements, and take a lot of notes, but nobody knows the home as well as you do. We just want to make sure when we're pricing your home that there's nothing that we're overlooking or forgetting. We're also going to ask you what you feel are the best-selling features of your neighborhood or location. We want to know if there is anything not functioning properly at this time, or is there anything that needs attention. An example may be, "Yes, we have a water softener, but it's not working properly," or, "Our stove has burner that's not working."
Now, obviously a stove that has a burner that's not working is not going to substantially change the price, but those are all things that we need to know when we're pricing your home. Also, I want to know about any updates, upgrades, or remodeling that you've done to the home, and when those various things were completed. Once we have all that information, we're now going to do our homework. We're going to try to find other homes similar to your home (similar in terms of the location, size, amenities, and condition). We're going to compare your home to homes of the same style hopefully.
If we're pricing a ranch, we don't really want to compare your ranch to a two-story. We want to compare your home to another ranch. As far as year built, if your home was built in 2005, we don't want to compare it to a home that was built in 1978. It's very important to compare similar age of homes. We're going to compare your home to other homes that are currently for sale. We don't put a lot of emphasis on the homes currently for sale because we have no idea if those homes are actually going to sell or not. If they do sell, we have no idea how much they're going to sell for, but we do want to know what your competition is, so we do look at the homes that are currently for sale.
We're also going to look at homes that are similar to yours and what they've sold for in the last 6 months to a year, and that's going to really play a big role when we're pricing your home. We're going to look at pendings. Pendings are homes that were just currently on the market but recently have received an acceptable offer but have not yet closed. We don't know what those homes actually sold for, but we do know that they have accepted an offer, so we do use pendings.
Lastly, we're going to use expireds and withdrawns. We're going to go out and we're going to find similar homes to yours that were on the market and did not sell. An expired listing is a property that was on the market for the complete duration of the listing contract and did not sell. A withdrawn listing is a home that was on the market and for whatever reason was taken off the market and did not sell. Once we know how many homes are currently on the market that you're competing with, we also look at how many homes have sold over the past 6 months to a year. What we're trying to determine is what the supply and demand is, and what's the market absorption rate right now. What we mean by market absorption rate is, for example, if there's 10 homes on the market that you're competing with, and we determine that on average, 2 homes sell per month then we know that there's a 5 month supply of inventory out there right now.
If we determine that there's 1, 2 or 3 months of inventory that you're competing with, we may recommend that you overprice your home a little bit because the demand exceeds the inventory, and that's a seller's market. If there's 4 or 5 months of inventory out there, we're going to recommend that you price at market value to get your home sold. If there's 6 or more months of inventory on the market, we consider that a buyer's market. If we're in a buyer's market, we may recommend that you price a little less than market value.
Also, you can't really say the Peoria area is a buyer's market, or a seller's market, or a balanced market, because every situation's different. For example, let’s say that I'm pricing homes between $150 and $175,000 in Richwood School District. I may determine in Richwood School District there's 9 months of inventory out there, but I may also look in Dunlap School District and determine there's only 2 and a half months of inventory out there. If I'm listing a home between $150 and $175,000 in Dunlap School District right now, I'm going to recommend that the seller prices slightly higher than market value. If I'm listing a home in that same price range in Richwood School District, I'm going to recommend that the seller prices slightly below market value.
Traps To Avoid When Pricing Your Home
When you choose your price, you choose your competition
Let's talk a little bit about traps to avoid when you're pricing your home. One thing to keep in mind is, when you choose your price, you're also choosing you competition. If you have a home that's worth $200,000 but you want to price it at $220,000 to build in bargaining room, now what you're doing is you're competing against other $220,000 homes instead of homes that are $200,000. Your home may compare real favorably at $200,000, but it may compare very unfavorably at $220,000. Keep that in mind when you're choosing your price, that when you choose your price, you're also choosing your competition. If you were to overprice in that situation and price your home at $220,000, if it was worth $200,000, then you're actually helping sell the other homes that are $200,000 because you're making them look more attractive.
“Can we just try it for a while at that higher price?"
The answer is yes. You can do that, but I definitely do not recommend it. The reason is because your home has its highest perceived value early in the listing period. The first couple weeks your home has the highest perceived value that it's ever going to have. It's very, very difficult to recreate that demand for your home. There's buyers out there that are scouring the internet on a daily basis to find the few brand new listings that come up on a daily basis. If you overprice your home early on, you've wasted a big opportunity.
Overpricing your home at the start would be like a retailer marking their prices down a week after Black Friday! You cannot recreate Black Friday again. There's only 1 per year, so it's very important to price your home right at the start.
“We can always come down"
You can come down, and if you overprice your home, unfortunately you probably will have to come down, but here's something else to keep in mind, the longer a home's been on the market, the less perceived value it has.
One question that every buyer asks when we show them homes is, "How long has this home been on the market?" Again, the longer a home's been on the market, the less perceived value it has. There's been many times over the years where we've shown buyers home, and a buyer may walk in and say, "Oh wow, this is exactly what we're looking for. This might be the one," then they go home that night and they find out that that home has been on the market for 214 days. What happens in that situation is a buyer starts talking themselves out of liking that home because they say, "Well, that home's been on the market for 214 days. I wonder what we're not seeing that everybody else that's passed on this home has seen."
They start talking themselves out of buying that home. If that home had only been on the market 2 days at that price, then it would've created urgency, and I'm assuming or I'm guessing that if that home had only been on the market 2 days, the buyer would've purchased it. Keep in mind when you're pricing your home that the longer a home's been on the market, the less perceived value it has, and if it's been on the market a long time, it's hard to sell at any price, even if it's well below market value.
“They can always make an offer"
True, any buyer can make an offer at any time, but a buyer can only make an offer if they see your home. As an example that has nothing to do with houses but will get the point across: Let's say that you're looking for a pair of jeans. Your size is 34, and you're looking for a specific jean. You go into the store, and what do you do? You go directly to where all the size 34 jeans are located. You look through, and you say, "Oh, the pair of jeans that I want is not here." That pair of jeans is there, but the problem is, somebody else put it in with the 38s. When you're looking to buy a size 34 jean, you're not going to go to where the 38s are to find a 34. You're going to go where the 34s are.
Back to houses: Let's say you have a $200,000 property and you price it at $220,000. A lot of your buyers that can pay $200,000 may only look up to $205, or at most, $210, so if you price it at $220,000, they can make an offer if they know about your home, but they probably are not even going to know about your home. Let's talk a little bit about building in bargaining room. A lot of sellers want to build in bargaining room, and while I agree that you should build in some bargaining room, I don't think you should build in much.
Let’s say that there are two homes that we think are worth $200,000. My recommendation would be to list it at no more than $204,900. Let's say that another seller has a home that's worth $200,000, and they say, "I want to list it at $214,900, or $219,900 to build in bargaining room." Which home do you think looks better online? If they're both going to sell for $200,000, do you think that the one priced at $204,900 looks better than the one priced at $214,900 or $219,900? I will almost guarantee you that the one that's priced at the $204,900 will get more showing, and it will sell quicker than the one priced at $214,900 to $219,900.
Let's say that you do price your home at $214,000 or $219,900, and you get lucky and somebody gives you $214,000 for it. If that person is getting a loan, their bank is going to require an appraisal. If the home is only appraised at $200,000, the bank will not give the buyer a loan to buy a $214,000 house. In that situation, you would need to renegotiate the contract at a lower price or the deal could fall apart.
“We had an appraisal higher than that."
A couple questions I would have is, "What was the appraisal completed for?" If the appraisal was completed for a refinance or a home equity line, it’s typically going to be higher than what you could sell your home for. I would want to know what the appraisal was completed for, what was the reason, and when was that appraisal completed, because if it's an appraisal that's a year or more old, then it really has nothing to do with what the market is today.
"We paid more than that for our home."
Contrary to what many sellers believe, what you paid for a piece of property has absolutely nothing to do with what it's worth today. Look at homes in Florida, Michigan, California, Arizona, and Nevada when the market took a turn for the worse. Some of these homes dropped in value 50% from what a sellers purchased them for. In those situations, what those sellers purchased their home for had absolutely nothing to do with the value was today.
Let's take, for example, when you buy stock. What you paid for a stock has nothing to do with the performance of the stock in the future.
If you inherited the home, your cost is $0. How much would you want to sell your home for? My guess is you would still want to sell it at market value, so even though your cost is 0, you're still going to want to sell the home for market value. The original cost of a home has nothing to do with what it's worth today.
“We need the money"
Your financial situation has nothing to do with the value of your home. Would you pay more for a property if you knew the seller needed the money? I think we both know the answer.