Chapter 5
How to Price Your Home Properly
In This Chapter
◆ The importance of good pricing
◆ Value versus price
◆ How to price
◆ Reductions: how and when to do them
◆ Gauging how overpriced your home is
Pricing your home correctly is the most important step in the process of selling. If you had to choose just one thing to do well, it’s pricing. That’s because a well-priced home will always sell—in any type of market.
 
There is a saying in real estate: in the absence of proper pricing, no amount of marketing or advertising will sell your home. You could have the most beautiful home in your community, have hundreds of buyers come through it, and advertise it all over the Internet and in magazines and newspapers … but if potential buyers do not perceive value at your asking price, they will not buy it.
 
This chapter takes you through the steps needed to price your home well. It also covers a key component of pricing—how the buyers perceive your asking price. The result is that you will sell your home for the highest amount of money and in the shortest period of time.
 
We share specific tools as well as some general concepts. We also talk about using hard data, getting access to hard-to-get information, and using your basic instinct (or your Realtor’s). You should consider all three when trying to come up with the right asking price.

The Difference Between Price and Value

We’re always surprised when we hear someone who has not sold their home say, “My home is worth about X amount of dollars.” The truth is that there is no possible way to know what your home is worth until a buyer takes out his checkbook and tells you what he’s willing to pay. At that moment, the value of your home is established. The market has spoken. In real estate, the buyer is the market. It is not the seller who establishes value. She establishes only the list price.

The Price

There are two types of “price.” There is the asking price or list price that the seller sets along with a Realtor. Then there is the sale price, which is what your home will actually sell for. The sale price represents the value of the home or what your home was worth on the particular day that the offer was made.
def·i·ni·tion
The list price is the amount of money that the seller is asking for the home and hopes to receive from a buyer. The seller may ultimately sell it at that price, below it, or above it. The final, agreed-upon number is the sale price.
To understand how to set the list price of your home, you must first understand that a home is not a product like a pair of shoes in a department store. The shoes have a set value that has been established by the store. The store is saying, “This is our price, take it or leave it.” If the shoes don’t sell, so be it. They may eventually go on sale when the season is over, but, in essence, the seller (the store) has set the price and it is non-negotiable.
 
Now, to understand how the sale price of a home is arrived at, think of the real estate market as you would the stock or commodities markets. A pork belly is a commodity. If, on any given day of the week, pork belly trading slows up, then their price falls until buyers once again perceive value and trading resumes.
 
Like a commodity, a house will always sell, or “trade”—in any type of market—if the seller understands that the buyers determine the market value. If you think of a home as trading, rather than selling, then the analogy is complete.

Creating Value

When do buyers buy? They buy when they perceive value. In other words, they buy when they think they’re getting a good deal at a fair price. When the market falls and home sales slow down, it is a common misconception that the buyers have gone away or that they have just disappeared. In reality, they are still in the market for a new home but they have simply stopped perceiving value. The minute that prices adjust to proper levels, buyers will instantly begin to make offers. When a sufficient reduction is made, the buyers are at the ready and the home sells immediately.
 
You can still sell your home even when the market appears to have stopped dead in its tracks. It’s not because you’re prepared to give it away. It’s because you are the rare seller who understands how to price.
 
When you have created a perception of value through your price, your home will sell quickly and for more money than if you did not.
 
Again, we are not saying that you should give your home away, but rather that home buyers are avid comparison shoppers. They compare every detail of two similar homes priced in the same range. If a buyer is strongly considering two properties that are just about equal in most ways except in price, the odds are that an offer will be made on the lower-priced home.
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Trick of the Trade
There is a clear relationship between the number of days that a home has been on the market (DOM) and the price at which it sells. You are much more likely to get your asking or list price in the first few days or weeks. After your home has been sitting on the market for longer than what is normal for your area, the value goes lower and lower.

Setting Your List Price

There are three areas to tap into when you price your home. Ideally, all three should be used together to come up with the best number. None should be used alone. To help you to remember them, think of the RIB Rule:
Relevant data
Insider access
Basic instinct

Relevant Data

There is specific, relevant data that can be used to help establish a list price for your home. They are comparables, local market trends, appraisals, and tax assessments. Some types of data are more useful in pricing than others.

Comparables

This is the most popular tool used to price a home. Competitive market analyses (CMA), also referred to simply as the comps, are “comparable” listings of other homes which are similar to yours in style, condition, and location.
When reviewing any type of comps, there are key features to compare:
◆ List price
◆ Sale price (if it has closed)
◆ The date (the market conditions at the time)
◆ Length of time it took to sell (or days on market)
◆ Number of bedrooms
◆ Number of bathrooms
◆ Size of lot
◆ Property taxes
◆ Square footage (if provided)
◆ Overall condition
◆ Condition of kitchen and bathrooms
◆ Neighborhood
◆ Style
There are three types of comps, and we think it’s important that you evaluate all three—never just one.
Active or currently on the market (your competition): Listings of homes that are currently active or on the market. Active comps are helpful—these homes are what yours will be compared to. Pretend you’re a buyer out shopping and ask yourself the hard question about how your home stacks up against the others on the market.
Under contract (the secret comps): We call them this because, until these transactions close, the sale price is secret information and can only be obtained through private contacts or Realtors who keep themselves in the know. After they close, they become a matter of public record. But at the moment, the sale prices are unknown to most people.
Under-contract comps are important because they reflect the current pulse of the marketplace. In other words, by finding out the agreed-upon sale price, you have a powerful indicator about what buyers are willing to pay for homes like yours, right now, in the current market climate. Buyer behavior patterns shift constantly, and tapping into these patterns is important but difficult to do.
Closed (factual data): Because sold comp transactions are closed, the sale prices have become public record and are now factual data for you to use in comparing your home to others. The challenge with closed transactions is that they are, by definition, old information. The sale price offered by the buyers was established weeks, and more typically, months or years ago when the market was different. Try not to evaluate closed transactions from more than one year ago. It’s still dated material, but if one of them happens to be your neighbor’s home, and it’s the only home on your street to sell in the last year, it will have some relevance to you.

Local Market Trends

When reviewing comps that have sold or have already closed, look at the sale prices compared to the list prices. You will notice a trend, and the trend will help you to price your home. All of the homes will have done one of the following:
◆ Sold below the list price
◆ Sold at or relatively near the asking price
◆ Sold above the asking price
Once you recognize the trend, you’ll get a sense of how the buyer pool in your community is behaving, which will provide some guidance in terms of how aggressive you want to be with a list price If every single home is selling below the asking price, it will be much more difficult (but not impossible) to get a buyer to pay above the list price. Can you change that trend? Yes, but it will take the guidance of a very skilled Realtor. By having a thorough understanding of local market trends, you are more likely to position your home well pricewise, and to better anticipate the outcome of the sale.

Appraisals and Tax Assessments

Some sellers choose to use professional appraisers to help price their homes. While a Realtor will come up with a suggested list price, appraisers tell you what they think the value is. You already know how we feel about assigning an exact value to a home; it’s nearly impossible to do. The value of a home shifts constantly, and its exact worth can only be determined on the day that a buyer makes an offer.
 
Appraisals are used most often for such things as getting home loans, obtaining property insurance, tax and estate planning, banking, and municipal tax assessments. The values that they come up with are relied upon and used for years by these institutions. They don’t update them unless you are changing your level of insurance coverage, tax status, refinancing, or your town is going through a tax base revaluation (which is a relatively rare occurrence). Even if you’ve had one done recently, home values shift constantly.
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Trick of the Trade
Even though a seller shouldn’t use the tax-assessed value as a list price, it can be helpful as a starting point to assure you that your home is priced within a reasonable range as others of the same size and in the same neighborhood. For example, if all of the homes on the market priced at about $400,000 have property taxes of approximately $5,000, that information can give a reasonable range to consider before coming up with an exact list price.
Using your tax-assessed value is also a tricky thing; you should be careful if you use that number to price your home. It represents only what your municipality thought your home was worth on the particular day that it was assessed. That assessment may have happened years or even decades ago, yet your current property taxes are still based upon that value. The figure may have no connection to today’s real home values. Our own town was reassessed a couple years ago. The value that was assigned to our homes is already nearly irrelevant. Some homes are now worth more than the assessed value, while others are now worth less. As more time passes, they will become completely irrelevant for pricing purposes.
 
Whether having a private paid appraisal done or having the town or city do it, they all try to establish your home’s worth by walking, inspecting, measuring, and evaluating it. A tax revaluation covers every single home in the community. The reason is that, after time, the taxes from home to home get out of balance from one another as people make upgrades and the homes have turned over two or three times. To get them all back into balance with each other, a new reassessment (or revalue) is ordered for the entire community. The purpose is to be sure that each homeowner is paying his fair share of property taxes, not to state the homes’ permanent value on the open market.
 
Following is a table illustrating types of appraisals, who orders them, and the value that they try to establish.
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Seller Alert
A private appraisal costs you money, as it is a fee-for-service business. An appraisal done by your local municipality is usually free of charge, as is a CMA done by a licensed Realtor.
Types of Appraisals
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Insider Access

Information is power. In residential real estate, some of the most relevant and powerful information that you’ll need is also the most difficult to get. We’re referring to the “secret comps” discussed earlier in this chapter. The sale prices for comps like these are not yet public information.
 
But they are valuable because they reveal what buyers are willing to pay for a home like yours right now, this month, and even this week. The only people who know how much that home down the street from you went under contract for are typically the buyer of the home, the seller of the home, the Realtor, the bank or lender, and the attorney (if there are any involved).
 
It is very helpful to find this information. If an exact number is not available, then an idea of how high a particular home recently went under contract for is usually sufficient. Many Realtors have it—at least those Realtors who are out there every day, working full-time in the trenches and communicating with colleagues. They don’t share the information easily, nor should they, as sometimes it is considered a breach of ethics to reveal information about a pending transaction.

Basic Instinct

In the real estate business, there are certain Realtors who seem to have an uncanny sense of what buyers will pay for homes in certain price ranges. It’s a skill. And it’s a highly sought-after skill. Also, certain homes require a sharper instinct to price than others. They may be unusual or have special characteristics to them. Let’s begin with the ability to interpret the buyer’s perception of homes on the market.

Knowing What Buyers Will Pay

One of the ways that a Realtor acquires the skill to instinctively know what someone will pay for your home is by representing buyers in all price ranges. When Realtors work with buyers on a regular basis, they’re plugged in right at the source. Showing the buyers homes, weekend after weekend, and putting in offers gives a Realtor a terrific sense of what they will pay in certain price bands. When that Realtor represents you and prices your home, it gives you an edge because the Realtor’s instinct is based on what drives the entire market—the buyer’s perception of value.
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Trick of the Trade
Pretend that you are a buyer. Ask your Realtor to “show” you (physically take you inside) some of the homes that are currently on the market in your price range. Your Realtor may simply target some open houses for you to attend. This is an invaluable experience when pricing your own home.

Hard-to-Comp Homes

When a home is special or has uncommon traits, pricing it becomes even harder. Because the traits are unusual, it requires great instinct to know how much higher or lower the list price should be, or how the buyer pool will react.
 
Perhaps your home has one of these elements:
◆ Special location
◆ Dramatic architecture
◆ Unique amenities
◆ Largest home in town

Special Location

You know which neighborhoods are the better ones in your community. And within these neighborhoods, there may be pockets of sought-after real estate. Perhaps one particular street is magnificent, located on a park, or lined and canopied with giant oak trees. Maybe every house on the street has a sweeping view of the valley, mountain range, or a nearby city skyline. Or perhaps it is the first quiet and serene street that is still within walking distance to town.
 
It’s not that you (or your Realtor) aren’t aware that the location is special. Everybody in town knows it’s a great street. It’s just that it’s so hard to quantify it in a list price. How much money should you add onto the list price because of the locale? To add to the difficulty, a home on that street may not have sold for two or three years, so there are no relevant comparables to help guide you. Clearly, it takes some instinct and experience to price a home like this.

Dramatic Architecture

Dramatic architecture is rare and can be valuable. But rare things are harder to appraise and extreme styles don’t appeal to everyone. The pool of people in the market for them is smaller. If the style is different from that of the rest of the homes in the community, it can work for or against you.
 
Take, for example, an ultramodern contemporary amid a sea of center hall colonials. The buyers can appreciate the architecture, but it doesn’t mean that they want it. They likely came to your community in the first place because they liked the colonials for which your town is known. On the other hand, a magnificent French Normandy in the same community might be extremely sought after for its originality.
 
We call these homes “love-’em-or-hate-’ems.” Buyers walk in and either instantly dislike it or fall madly in love. The trick to pricing them is to have a gut feeling about whether their unusualness will be perceived as a commodity or not. A basic instinct can help you to predict.

Unique Amenities

If you live in Florida or southern California, a swimming pool is not a unique amenity. And its universal appeal in that region typically adds value. But in the Northeast, pools can actually take value away. A significant number of buyers don’t want the headache of maintaining a pool that can be enjoyed only six months of the year. It needs to be opened and closed every year, it might require service several times a year, buyers may have young children whom they worry about, and they perceive it as an overall liability.
 
It’s important to know whether your amenities are unique or universal upgrades. Here are some unique amenities we’ve seen that don’t always add value to a home:
◆ Koi ponds
◆ Built-in outdoor Jacuzzi
◆ Wine cellar
◆ Riding ring
◆ Second kitchen (“summer kitchen”)
◆ Putting green
◆ Boat dock
These amenities may appeal to some segment of the buyer pool, but many buyers won’t see value in them. You may have enjoyed it immensely while you lived there, but the buyers don’t want to pay a premium for an upgrade that they don’t need, and that they may have to have dismantled or ripped out after they purchase.
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Trick of the Trade
If your home has a unique amenity that may not appeal to the entire buyer pool, consider offering to have it converted back to a more universally usable space. Have the Realtor include the offer in the listing itself so that buyers will have a more open mind about the property before they even make an appointment to see it. Also consider marketing the property in specialty magazines about boating or horseback riding, where readers may be looking for specific amenities like a private dock or riding ring.
There are, however, upgrades that are almost universally appealing, like expensive countertops in a kitchen, central air-conditioning, a family room, or a master bathroom. These are easier to incorporate into the asking price than unique amenities that may be more valuable to one person than they are to another.

The Largest or Most Valuable Homes in the Community

To use a cosmic analogy, there is a part of the atmosphere—at the top of the world—where the sky ends and space begins. It’s known as the stratosphere, and for most of us it represents uncharted territory. This is where the seller finds herself when her home is the largest or most valuable home in town. To put it simply, there is no local comp for her home. She’s flying almost blind. Her home is at what is called “the top of the market”—the top price range or price band in the area.
 
When this home sells, it may become the most expensive property ever sold in your community. On that day, a brand-new top-of-the-market value has been set. It’s extraordinary and interesting to witness. The buyer pool for such a home is much smaller than it is for other homes. And the buyers within this pool are going to be leery of paying the highest price that has ever been paid. You can bet that they are going to proceed with great caution. They will drive a hard bargain and negotiations could drag on. The buyer for this home will justifiably challenge the seller and the listing agent on the asking price. And he’ll have the advantage because there is thin air up there at the top of the market—in any community. There usually aren’t a whole lot of buyers lined up to buy the most expensive homes in town.

Reductions

You’ve priced your home and now it’s not selling. Let’s talk about reductions in price. What we love about reductions is that they give everybody a second chance, a fresh start. The only trick is to know when to do one and how much to come down in price.

How Overpriced Is Your Home?

As we discussed earlier, if your home is not selling, the reason is that it’s overpriced. To use an analogy, it’s like when people think it might be time to lose a few pounds. Down deep, they know they’re overweight. The only question is how much do they need to lose? When your home has no offers on it, you probably recognize that you need to make a reduction, but how big a reduction do you need to make?
 
Any reductions should be meaningful in size. We know that “meaningful” is a relative term. The purpose of a reduction is to regain the attention of the buyers—and the Realtors who represent them. With a good reduction, you’ll encourage the buyer pool to take another look at your home and hopefully, the new price will spur a sale.
 
There is, however, a way to figure out approximately how overpriced your home is and what size reduction to make. It is more art than science and it’s a relative gauge, but we have found it to be helpful. It has to do with tracking showings.

Tracking Showings

The number of times that your home has been shown is an important gauge of whether it’s overpriced, particularly when it is not selling. You will probably labor over the decision to reduce and by how much to reduce. Monitor the showings yourself or tell your Realtor that you would like a weekly report on the number.
 
Here’s how to apply the number of showings to the size of a reduction:
◆ A lot of showings: If your house has had many showings, none of which result in an offer, then your home is probably only a little overpriced. Your list price did not prevent buyers from making an appointment to see it. If it were grossly overpriced, they would never have made the appointment at all. And yet, once they got inside your home, they didn’t perceive quite enough value to buy it. A reduction is needed but not necessarily a huge one.
◆ Occasional showings: If your showings are dwindling, then your reduction should be significant to make an impact. What’s happening when the showings are just beginning to dry up is that they actually do dry up! But you have warning—a chance to do something before your property gets completely stale. Decreased showings are a clear indicator of what is to come. It’s a gift to have foresight. Seize the day and make a decent reduction so that you are not chasing the market downward. You’ll spare yourself a lot of stress and heartache.
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Seller Alert
Some people feel that a price reduction is not necessary when buyers are still making appointments to see a property. This is not true! If you were at the correct making appointments to see a property. This is not true! If you were at the correct price, you would have an offer.
◆ Hardly any showings: If buyers are no longer coming through in any meaningful numbers, then your home is grossly overpriced. The reduction needs to be immediate and very large. If a large reduction is not made, the home will possibly sit permanently.

When to Do a Reduction

To figure out when to do a reduction, you first need to determine if your home has been sitting on the market longer than most homes in your community—particularly homes in the same price range. This measurement is the days on market (DOM), which we referred to earlier. Remember, pricing your home at the right number is a competitive process. Your home will not look good once it has been on the market a long time, especially if it’s longer than your competition. The best scenario is to have your home sell ahead of the curve—that is, more quickly than your competition. You will get a higher price as well. (See Chapter 9 for more information.)
 
If the market is going down and you do not make reductions fast enough (or large enough) to get a buyer to make an offer, you can end up in the dangerous position of chasing the market. When this happens, it is hard to catch it. Being proactive and realistic is the key to making reductions that actually result in your home selling.
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An Overpriced Home in a Falling Market.
As you can see, the gap between your list price and the direction the market is heading gets wider and wider every day.
 
As you can see below, even making multiple reductions too slowly can result in chasing—not catching up with—the market.
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Making Reductions Too Slowly in a Falling Market.
The emotional trap that sellers sometimes fall into is believing that the reductions will cause them to lose money. This is a myth. You cannot lose what you never had. Buyers did not perceive value at your original price. Soon thereafter, the market fell even more. The value of your home came down; that’s true. But you did not give it away or lose money. The value is always changing and, in a falling market, it’s better to sell it before the price goes down any further.
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Trick of the Trade
The week you make the reduction, try to get it done by Wednesday or Thursday. That way, buyers making appointments for the weekend will hear about it and have time to include your home in their list of homes to see.
What’s good, yet questionable, about numbers is that you can often manipulate them to make them work for you (or against you). The word “value” is a relative term, and finding the sweet spot when pricing is hard to do. The good news is that you get more than one chance to get it right. You can reintroduce your home to the marketplace with a new price and a new attitude if you track your showings, understand what kind of market you’re selling in, and are proactive.

The Least You Need to Know

◆ Pricing is the single most important factor when selling your home.
◆ Don’t fall into the trap of assuming that your list price is what your home is actually worth. Buyers establish the value when they tell you what they’re willing to pay.
◆ To price your home, use relevant data, market trends, insider access, and your gut instinct.
◆ If your home is not selling, track the number of showings to figure out how big a price reduction you need to make.
◆ You can always correct the price!
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