Are You Overestimating Your Home's Value?

Seventy-seven percent of home sellers think their homes are worth more than the agent's recommended selling price.

A recent study published in the Journal of Housing Economics and quoted in RISMedia found that homeowners are overestimating the value of their properties by 8% on average.

The study harkens back to an earlier survey of real estate agents, the vast majority of whom felt their clients were overestimating the worth of their homes - some by as much as 20%.

These incorrect assumptions on the part of homeowners often have unfortunate results in terms of initially overpricing their properties, then dropping prices by too much when offers don't happen.

Of course, it's human nature to think optimistically about your home's value. Emotional attachments color people's perceptions about their home's worth. It's actually rooted in psychology and our natural human tendency toward loss aversion.

And, as RISMedia reports, homeowners believe prices will continue to rise; a 2014 report by the Federal Reserve found that 39% expected home prices to rise, compared to 6% who expected a decline.

Homeowners also are naive about the impact of upgrades on the value of their properties. In many cases, you may get back only a percentage of what you put into home enhancements, and many improvements don't come close to paying off what they cost, especially if they're not in line with the neighborhood norm.

Sellers sometimes list their houses for a high price in hopes that someone will be willing to pay the asking price and turn the inflated value into realized value. But too often, owners don't understand their local housing market. This underscores the need to use reliable data, including recent sales comparables, to know exactly what a house is worth. Real estate agents are in touch with local markets and offer reliable - and realistic - pricing advice.

Don't try to go it alone.