The Difficulty in Pricing a Home Accurately
How Realtors Price Homes, A Quick Scenario with John, Rob & Judy
Realtor John Doe walks into 123 Main St. and sits down with Rob and Judy Brown. Realtor John does a walkthrough of the home with the sellers, where he assesses the home for condition, upgrades, amenities, and is also secondarily assessing how the home "shows" (whether items need to be removed or if staging is needed). John brings what most Realtors bring with them - paperwork to sign for listing the home (agreement and disclosures) as well as a detailed list of homes that have sold in Rob and Judy's neighborhood and nearby neighborhoods. The "Comps" (short for "comparables" or "comparable homes") John uses usually have photos and always the specifications - Number of Bedrooms/Baths, Square Footage, Lot Size, Price Per Square Foot each home had when sold. The photos of said properties will often be used as indicators of upgrades e.g. Remodeled kitchens, baths, pool/spa, recessed lighting, new windows, etc. If savvy, the Realtor is able to differentiate these homes into categories (some use Tier 1, Tier 2, and Tier 3 to distinguish homes that are in the least to most desirable neighborhoods, have the least to best upgrades). Then a breakdown of price per square footage ensues where John shows Rob and Judy how 123 Main St. stacks up against the "comps" with a discussion of where their home falls within the 3 Tiers, which is, of course, John's professional opinion.
Once the best and most apropos comparables are identified, John will then show Rob and Judy a price per square footage range wherein 123 Main St. would land. Applying that range to the square footage of 123 Main St., John has now established a workable price range for the Brown's home. For the sake of clarity, let's say the Tier 1 homes are in the $210 to $235 per square foot range, Tier 2 fall within $236 to $270 and the best Tier 3 homes are in the $271 to $300 range per square foot. Since 123 Main St. is 2500 square feet, and has been identified as a Tier 2 home, the numbers work out to $590,000 to $675,000 for the actual value of the Brown's home. Now comes the even harder part of where to start the list price, and this comes down to a number of factors which include Rob and Judy's time frame, urgency, market conditions (buyer or seller market or a little of both?) whether it makes sense under the Brown's circumstances to start way up in the $660,000 to $675,000 range or to competitively price the home more toward the low 6s.
"I'm Not in a RUSH!"..."I'm NOT desperate!"
As an active listing agent for the past 12+ years, I've seen just about every scenario, every condition of home, sellers with drastically different circumstances. Some owe so much on the home that even in a good market, with the fees involved to sell, they're cutting it close with coming away with any money at all. Some have been "under water" and owe more than the home is worth (which requires a totally different conversation about a possible short sale) and some own the home outright. What adds complexity to the pricing dilemma is - after the data has been worked through, there is still the circumstances of the Seller and whether they are wanting to get out fast or are really just "testing the market" and not 100% committed to even selling the house. The two phrases I've heard the MOST over the past 12+ years are "I'm NOT in a rush," and "I'm NOT desperate." I have heard the second statement several times when, in reality, the sellers were in a must-sell situation. The hardest conversation to have with the "I'm NOT in a rush/desperate" sellers is, even though they're not in a rush and not in a hurry and not desperate, there is often a danger in pricing the home at the top of the market with the hopes of the right buyer coming along who will, one day, see the true value of the home and be willing to pay that price because they are in love with the home and will do anything to get it.
"What's Wrong with This House? Maybe the Sellers are Desperate?"
What really happens is, in a normal or down market, there are no offers on the home and the home sits, collecting dust on the MLS (Multiple Listing Service) with 1-2 agents showing the home per week. When 123 Main St. has, say, 60 days on the market, the buyers begin to think "What's wrong with this house that no one wants it???" And, second thought, "Since the Seller has no offers, maybe they're desperate now and will take our low-ball offer." The funny thing is: almost every Seller I've talked to understands this concept. But, most insist that they want to try higher, sometimes even the top of the range, which means their Tier 2 home is really a Tier 3 homes, and which incidentally means they're in disagreement with the experienced professional they procured to sell their home in the first place!
"I KNOW you're the professional, but...."
Realtors are real people with real thoughts, feelings, and emotions and some can handle the fact they're being indirectly (and often unintentionally) challenged, and some take this as an affront and mistrust of the agent's abilities to accurately assess the price range of a home. The experienced agent has seen the disagreement and discord so many times, they're ready for it. They won't be surprised that Rob and Judy want more for their home than numbers and common sense suggest. But then, the Realtor's job (and this is what separates good Realtors from bad Realtors) is not to tell Rob and Judy what they WANT to hear but what they NEED to hear. Going along with the Sellers' plan for the sake of non-confrontation and so the Sellers will like the Realtor and hence, give them the listing, is rarely a good idea. In the end, the home will sit, over-priced, there will be a battle and uncomfortable conversations about dropping the price, and, often, the Sellers blame the Realtor for "not doing enough" and terminate John Doe at the end date of the contract. That is what is called a "lose-lose" scenario.
Why Realtors will Never Go Out of Business
With websites like Zillow, Trulia and Redfin, the trend is for even those with a casual interest in real estate have access to a great deal of information. Many people I talk to have a basic understanding of home prices in their area. Unfortunately these mega-sites, although rich in information, are simply NOT accurate when it comes to the true value of a home. The only homes they price accurately are the ones ALREADY on the market since all they do is take Realtor-inputted data and regurgitate the data onto attractive, colorful, user-friendly platforms. A home owner may even get lucky with the numbers from Zillow's "Z-estimate" lining up with the actual price of their home (which is extremely extremely rare but can happen). But pricing a home is just one, small piece of the puzzle. The puzzle is made up of Real Estate Law, legalities, home inspection repairs, termite repairs, negotiations over repairs, understanding the voluminous stack of legal disclosures, handling offers (which are themselves complex) coming in from buying agents, and having an eye for items on the offers which could be negative or even detrimental to the seller of a home. A good Realtor has experience at all of these, and more. A good Realtor has done the puzzle many, many times. I've often equated selling a home to planning a wedding - so many parts, so many details, and have even felt like a General Contractor with recommending and assisting with the scheduling of plumbers, electricians, flooring people, cleaners, stagers - the list goes on. I've heard people say that Realtors do "nothing" for a lot money. I always show them the gray hairs popping out all over my head since ALL the high stress events and problems fall directly on my head. When something goes wrong who do Mr. and Mrs. Brown call? Their Realtor. When there is a massive problem with something that came up during the home inspection or on the title report or with the escrow instructions, who do the Sellers call? Their Realtor. Problem Solver, Negotiator, Wedding Planner, General Contractor and Pyschologist (believe me) - The Realtor as a profession is not going anywhere.
By the way, if you took the time to read this entire article, hats off to you and thank you. To search homes in Orange County, click here---> NIC PETROSSI REAL ESTATE