In the “good old days” some of us might have presented sellers with a wad of printouts, offering a ration of verbiage about the expected price range. Some took a more direct approach and asked the seller what price he would like. Still others checked with the local tax assessor's office, deferring the decision on the home's value to the assessor. Nowadays it’s the AVM (automated value model) like Zillow. (See the AVM blog below.)
None of these methods is satisfactory. You will need to prepare an "appraisal style" market value analysis. The first step in the process is finding three (or more) similar sold properties. Similar does not mean exactly the same. A proper choice requires judgment and experience but the ideal homes are within a mile; have sold within the past six months; and are the same style, two-story, rancher, or split-level, for example. The choice of comparables is sometimes obvious, sometimes nearly impossible.
Properties currently for sale cannot be used: They will only predict a price at which a home will not sell since these properties have not yet sold themselves. Do not fall into the trap of spending time and effort predicting a price that is too high and which will only keep the home on the market unsold. It is easy to find a price that is too high without all that complicated analysis stuff: Just ask the seller! By comparing the home with sold properties, you will be setting the stage for the home to be sold.
The contract prices of comparable properties that sold more than a few months ago should be adjusted for time, that is for appreciation or depreciation. This adjustment will not be required in a market in which prices have been moving very slowly. Next, significant differences between the seller’s property and each comparable property must be identified and dollar adjustments made. Dollars will be added to the contract price of a comparable home for features the seller’s home has, but the comparable home does not have. Think of this procedure as "buying a deck for the comparable" to make it equal to the deck the seller’s home already has. Dollars will be subtracted from a comparable's contract price for features it has, but your seller’s property does not have. Think of this procedure as "taking the value away from the comparable" for its two-car garage that the seller’s home lacks.
The list of features that make a difference is almost endless, but items with a value less than about $500 usually can be ignored. No adjustment, positive or negative, is required for any feature that both the seller’s home and the comparable property have. Values assigned to features are a matter of judgment. They should measure what today's buyer will pay for that feature in a similar home. Values are not the original cost of the feature, nor its replacement cost today. The classic example is a $100,000 in-ground swimming pool, which is often found to be worth only $20,000 or $30,000 to a typical buyer in many markets. If you are uncertain about the market analysis procedure, your confidence will grow with experience. Yes, you will almost need to become an appraiser, so take all the appraisal courses you can find. This article is just the tip of the iceberg.
When the contract prices of the three comparable properties have been adjusted properly with appropriate positive and negative values, you will have three individual estimates of the subject home's market value. These three numbers should be in a reasonably tight range. Using experience and judgment, you can suggest a single expected contract price for the home. This figure need not be an arithmetic average of the three estimates nor the median value.
This market value analysis method, when performed properly, will accurately predict the price you should expect on a final contract. It is not the asking price, determination of which will be discussed in a later post. The method of analysis described above is called the sales comparison approach. For the sake of completeness, there are two additional methods for determining market value: The replacement cost approach, and the income approach. In most major markets, neither of these methods is used widely as a primary method to value residential resale real estate. Market value analysis is not only a very technical process, is a critically important step in the home selling sequence. Get it right and your listing presentation will shine.
This article is excerpted from David Rathgeber's
AGENT'S GUIDE to REAL ESTATE
which is free online at http://www.davidr.net/AgentsGuide.html.