Clients often asked me if a listing price is fair.  If you’re a buyer from out of town and scouring the Sequim MLS online, you will come to a home that looks like it has a lot of potential, but you’ll be wondering if the listing price is fair market value, wondering how much would you offer if you do write an offer.  There’s a lot to that discussion, but here’s a synopsis of the kind of analysis I do with my clients, and this can help you analyze a listing price.  The following is an email to a client who asked me about a listing price.  I’ve disguised the property addresses and the prices (which will change the math a little) to protect the innocent.

Question on Listing Price

You asked how much I think this home is worth in this market.  Good question.  It’s listed now at $438,000.  I’ve shown several homes in this neighborhood over the past several years, and I’ve watched which ones have sold and for how much.  So I can walk through this home at XX Street and picture exactly what every room looks like and compare it to the others.  Here are a few thoughts about value.

Listing Price v. Replacement Cost

The first numbers I like to look at are the cost of buying this lot today, doing the excavation, and getting a well and septic connection, and building the house.  This is a medium custom quality home, and the cost here of building a home like this averages $125 per square foot.  With 2,217 sq. ft., that totals $403,000 ($278,000 for the house construction, $100,000 for today’s price for an acre in this location, and about $25,000 for the rest).  The original owners built this home near the peak of the market in 2004.  That’s unfortunate for them, because they would most likely have paid a lot more for the land at the peak of the market, perhaps $150,000.  They also might have paid a premium to build the house, depending on who their builder was.  But based on today’s values and costs, I would estimate the replacement cost of this home at about $400,000.  That’s very realistic.

Listing Price v. Comps

The next numbers I like to look at are comparables.  I’ll just use one comparable for this example, but it is probably the best most accurate comp anyway.  It is a few houses down the same street on the opposite side.  It is also a custom home, and on the same size lot, and the home was also built in 2004.  I showed this home several times, and it is now sold.  It is 2,290 square feet (compared to 2,217).  It was originally listed for $424,700, and sold for $392,450. 

Here’s how I compare the two.  The home that sold at XX Street is very comparable in every way.  It sold for $170 per square foot.  The home at XXX Street has a listing price of $198 per square foot.  Based on a sales price of $170 per square foot times 2,217 sq. ft., the home at XXX Street would be worth $378,000.  This is a very solid number.  We don’t normally have such good comps to use as we do in this case.  It is somewhat below the figure I calculated for replacement value, which also is consistent with the fact that homes are selling in this market for less than the cost of construction today.

I’m confident that $378,000 is a reasonable price for this home, although it would probably cost close to $400,000 or more to replace this home today.

It is possible the sellers have a large loan, and their loan plus their selling costs might prohibit them from selling it for $378,000.  Of course, we won’t know how much they would sell it for until we try to negotiate a lower price than their listing price. 

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Buyers ask me about real estate prices and the question is, “What is a fair price in this market?”  As I show homes to retirees from outside the Sequim area, the concern they have when they find the ideal home is how much to offer.  They don’t want to pay more than they have to, but they also don’t want to write an unreasonably low ball offer that is a waste of time and seriously offends the seller.

Real Estate Prices – Order Out of Chaos

The first point of reference when making an offer is the current listing price.  You may have heard someone regurgitate  a rule, such as, “Homes are selling for 90% of their listed prices, so you never offer the full listing price.”  Oh really!  Suppose a listing price started at a reasonable listing price and was reduced to far below true fair market value for a quick sale?  Or suppose the listing was on the market for two years, and it is now a short sale and being offered at far below FMV?  Suppose it has been reduced to such a steal of a price that there is no doubt several other buyers are going to snap it up?

When it comes to real estate prices, some homes are listed well above a fair market value price (FMV), but others are listed right on target in this current market, and still others have been listed at a garage sale price for the quickest possible sale.  This points out that general rules on offering prices are not applicable for a specific home.  What you need is the full history on a particular home, how long it has been on the market, and an accurate understanding of the true comps in this market.  And watch out for listings that are priced with no differentiation for location.  For example, a home right on the busy freeway should never be listed at the same price as a similar home in a private gorgeous area far from the highway and noise.  If you were going to make an offer on the freeway home, you might offer 80% of the listing price, but the home in the quiet area might deserve a 98% offering price.  There are many variables, and you’ll need to look at all of them to arrive at a fair offering price.  Only then will you be able to place a particular home in the context of current real estate prices.

Real Estate Prices and Reality

I just had a client call me this morning, a client I referred to another Realtor in the Puyallup area.  She asked if his advice to write a full price offer on a home was good, because she isn’t sure about real estate prices right now.  I know this Realtor.  He is one of the most knowledgeable, professional and honest Realtors I have known in 30 years in this business.  He knows the market and he knows how to work for his buyer.  If he says the current listing price is so good the buyer should write a full price offer, there is no doubt in my mind he is right.  In following up on this, I learned this house is a steal at the current reduced listing price, and two other buyers are in the process of drafting offers.

Of course, generally in this market and in light of the chaos in real estate prices, we would expect to write an offer that is significantly less than the listing price, but be careful you don’t get bad advise on how to write your offer.  Rely on a professional who knows the market and has a lifetime of negotiating prices.  Be careful about taking advice from friends.  Remember, while friends mean well, when you are sick, everyone is suddenly a doctor, and when you have a legal issue, everyone is suddenly a lawyer.  We know better.  Right?

Negotiate your specific home based on the relevant data and history for that home and based on real comps, not distant comps.  Real estate prices are all over the map right now, but be sure your offer is the right offer.

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Are home values tumbling?  Fox news reported today that Zillow’s first quarter data suggested that home prices have dropped in the U.S. by 3% in the first three months of 2011.

As they say, “Statistics don’t like–statisticians do.”  In this case, there are many possible interpretations of this data.  But there are a few simple rules to consider when drawing ultimate conclusions from this scant information.

First, this is data collected by one private company, Zillow.  Does it include 100% of all sales across the entire U.S.?  I can guarantee that it does not.  But it may include sufficient data to validate the reduced values.  We don’t really know.

Second, a statistical study must be properly weighted to exclude or adjust data that would or can scew the data.  In this case, the U.S. real estate market is so dramatically different in various regions and states that it is a very general statement to apply one statistical template to all areas.  Perhaps home prices only declined by 1% in your area and 5% in Phoenix.  It’s also very possible that prices stayed the same in your area and dropped by 6% in the foreclosure disaster areas, like Vegas and Phoenix.  Averages on a national level are not very helpful, except to remind us that nationally the real estate market is not sending any signals of recovery yet.

Have home values in Sequim declined by 3% just in the first quarter of 2011?  Not likely.  That would mean that a home at $300,000 has declined by $9,000.  There’s literally  no way to measure that.  I haven’t seen it, and prices just don’t drop automatically here.  There’s also no way to know whether a price decline is the result of a falling market in the first quarter.  A listing price may have dropped by 3%, more or less, but that may be a response to declining prices over the past 24 months.

Statistics like this one published by Zillow can be very misleading.  What does this statistic mean for a buyer or seller in Sequim?  Nothing.  Absolutely nothing.

Every transaction I negotiate for my buyer clients as a buyer’s agent are individually negotiated–one buyer and one seller, each represented by an agent.  Each transaction stands on its own.  Each seller and each buyer have their own motivations and financial considerations.  Each transaction is negotiated on its own merits.  What is happening statistically as an average number around the country in all local markets is interesting but of little negotiating value.

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Clients ask me periodically if they should make certain improvements on their home to make it more sellable.  What I’ve learned from hundreds of buyers who have looked at thousands of homes is that buyers generally do not care if some minor improvements are made.  In other words, it does not impact their decision to buy a home.  Now, if you have a major visual problem, such as a hole in the sheetrock in the hallway or a hole in the living room ceiling, yes it will make a difference to buyers.  A light fixture that is hanging at an angle in the dining room should be fixed.

But if you are considering a major remodel of the bathroom at a cost of $3,500, you will not get that money back from the buyer.  Will it make your home more sellable?  Probably not, unless the bathroom was such an ugly disaster that it would gross a buyer out.  The general rule is that whatever money you put into your home to get it sold is money you will not get back.  If it helps sell the house sooner, then do it, but only if it is cosmetic and doesn’t cost much money.

If your home is not the right home for a buyer from out of state, some improvements, other than minor cosmetic improvements, are not going to get them to sign an offer.  If your home is the right home, the right floor plan, the right location, and within their budget, not spending money on improvements is not going to push them away.

You can see that these same rules apply to the methodology for professional appraisers.  They do not add value to a home for the kinds of improvements I’m talking about.  Want to see exactly what goes into a lender’s appraisal?  Here are the rules on values and appraisals.

For Fannie Mae, Click here

For Freddie Mac, Click here

For FHA, Click here

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Question:  I found your website doing a search for “for sale by owner” information. I am considering the pros and cons of listing this myself, or enlisting a broker to help me out.  I am impressed by the amount of information you provide for free.

Although my property is in Kitsap County, I am writing to ask your advice regarding setting a price that is well above the current market value.  The reasons I am considering this are:

1. I am in no hurry for a sale. If it takes the market improving to the point that my asking price is more obtainable, I may be willing to wait for that.

2. Property is 1+ acre in a location that would be perfect for a small business owner. we are on a busy road, and although right now it is zoned residential (the home is manufactured), there are several businesses very nearby. It is only a matter of time before this property is used commercially as well.

Thank you for your time and thank you also for being so generous with the information on your website.

Joe [not real name]

Answer:

One of my pet peeves is overpriced real estate. An overpriced home on the market can actually cost a seller a lot of money. A home only sells for fair market value (FMV), not more than buyers are willing to pay. That’s what FMV is–what a ready, willing, and able buyer is willing to pay for a home. Yet we still see both FSBO’s and agent listings on the market above FMV, and some are substantially above FMV.

If your home is for sale at a price above FMV, you can end up selling it for even less than FMV down the road. I’ve been preaching this for almost 20 years now, but finally there is authoritative proof. [See my earlier blogs on this: Save $10,000 Buying and Port Angeles and Sequim Overpriced Listings]

The proof is in the Sunday, October 28, 2007 issue of the Seattle Times at page E7:

“Real estate agents often warn sellers about the danger of overpricing a house. Now they have evidence to show skeptical clients: research by Jeffrey Otteau, a New Jersey appraiser. He found that in a market where prices are declining, sellers who ‘test the market’ with a high price usually end up with a lower price than those who price realistically.”

The article points out that a house that is priced right for the current market sells within a reasonable time, but one that is overpriced will sit on the market while the market prices decline, and when the home does finally sell, it sells for less than the FMV of that home when it was first on the market.

The statistical proof showed that in a market where a home that was listed for $599,900 (FMV) and which sold for $599,000 (almost full listed price within 30 days), a comparable house that was overpriced at $634,900 actually sold for $585,000 months later when the market had declined even a little more.

There’s another solid reason not to overprice your home.  When a home first goes into the MLS and is advertised at that price, you have an opportunity to reach a small percentage of buyers who may be interested in your home, can actually afford it, and who are ready to do so now.  An overpriced home may cause them to look elsewhere.  And this is the clincher, buyers rarely come back to look at the same home again even after you’ve reduced the price.  That’s true.  Not only will most buyers not come back to see if you’ve reduced the price in the months to follow, but by the time you actually do reduce the price in the MLS, those original buyers are long gone, most having purchased a home that was not overpriced.  So as a practical matter, you have one shot at each buyer.

Sometimes a seller who wants to gamble by asking far more than his home is worth will say, “I’m in no hurry to sell.  If it doesn’t sell, I can hang on to it until prices go back up.”  If that’s your sentiment, then don’t waste time and effort listing it for sale when you know it won’t sell.  Hoping you will get lucky and find an uninformed buyer who will pay way more for your property than the true FMV is a pipe dream.  Buyers are very intelligent these days, especially with the availability of the powerful tools on the Internet.  If you want more, then don’t list your home until prices actually do appreciate to that level.  Believe me, no one will buy an overpriced home.

This is such an important lesson for homeowners who want to “test the market” with an excessively high price. Don’t do it. You could lose a lot of money by the time you end up selling it for much less in a slower market.

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One of the popular games in Clallam County as well as around the country right now is called, “Musical Chairs With Realtors.”   It’s a game that some sellers of homes and land are playing without realizing the tragic consequences of losing.   Here’s how the game works.

An owner of either a home or vacant land hires a real estate agent to list and sell the property.   The agent wants to list the property at a sellable price, of course, because the agent only earns a commission if he actually sells the property.   The seller is a strong personality.   The seller tells the agent what the property should sell for.   The seller asks the agent his opinion, but everyone in the room knows the seller isn’t really asking:   the seller is telling.

An agent often cannot be certain the seller is wrong, because pricing property is not some kind of mathematical science.   It is partly objective, partly subjective, and timing is everything for the right buyer at the right time and place.   Often an agent is persuaded that a seller’s property could be listed at a price the seller is quite adamant about.   Who knows, the seller could be right.   There are not any recent sales of anything exactly like this home or lot, so it is hard to definitively prove anything to a seller that will persuade him to reduce the initial listing price.   But in so many cases, this agent can testify, as can many other agents, that sellers send strong messages that they are not to be challenged on the price.   There are many ways sellers send this message, and those of us in the business know only too well how this works.

An agent doesn’t want to be rude or offensive, and without specific mathematical proof that the listing price should be lower, it is hard to say anything real intelligent or persuasive to a passionate owner who justifies every which way up one side and down the other why this property should sell at such and such a price.   Sometimes it is just impossible to argue otherwise.   Any agent worth his salt knows that if he argues with his client, he loses.   We don’t argue with our clients.   It would be bad form and unproductive.

So the agent lists the property, but after so many months, usually three to six months, the owner has decided it’s the agent’s fault it hasn’t sold, and it’s time to try an agent that can sell it.   Granted, some sellers don’t blame the agent, but still the result is the same in that they hire another agent.   (Honestly, even though a seller may say he doesn’t blame the agent, he really does, or he wouldn’t be listing with another agent.)

And the game of Musical Chairs With Realtors begins.   The first agent notices that the new listing price with the second agent is way below the price the seller insisted he list it at.   What does the agent think?   The agent is thinking, “Wow!   Why didn’t my client list it with me at that price.   I might have been able to sell it.”   This is an entirely legitimate question.   To this some sellers would immediately reply, “Well, why didn’t you tell me it had to be listed at this lower price.   I would have reduced it and you would still have it listed.”   Not.   Experienced agents try to tell sellers a hundred times that the price may be too high, but many sellers simply refuse to hear it in all the conversations.   They don’t want to hear it, and they direct the conversation to justifying the price each time.

But it gets better!   Wait, there’s more, to parrot the famous commercial.

The second listing agent is soon to be replaced by a third listing agent, only this time at an even lower price.   Oh, this game of musical chairs is such a fun game for all of us. Who benefits?   No one.

The seller is making the job of selling his properties hard for everyone, and he is sabotaging his own goal of getting the properties sold.   The seller is also disrespecting every agent he hires and then dumps.   And worse, with his property on the market so long, he has made his own property less desirable to buyers who no longer see it, even when he keeps reducing the price.

There may be an occasion when it is appropriate to change agents.   Agents come in all different sizes and shapes, so to speak, and education, experience, competence, trustworthiness, and professionalism all play an important part to the discerning seller.   (Note the word “discerning.”)   A seller might find out that his agent is not good at marketing and sales, and with some due diligence find an agent who is.   But in the vast majority of cases from my experience, most sellers are playing musical chairs, rather than doing some deep investigation to find out who is the best.

This game of musical chairs is played all the time, every week in Clallam County and around the country.     Not all sellers are playing this game.   How many are or what percentage are playing is hard to say, but a substantial percentage are playing.   It’s too bad, too, because everyone loses when this game is played, and in this market who can afford to be a loser.

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