Home sellers in Sequim and Port Angeles must price their homes right to sell in this market, but how do they do that? What is the right price? Buyers also need to be able to have a very specific idea of what a reasonable price is for a home in order to write an reasonable offer and at the same time not pay too much.
Most people understand that pricing a home is not a mathematical science, and that there is a large subjective element. But there is a practical approach to arrive at a very realistic range of values and then narrow the price to a specific number. So while we can say nailing a fair price for a home is as much art as it is science, we actually can approach this intelligently and get very close to what an accurate and fair price would be.
By the way, this is the short version of how to price a home. There is much more thought that goes into an intelligent and accurate analysis, but this summary will give you a good idea of the process so you can use this approach yourself, or so you can ask good questions as you work through this process. Don’t assume all real estate agents know how to do this well. Not all do. Remember, the answers you get from your real estate agent are only as good as the questions you ask. Be sure you know the issues and the questions. You don’t have to know all the answers, but if you know all the questions, you can find the answers or the right agent to help you find the answers.
The first thing I like to look at when I’m going through a home is the cost of replacement. I look at the materials and floor plan, the excavation, and the features in the home. Then I look at the cost per square foot to build it. I’ve learned that to build a nice custom home ranges from $150 per square foot to $300 per square foot. The cost to build a cracker box home will start somewhere around $75 per square foot and go up from there, but almost all builders who advertise low rates bring the cost per square foot up during construction with extras and “surprises.” Their contracts are usually open-ended, which means they can add to the original price.
The cost of replacement is just a starting place. This isn’t the ultimate answer to value. It’s good to know right away how much it would cost to build this home on this lot. Now tuck that number in the back of your mind. (You might need help identifying the cost per square foot for a particular home, because it will depend on floor plan, quality of materials and workmanship and so on.)
Next, I like to look at the property data at the Treasurer’s office. Assessed value is an interesting number, but by no means is it always accurate. While the assessed value is supposed to be 100% of its current fair market value, it rarely is. The square feet shown on the county records are not always correct. Many people have added a room or converted the garage to a bedroom, but did not get a building permit to do that, so it won’t show up as finished space on the records.
Now we come to comparables. The most popular method for identifying the value of a home is to do a comparative market analysis. I’ve seen some real disasters here, meaning that I’ve seen agents put together a comp report that is way off. Be careful. It’s easy to pull up so-called “comps” that are not really good and accurate comps at all.
The best comps are houses that are similar that have actually sold as opposed to listings that are active but have not yet sold. And these sales are most accurate if they are recent, like within the past few months. The older the sale, the further you get from the current market and current prices. The comps should also be in the same or similar area.
Comps must be similar, which is often hard to find. I’ve seen houses that are beautiful custom built homes that are worth $450,000 plus, and they are being compared to lesser homes that sold in the range of $275,000 to $325,000. It takes experience to understand how to differentiate houses and compare apples with apples.
Then it is always good to take a look at active listings that are similar to see what the competition is. These are just numbers to look at, and by no means are they definitive, because they have not yet sold. Some will sell for much less than their current listing price.
No one can come up with an exact number for an ultimate price. It doesn’t exist, but I do like to look at what I call a range of values, so all the data collected indicates that the fair market value of a home is within this range of values. Then it is a matter of discussion to decide exactly where to nail the price down, and that becomes the listing price.
One of the best guides to doing a good job with this kind of data collection and analysis is old fashioned experience. If you need assistance with this process and you want to bounce ideas off me, just email me or call me.
Last Updated on April 23, 2009 by Chuck Marunde
Well done, great post!
Nice one. A great read yet again.