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SETTING THE LISTING PRICE is probably the most important process in selling real estate. If the property is listed too high, it won’t sell. If it’s listed too low, the seller stands to lose a lot of potential income.
Why Do Sellers List Too High?
Some sellers list too high because they don’t understand or believe in the concept of market value. Often, their property is unique or unusual with no truly comparable sales. They may hope to attract a wealthy but uninformed buyer who will pay their asking price. These sellers (and their agents) believe that real estate value can be influenced by advertising, promotion and a good sales presentation. Their motto: “It’s worth whatever I can get someone to pay for it.”
Other sellers list too high because they think the next real estate boom is just around the corner. Their motto: “I can always lower my price but I can’t raise it.”
Far too many sellers list too high because they are simply not that motivated to sell for anything less than their dream price. Their motto: “This is my price, take it or leave it.”
The Comparative Market Analysis
The most widely-used approach for setting the listing price is the comparative (or competitive) market analysis, or CMA. Real estate agents will usually prepare a CMA free of charge because they hope you will list your property with them. A CMA is part appraisal and part sales presentation.
A CMA is not an official appraisal. However, an experienced real estate agent familiar with the local market can produce an estimate of value which is more accurate than the estimate of an inexperienced or out-of-town appraiser.
If you are unsure of which real estate office you want to work with, request a CMA from three separate real estate agencies. It’s a good idea to get a CMA even if you think you might want to sell the property yourself to avoid paying an agent’s commission. The CMA will give you valuable information about the local real estate market and does not obligate you to sign a listing agreement.
Value is always an estimate or an opinion. Therefore, different estimates of value will always vary. However, unbiased and well-researched value estimates should all be in the same ball park. Beware of agents who estimate unusually high values. This practice is called “buying a listing” and is unethical.
There are several advantages to getting a CMA rather than an appraisal to determine the listing price.
- A CMA is free.
- A CMA doesn’t take as long as an appraisal.
- Because a CMA is a free service, a potential seller can confirm the accuracy of the value estimate by getting CMAs from more than one real estate agency.
- Real estate agents make frequent tours of local properties, so they are usually more familiar with comparable sales and listings than appraisers.
- Agents work directly with buyers and sellers, so they usually have a better understanding of their likes, dislikes and motivations.
- Agents talk with each other and usually have a better knowledge of the details and conditions which influenced the price of comparable sales.
- Some agents specialize in certain types of properties and may be more qualified than some appraisers to estimate their value.
- Agents have a marketing mindset, and therefore tend to be more creative than appraisers. They may uncover value-enhancing opportunities through division, assemblage, boundary line adjustments, use permits and remodeling that an appraiser might overlook.
- An appraisal may uncover defects or produce a lower-than-expected value estimate which the seller might have to disclose to potential buyers. However, a diligent buyer will eventually uncover any defects and determine the market value. Attempting to avoid disclosure is an unethical practice.
The “Pre-Qualified” Property of the Future
Some real estate analysts predict that the real estate market of the future will include only “pre-qualified properties” offered to “pre-qualified buyers.”
In order to “pre-qualify” their properties, sellers can order a structural inspection, a pest report and a listing appraisal prior to putting their property on the market. Ocean front and hillside properties may require a geotechnical report to determine setbacks and foundation designs. Other properties may need more detailed inspections of roofs, foundations, underground storage tanks, wells and septic systems.
The current practice is to place the burden of proof on the buyer, who orders the required appraisal and inspections reports only after making an offer. This has resulted in unnecessary tensions between buyers, sellers, agents, appraisers, inspectors and lenders.
By ordering the reports up front, the seller can make the most practical repairs and value-enhancing improvements, set a realistic listing price and offer full disclosure to potential buyers. Many people think this is a win-win solution all around.
The Listing Appraisal
An appraisal is an estimate of value prepared by a state-licensed appraiser in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP). Like a CMA, it’s quality and accuracy depends on the skills of the person preparing the report and their familiarity with the local real estate market. However, lenders require appraisals prepared by licensed appraisers and will not accept a CMA.
Most appraisers will do a listing appraisal for a lower fee than a standard lender appraisal. When the property sells, the appraiser can convert the listing appraisal to a lender-approved format in less time than it would take to do the job from scratch. The current practice is to order the appraisal late in the sale process, usually after the buyer and seller have already agreed on the price and conditions of sale. These eleventh hour appraisals sometimes uncover problems and defects which can delay the closing or even kill the sale.
When the property sells, the seller can recover the cost of the listing appraisal and any inspection reports by asking the buyer to pay all or part of the fees, most of which the buyer now pays anyway.
There are several other advantages to getting a listing appraisal instead of (or in addition to) a CMA.
- An appraiser is usually more qualified to estimate the value of commercial, industrial and complex residential properties than the typical real estate agent. Most rural properties have some complexities such as timber value, mixed use, value-enhancing views, excess land, etc.
- The appraiser can produce a more accurate estimate of value when the structural inspection, pest report and any other required investigations are done first.
- An appraiser can help the seller set a realistic asking price, find and cure defects and make value-enhancing improvements. This gives the seller a better chance of attracting a buyer, prevents surprises during closing and gives real estate agents a better chance of making a commission.
- An appraiser’s estimate of value is more likely to be impartial and unbiased. The agent doing a CMA may be pressured by potential sellers to produce an inflated estimate of value, do a less-than-thorough property inspection and ignore defects in order to get the listing.
- In doing a listing appraisal, there is less pressure on the appraiser to estimate a pre-determined value or help complete a sale. After a property is in escrow, appraisers are often pressured to hit the agreed-upon sale price, ignore defects and help close the deal.
- Appraisers tend to be more analytical and detached about real estate because they don’t work directly with buyers and sellers.
- An appraiser will usually measure the buildings and other improvements more accurately than a real estate agent.
How to Set the Listing Price
Real estate agents use a simplified version of the sales comparison approach called “rank analysis.” This method is well-suited for standard residential properties and unimproved land. Many appraisers also use rank analysis, especially for private and non-lender work.
In many ways, the rank analysis method is superior to the “adjusted sales comparison approach” used by appraisers on the standard Uniform Residential Appraisal Report (URAR) form required by most lenders. In the real world, buyers and sellers make decisions by comparing the entire property. Dollar adjustments for different property features (bedrooms, bathrooms, gross living area, etc.) are often subjective and arbitrary and are seldom supported by market evidence. In fact, experienced litigation appraisers don’t even attempt to use adjustments in a court of law because they are so easily challenged.
Commercial, industrial and complex residential properties can also be appraised using rank analysis. However, they usually require the use of other appraisal techniques as well.
The following is guide for both real estate agents and appraisers for setting the listing price.
1. Inspect the Property. The first step in estimating market value by any method is a thorough inspection of the property being appraised. There is no substitute for walking around the property, talking to the owner and/or tenants and looking at the inside and outside of all improvements.
Don’t limit your inspection to what you can see. Ask about access, road maintenance, common elements, easements, encroachments, neighbors, merchantable timber, roofs, foundations, insulation, underground storage tanks, nonconforming uses and non-permitted construction. Ask about heating, water and septic systems.
You should conduct every inspection as though you were the potential buyer. This is a good time for agents to talk with sellers about ordering a home inspection, pest report and other special investigations as needed.
2. Search the Records. A thorough records search should include the county assessor’s information, assessor’s parcel map and the current general plan category and zoning district. Don’t overlook the general plan, the master document which sets policies for growth and development in every city and county. The zoning ordinance is merely the legal code which implements the general plan.
When in doubt, visit the city or county building and health departments and ask to look at their permit files. A record search will not trigger any enforcement action.
3. Select the Comparables. Select three separate groups of comparables or “comps” which most resemble the property being appraised. These three groups should include the following.
- recent sales
- current listings
- recently expired or withdrawn listings (these should be unrelated to the sale or listing comps above)
Selecting comps is both a science and an art. It requires objectivity, familiarity with the local market and an understanding of buyer and seller motivations. The following is a guide for selecting comparables.
- They should resemble the property being appraised as closely as possible in terms of land use, type of improvement, lot size, building size, etc.
- They should share any significant value-adding characteristics (ocean front, ocean view, etc.)
- They should be recent (preferably within the last six months).
- They should be close (preferably in the same neighborhood).
- Each group of comps should include enough properties to more than cover the range from clearly inferior to clearly superior. Although this can be done with only two comps, more comps will produce a more accurate estimate of value.
- Each comp should include all the listing records for the property (previous sales, active listings, expired listings).
- Expand the search backward in time, if necessary.
- Expand the search outward in distance, if necessary (preferably in similar neighborhoods).
- Double check the information for each comp, such as price, zoning and lot size. Watch for high prices that include personal property or dividable land. Watch for low prices related to foreclosures, estate sales and quick sales. When in doubt, call the listing or selling agent.
4. Organize the Comparables. Put the records for each comp in a folder containing the assessor’s information, assessor’s parcel map, past listings and related information. If you’re working with land comps over 5 acres, include a topographic map. Topo maps help you compare slope, buildable areas, views and sun exposure. The Mendocino County Planning and Building Department maintains a complete set of USGS maps with parcel overlays.
Separate the comps into three groups – sales, active listings and expired and withdrawn listings. Transfer the basic information from each comp to a format suitable for presentation to the seller. Include a picture of each comp if available.
5. Rank the Comparables in Order of Price. Rank each group of comps in order of sale price, listing price or the last price at the time the listing expired or was withdrawn.
6. Analyze the Comparable Sales. The comparable sales should produce the most accurate estimate of market value. Select the first comparable sale which is clearly inferior to the property. Next, select the first comparable sale which is clearly superior to the property. These two sales establish the lower and upper range of value.
Determine where the property fits within this range and why. For example, if this type of property is increasing in value, you might place it in the upper end of the range. If this type of property is oversupplied, you might place it in the lower end of the range. If you can’t determine where the property lies within a given range of value, then the most probable value is in the middle.
Determine how long the comparable sales were on the market before they sold, including previous expired and withdrawn listings. This is a good opportunity to show sellers the relationship between listing price and days on market.
Beware of automated CMA programs. Computers are great at helping search for comps, but experienced agents and appraisers are still best at deciding which ones to use and how to analyze them. Also, the automated CMA programs I have seen calculate the average price of all the comps selected. Averaging the comps will not produce the most accurate estimate of value. You should be searching for the most probable range of value and the most probable location of the property within that range.
7. Analyze the Comparable Listings. Go through the same process with the comparable listings. The comparable listings should produce a higher estimate of value because most sellers list above market value. Analyzing the comparable listings can help sellers see which properties they are competing with. This is why a CMA is sometimes called a competitive market analysis.
This is a good opportunity to point out the difference between selling prices and asking prices in the local market. In some markets, such as the Mendocino Coast, there can be a big difference.
8. Analyze the Comparable Expired and Withdrawn Listings. Recent comparable expired and withdrawn listings can be helpful because they represent properties which were exposed to the market and were rejected. Make sure the comparable expired and withdrawn listings are not previous listings of the other sale and listing comps you are using. This is a good time to explain to potential sellers why some properties sell and others are rejected.
9. Estimate the Value. After this analysis, you should be able to estimate the current market value, suggested listing price and even the time it will take to sell the property at a given asking price.
Conclusion
Setting the listing price is probably the most important process in selling real estate. It is also a good time to educate and inform potential sellers about the local real estate market. Real estate agents, appraisers and inspectors can create a win-win situation by working together to get a property “pre-qualified” and in top condition to sell.
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