Across the Picket Fence - Pricing

Across the Picket Fence

Pricing your property

Real Estate Appraisals, Pricing

Q: If you sent two or three appraisers to the same property... what kind of range can you expect?

Appraiser: Five percent. That is what the banks accept (for a variance).

Q: What is the main difference between an appraisal and a market analysis, and which is the best figure to use when determining the price of your home?

Appraiser: A market analysis is essentially a broker's appraisal of the home...and should be fairly close to an appraisal (done by a professional appraiser)... However, I've seen instances where the differences are substantial, -- making a difference of as much as $25,000 to the value of the home. The square footage might be calculated wrong, for example, or the comparables might not be adequate. Anyone can make an error, even an experienced appraiser or a seasoned broker... What I'm suggesting to you is that whether you get an appraisal through an appraiser or a broker, make sure you have confidence that they know what they're doing. And when setting your price, check your competition... see what your neighbors are pricing their home at.

Q: What happens if the market analysis is wrong, and I unknowingly sell my house for much less than it's worth?

Appraiser: The buyer gets a good deal!

Is there anything that protects me?

Lawyer: No. You are legally bound to sell your house for the price you agreed to sell it for, unless you and the buyer enter into another agreement.

Q: If a house appraises for $100,000, and it sells for $95,000, what does the bank do with this? How much will they lend?

Banker: The lender will lend on a figure of the appraised value or the sales figure, whichever is less. If you buy a home for $95,000, and it is appraised for $100,000, the bank would base their loan on $95,000.

Q: (to the appraiser) Over the years, I've added several expensive upgrades to my property. How much does this add to the value of my property -- and how do you calculate the added costs when you do the appraisal?

Appraiser: It all depends on what the upgrades are. There are items in the property that you'll never get your money back on...or only a portion of it. Things like inground pools...super large decks or porches...excessive landscaping (the buyer doesn't want to be married to all that landscaping)...too many bathrooms: some homes have a bathroom for every bedroom -- the market doesn't dictate that. We're talking buyers, and what the buyers want. In general, the market doesn't respond to these kinds of (excessive) amenities, and certainly not to the extent that it costs you to build it. These are situations where value does not reflect the cost of adding the amenity.

Seller: My roof needs to be replaced, but I don't have the cash to do it, so I'd like to offer a rebate in my ad for $5000 to replace the roof.

Lender: Your lender will require you to replace the roof prior to closing anyway if the bank's appraiser says the roof needs to be replaced within the next five years. If not, you'd want to simply offer a rebate toward closing costs since any rebate amount intended for a specified maintenance cost is considered a "seller concession", and is deducted from the sales price of the home. For example, if you're selling your house for $300K but offer a $5000 rebate, the sales price of the house will be adjusted to $295K by the lender, and they will only loan based upon that amount (not the $300K agreed upon by you and the buyer).

Seller rebates should not exceed the amount of the closing costs, which is why most rebates are phrased "up to $______ toward closing costs". Rebates for conventional mortgages are limited to 3% of the sales price when putting 5% down; 6% with a 10% down payment, etc.

We are downsizing and moving to Florida. We'd like to sell our house furnished, except for a few pieces, together with our lawn equipment, snow blower, etc. How do we handle this in our asking price? Should we just sell as furnished, or put a price on the furnishings and sell as a separate deal? Finally, how do people normally handle things like this in the contract -- do we have to itemize every piece of furniture and attach this to the contract?

Because lenders will not lend money to buy furnishings and lawn equipment (these things are known as "personal property"), the real estate purchase and sale contract should reflect only the price for the land and house (known as "real property"). The personal property should be a separate deal, with a separate contract. It would be best if you itemize every single piece of furniture and equipment, but because this can be impossible, another way to do write it would be to say that all furnishings and equipment are to be conveyed, except for the following: and list the items you are not leaving. Unless you itemize every single thing that is being sold, there must be some level of trust between the parties.

Seller: When pricing a home, what is the usual amount of "cushion" that's built in?

Although most people leave some room for negotiations, there are plenty of sellers who put their best foot forward from the beginning with a no-haggle, bottom-line asking price. Often times these are people who want to make a quick sale or simply are uncomfortable with negotiating price. There really is no "usual amount" -- each seller has her/his own circumstances which influence how he/she sets her/his price. For example, the sellers could be in a hurry to sell due to a transfer or they need to sell in order to buy another property. Or they may have a unique home that is difficult to find comparables for (and therefore price) and they may start on the high side rather than risk underpricing their home. Others may not need to sell, but are willing to do so "for the right price." One thing to consider is that you may be approached by a buyer who is working with a buyer broker. Since many times the seller is asked to pay the broker's fee, you would want to have at least a 2-1/2 - 3% cushion built in to cover this fee. Obviously, in this case you would need to know at the time of negotiation who would be required to pay the broker's fee.


Seller: The problem I'm facing is that buyers are automatically offering me 5-6% less than my asking price, arguing that since I don't have to pay a commission I should be able to sell it for that amount. It's priced very competitively now, and I can't afford to go any lower. Should I raise my price 6% to avoid this confusion?

No. If you raise your price, you'll lose your competitive edge. First, are you sure you're "competitively priced"? Have you had an appraisal done within the last year? If the answer is yes, then you should have no problem convincing your prospective buyers that the house is worth what you're asking. You may even want to show them the appraisal document to demonstrate that the asking price is fair.

Also, explain to your buyers that the agent's commission is typically added on to the seller's bottom line! Since you didn't have to inflate you price to cover this fee, yours is already at a bargain.

Seller: The town has recently re-assessed our house for taxes. Is this a good measure of my property's worth?

According to an experienced appraiser, this is risky. While 90% of the assessments are on target, a few could be way out of line. Sometimes the measurement of the property is incorrect, or the comparables aren't very accurate. You might significantly overprice, or underprice, your home as a result. Your best strategy would be to hire a professional appraiser to be sure of your property's worth

Buyer: How is square footage determined?

Appraiser: It is the exterior dimensions of the house - width x length. The correct way to measure a house is to measure the four sides, on the outside. Below grade (meaning the basement) is evaluated differently than above grade, and should not be included in the total square footage.

Seller: I know that a basement is considered to be below-grade, and its square footage is considered different from above-grade. But what about a walk-out basement? Does this still count as "below grade"?

Appraiser: Yes. If any portion of it is below-grade, the square footage is considered below grade.

Seller: How about the garage? Is this included in the above-grade square footage?

Appraiser: No. A garage is not included in the square footage. In an appraisal, there is a separate line item that takes the size of the garage,or lack of it, into account

Buyer: The seller of the property I want to buy recently had a professional appraisal done. Why does the mortgage lender need to do another one (at my expense!)?

Most mortgage lenders will accept a recent appraisal commissioned by a second party (the seller, for example). It could be that the particular appraiser is not someone that the bank usually does business with. This does not mean that there is anything wrong with the appraiser or the appraisal... just that the appraiser is not on the lender's "list". It might be worth your while to shop around for a lender that does business with this appraiser, since it will greatly speed up your loan approval process, as well as save you a couple hundred dollars (to have another appraisal done).

Seller: Do most homeowners selling on their own have to drop their asking price by 6%?

While some may choose to do so in order to offer a more competitive price, it certainly is not a rule-of-thumb. On the contrary, many homeowners choose to sell themselves so that they don't lose the 6% commission (which comes out of their equity). The important thing to remember is that your home is worth what it's worth, regardless of how it's sold.

Seller: How do most (for-sale-by-owner) home sellers determine their asking price?

Some have professional appraisals done, which is the easiest method, and the one we recommend. Others do their own research by looking through their town clerk's records of sales of comparable homes in their neighborhood, or similar neighborhoods, preferably over the past six months. Some even get an idea by looking at our publication and seeing what similar properties are asking (especially those that recently sold). Finally, some take advantage of real estate agents who offer market analyses for free. This has its risks, however. Real estate agents vary in experience and ability, and you want to be sure the agent knows how to accurately price a property. Also, sometimes when suggesting a price to a seller, the real estate agent may flatter the seller with an inflated value in hopes of getting the listing, knowing he or she can persuade the seller to lower it later when the house doesn't sell (also, if they know the seller is intending to try the sell on their own first, they may inflate the value to decrease the seller's chances of being successful. They know, of course, that an overpriced home usually will not sell.) Conversely, they might undervalue the property in hopes of getting a listing that will move quickly. If you choose to do this, you should definitely get at least two, and preferably three, analyses done to make sure the price is in the ballpark.

When researching comparables, be careful. The key word when researching comparables, be careful. The key word here is "comparable". If you have a condo, it will probably be easy to do your own comparisons. With anything else, it can be tricky. Professional appraisers have various techniques/ formulas to adjust property values so that what might seem to be an apple and an orange comparison will balance out -- like "weighting" various features. Square footage plays a key role, of course. Number of baths, and other amenities all have their own "values". Keep in mind, however, that appraisers and realtors are only providing their best estimate of what they believe most buyers would be willing to pay for the property.