Not too high, not too low… find the price that’s just right.
There is a standing joke about economists which purports, “If you were to put three economists in a room, you would wind up with four opinions”. As my field of study at The University of Florida was geared towards an economics specialty, I have firsthand knowledge that there is a tremendous amount of truth to this.
Finding the price point where the supply line meets the demand line is fairly easy on a piece of paper with known variables. Finding out how much someone will pay for a 5/4 oceanfront home on a three acre parcel is a balancing act between what has sold, what is currently for sale, and what is going to be put on the market in the near future.
For a seller, setting the wrong price can have some unpleasant effects. Too low of an asking price could mean a flurry of lowball offers, or worse yet, an inordinate amount of money was left on the table. Buyers may think that there is some sort of defect in the property, or that the seller is desperate. Either of which sets unrealistic expectations that can be difficult to overcome. Too high of a price can leave a property on the market for years.
For buyers who don’t place the proper value on a home, it could mean overpaying, or initiating a bid that is unrealistically low. Enter into a contract to purchase too high, and you could spend thousands on inspections and an appraisal only to find that the appraisal is lower than the contracted price. If the appraisal comes in low, a lender may be unwilling to finance the full amount requested. Initiate dialogue with a bid that is too low, and you can be assured that the seller will respond, in kind, with a less flexible reduction to their asking price.
There are several methods that real estate professionals can use to value a property, but only someone licensed as an appraiser can give an appraisal. Real estate agents can give a prospective seller a CMA (Comparative Market Analysis). A Broker can give a BPO (Brokers Price Opinion).
The most popular methods of valuation are: The comparable method, repayment method, investment method, and the cost method. The comparable method is an attempt to put a value on real estate based on what is available for sale in the area, or what has sold in the area. The repayment method is an attempt to value a property based on how long it will take to repay the investment with rental income. The investment method attempts to show what the return on investment will produce. The cost method attempts to place a value on what it would take to reproduce the asset estimating construction costs. All of these are only opinions of value, what a home is worth is what someone will actually pay for it!
Variations in opinions of value occur for a number of reasons, but may be avoided by answering the following question accurately; “What do I hope to accomplish?” Understanding the different roles and motivations of the parties to a transaction can be beneficial when trying to understand why there is a disparity in different opinions, and can help a buyer or a seller make better choices.
A CMA is usually performed by an agent or broker, on behalf of a potential seller, in the hopes that they will receive a listing. This creates a conflict, as the value a professional estimates for the sale of the house may be lower than the value that will result in a listing contract. Often the winning agent isn’t the one who came up with the best price to market and sell a house, but the agent who provided the highest price as their opinion. While this may sound benign enough, price is a large factor in selling a house. It is easy enough to see the results of this strategy, as there are a number of homes on the market which have been on the market for over a year. If a higher asking price meets the seller’s wishes, setting a higher value isn’t too much of an issue. However, it is unfair to a seller for an agent to over promise, and under deliver at the seller’s expense.
In the appraisal process, an appraisal is ordered by the lender, and conducted by a disinterested third party, to establish a value which will protect a lender. That appraisal ensures the lender isn’t going to be stuck with an asset that is worth less than the amount they loaned. Because of the most recent financial unpleasantness, appraisers are likely to be more conservative with their numbers than they were in the past. This may reflect in a lower valuation of the asset.
While we are on the subject of appraisals, I believe that the most accurate representation of value would be from a licensed appraiser following Uniform Standards of Professional Appraisal Practice (USPAP) guidelines. However, appraisers are not infallible. Recently, during a sale, one of our agents had a property appraise for $165,000 less than the contract price. At this point it is important to have an agent that understands the appraisal process and method. The appraiser did not factor in a number of crucial items that would have increased the appraised value of the home. His comparable properties were all located on another canal, which was closer in appearance to a ditch than the canal the subject property was on. Further, he missed adjustments for Quality, Construction, and Market Inventory. While this may seem a little dry and sciency, when you are facing a shortfall of this magnitude, it is imperative to have an agent who understands how to correct the issue. It is also important to have an agent who has the motivation and time to dedicate to each transaction.
If you are interested in speaking to me about a Comparative Market Analysis, or have any real estate questions, please feel free to call or email Jonelle Kop.
John Gallant, Broker of Blue 9 Realty in Islamorada
