What’s the most important consideration for home buyers after finding a home that fits their needs and desires? If you are thinking price you would be correct, most of the time. For sellers, price is equally important and becomes the statement to buyers as to where a particular home is positioned in a given real estate market. This positioning, or pricing, is often very subjective and can lead to inflated listing prices and the dreaded longer market times. Assuming a seller’s goal is to maximize profits in the most efficient and timely manner, how does one price their property most effectively?
It all starts with the CMA
A good real estate agent should be able to assemble the market data for a CMA or ‘comparative market analysis’, sometimes called a ‘competitive market analysis’. The CMA compares the subject (seller’s) property to similar properties in the area. The comparable listings should be as similar in construction, location, lot size, age, and terms of sale as the subject property. The goal of the CMA is to provide a probable market price or market price range for the subject property. Usually agents will also provide a suggested listing price or listing price range. Assembling a quality CMA can take between 3-5 hours of an agent’s time. It’s not just a computer generated document requiring a few keystrokes while logged onto the local multiple listing service. Because of the time and thought involved in its creation, agents prefer to present and interpret the results in a meeting with the prospective listing client.
The CMA should/might include the following:
- Sales of homes similar to the subject property that have occurred within the last 6 months.
- Pending and contingent listings similar to the subject property that have occurred within the last 6 months.
- Currently 'active' listings similar to the subject property that are available for purchase now.
- The market times of the above listings and how these numbers will provide direction in the pricing of the subject property.
- Commentary on current market conditions and the 'tone' of the market as evidenced by supply/demand statistics and absorption rates for the area and price range considered.
Please look for ‘The science (and art) of pricing real estate: Part 2’ next week where we will discuss how to use the CMA to price your home competitively. We will also look at some of the common misconceptions when pricing a home and why you should pay attention to the statistics and not to your heart or necessarily, your agent!
4 comments:
I recently had a market evaluation done on my home by three different firms. There was approximately a 12% range between the highest and lowest of the recommended selling prices by these three real estate companies. My gut feeling would be to disregard the highest and the lowest and use the broker in the middle. What's the best strategy to follow?
I'm not sure I even want to put my home on the market at this moment!
Alice, your frustration is understandable, but don’t give up. Now is really the right time to be putting property on the market if that’s your intention. From now until approximately late October the window of opportunity is open!
Go back to the CMA’s and look at the most recent sold comps in all of them. Find the listings that are closest to your property in construction, location, lot size, age and terms of sale. These are the most important data points that you have when looking at market price. ‘Solds’ tell us where the market has been, where it has actually traded. If you can place your home close to one or more of the sold comps, you can come up with a possible sale price range. Next, try to remember how the different agents justified their various ‘sale prices’ for your home. There is good logic, fuzzy logic, bad logic and/or a combination of these. Take time to look at the comps and then listen to the agent’s logic for pricing your home. There are reasons why there can be a large disparity between competing agent’s recommended sale prices. This and other topics will be discussed in the upcoming, ‘The science (and art) of pricing real estate: Part 2’. Please read this for more details on CMA’s, agents and the pricing process. Thank you for your questions and comments.
Thanks. That was very helpful. Why do some agents seem to get the bulk of the listings in our area although they don't seem to be able sell the homes any quicker or at better prices than other agents? In fact, many times, it seems that their results are less effective. Is it due to discounting their fees...their name status...or some other factors? I find this quite irrational!
Thanks Alice, another good question/comment.
While there are many very good agents, some actually do get a disproportionate number of the listings. As you point out, many of these agents have records with long market times and listing sale prices that are lower than a great number of their rivals.
This can occur for several reasons. We will look at a few possible answers among many. Sometimes big name agents just 'out-market' their competitors and have a higher name recognition. Othertimes, an agent's tenure in an area will add to the perceived credibility of the agent regardless of their actual abilities.
Another factor is what is called 'buying a listing'. This simply means that some agents will furnish a would-be listing client with a very overstated recommended listing price. Once the listing is secured, the agent will simply reduce the price to an area that will attract buyers. This can often take weeks and months of wasted market time depending on how much the listing agent overpriced the home to start with. Remember to ask about the logic of an agent's suggested list price for your home. If the sales data and the agent's interpretation do not add-up, perhaps it is best to ask whether the agent in question is your best choice. Many people will often want to believe that their home is worth much more than what the actual sales data indicates. Look at the recent 'sold' comps first and compare your property as objectively as possible. Find an agent that can explain what the statistics mean and how well they can justify their pricing criteria. I hope this helps!
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