Pricing your home correctly can be the single most important factor when you're selling your house. You don't want to overprice the property, because you'll lose the freshness of the home's appeal after the first two to three weeks of showings. Demand and interest wane after 21 days or so.
Of course, there's nothing stopping you from dropping your price later, but that can be a matter of too-little-too-late. You'll want a comparative market analysis (CMA) so you're as close to value as possible.
- Pricing your home too high can be a mistake, but don't worry about pricing your home too low—you'll likely receive multiple offers over the asking price.
- You can use a comparative market analysis (CMA) and comparable home sales in your area to help you determine market value.
- Talk to your real estate agent, or check out the Federal Housing Finance Agency's house price calculator if you need more help.
The Pricing Dilemma
Although pricing too high can be a mistake, don't worry about pricing your home too low. Properties priced below market value will often receive multiple offers that will then drive the price up to market level. Pricing is all about supply and demand.
No two agents price property the same way. Some agents are much better at figuring out how to price your home than others.
Most agents will prepare a CMA for you, but you can also do one yourself.
The CMA: Pull Comparable Listings
First, look at every similar home that's been listed in the same neighborhood as your property over the last six months. Appraisers don't use comps that are older than three months, so you might want to narrow the timeframe even more.
Ideally, you'll want to come in close to the eventual appraised value of your home.
The homes should be limited to those within a 1/4-mile to a 1/2-mile radius of yours unless there are only a handful of comps in the general vicinity or the property is rural.
Often Overlooked Details
Some finer points are easy to overlook when you're comparing homes:
- Pay attention to neighborhood dividing lines and physical barriers, such as major streets, freeways, or railroads. Don't compare inventory from the "other side of the tracks."
Identical homes directly across the street from each other can vary by as much as $100,000 in some neighborhoods. Perceptions of desirability have value.
- Compare similar square footage within a 10% variance up or down, if possible.
- Compare similar ages. One neighborhood might consist of homes built in the 1950s, and it might be situated right next to another ring of construction from the 1980s. Values between the two will differ. Make sure you're comparing apples to apples.
Honestly assess desirability. You might be able to get away with tacking on a premium if you're fortunate enough to own a dream home that will cause buyers to faint upon entering.
Check Out Sold Comps
Compare the original list prices of the homes to the final sales prices to determine any price reductions. Compare the final list prices to actual sold prices to determine ratios. Ideally, compare to at least three properties that sold at market value.
Most local assessors' offices will provide lists of sales, and some newspapers publish quarterly sales reports in their business and/or real estate sections.
It's common for homes to sell for more than 100% of list price in a seller's market. Homes generally sell for list price or less in a buyer's market.
Adjust final sales prices upward or downward for lot size variances, configuration, and amenities or upgrades.
Look for Withdrawn and Expired Listings
Pull the history of any expired and withdrawn listings to determine whether any of them were taken off the market and relisted. "Expired" means that the term of the listing agreement ran out without a sale. "Withdrawn" means that the listing agreement is still in effect, but the homeowner no longer wants to market the property.
Add these days on the market back to the listing time periods to arrive at an actual number of days the properties were on the market. Look for patterns as to why they didn't sell, and note any common factors they might share. What brokerage had the listing? Was it a company that ordinarily sells everything it lists, or was it a discount brokerage that might not have spent sufficient money on marketing the home?
Think about the steps you can take to prevent your home from becoming an expired listing, based on this information.
The ultimate sales prices of homes that haven't sold yet are obviously unknown until the transactions close. But that doesn't stop you from calling the listing agents and asking them to tell you how much a property is selling for. Some agents will tell you, and some won't.
Again, make note of the days on the market. That can have a direct bearing on how long it will take before you see an offer. Examine the histories of these listings to determine price reductions.
Bear in mind that sellers can ask whatever they want to ask for their homes. It doesn't necessarily mean that they'll actually get that price.
Tour these active-listing homes so you can see what buyers will see when they visit. Make note of what you like and dislike about the properties, as well as the general feeling you got when entering the homes.
Recreate positive feelings of reception in your own home if possible.
These properties are your competition. Ask yourself why a buyer would or would not prefer your home over any of these others, then adjust your price accordingly.
Square-Foot Cost Comparisons
The buyer's lender will order an appraisal after you receive an offer, so you'll want to compare homes with similar square footage to come as close to the eventual appraised value as possible. Appraisers don't like to deviate more 25%, and they prefer to stay within 10% of net-square-footage computations. Comparable homes are those that are 1,800 to 2,200 square feet if your home is 2,000 square feet.
Average square-foot cost doesn't mean that you can simply multiply your square footage by that number, at least not unless your home is average-sized. The price per square foot rises as the size decreases, and it decreases as the size increases.
Larger homes have smaller square-foot costs, and smaller homes have larger square foot costs.
The next step after you've collected all of your data is to analyze it based on market conditions.
Suppose that the last three comparable sales in your neighborhood were $250,000. Your sales price might allow some wiggle room for negotiation in a buyer's market, but you'll want to be close enough to the last comparable sale to entice a buyer to tour your home. You might need to price your home at $249,900 and settle for $245,000 to sell in that type of market.
Conversely, you might want to add 10% more to the last comparable sale in a seller's market. You can ask more than the last comparable sale, and you'll likely get it if there's little inventory and there are many buyers. That $250,000 home might sell for $265,000 or more.
You might want to initially set your price at the last comparable sale in a balanced or neutral market, then adjust it for the market trend. Pricing at $254,500 would make sense if the last sale closed three months ago, but the median price has edged upward of 1% per month since then.
Help Is Available
Visit the Federal Housing Finance Agency's website if you feel that you're in over your head. It offers various tools to help you along, including a House Price Calculator that can help you add in factors for appreciation since the time you purchased the property.
Frequently Asked Questions (FAQs)
What happens if my house doesn't appraise for the purchase price?
If the appraisal for your home comes in lower than expected, the buyer can try to negotiate a lower sales price. The seller isn't required to reduce the sales price, but the buyer is free to walk away if they aren't happy with the difference between the appraised value and the sales price. The seller could also ask for a second appraisal, but the buyer doesn't need to agree to this.
What is the average price of a house?
The average price of a house in the U.S. is about $400,000. You can see how average sales prices change every quarter by using this resource from the Federal Reserve Bank of St. Louis. The average home price varies significantly by region. The most expensive homes are typically located in the West and Northeast, while the Midwest and South have lower average sales prices.