How To Price Your Home & The Stock Market


Pricing your home is one of the most challenging aspects of Real Estate especially for FSBOs because oftentimes the data that is available to the public is often misconstrued and there may be inherent biases. Pricing a property correctly the first time is the key to selling a home, and can even help buyers get the price they want as well. The main factors that I will talk about today in relation to pricing are of the following: Market expectations, Supply and Demand, AVMs, and Appraisals.

Market Expectations


Based on the principle of substitution, at any given price point, buyers will expect certain features or amenities related to those price points. The lower the price ranges of properties, the lower the expectations from the buyer for features. Wouldn't you agree that a buyer for a $1,000,000 estate would expect all of the latest appliances, modern floorplans, and a minimum of a 3 car garage? Furthermore, based on this principle, buyers will want to buy the most affordable priced home that fits their criteria for features.

Market expectations also relates to local or regional markets in that a buyer will not pay extra for a feature that is commonly not required. For example, for homes in New York City, fireplaces might not be as common as homes from Upstate New York. Therefore, fireplaces are not as weighted heavily in buyer's minds and therefore wouldn't pay extra for that feature.

Supply & Demand


Supply and Demand is a very real thing in real estate. Real estate is heavily dominant on market cycles and one way to go about seeing what type of market we are in is by utilizing the absorption ratio. The absorption ratio calculates how many months of inventory are in the market. In any given local market, there are varying rates of absorption ratio. For example, if a local market has an absorption ratio of 4, the market norm is 4 home sales per month. So if there are 40 current listings, it should take 10 months to completely sell all of those inventory. Let's say the market shifts from the norm of 4 home sales per month up to 3 sales per month, the market is leaning towards a buyer's market. If home sales increase to 5 home sales per month, the market is leaning towards a seller's market.

Another way to look at supply and demand is by activity. If home prices are selling high with low inventory, it is a seller's market. If home prices are selling lower and inventory is high, it is a buyer's market.

AVM's


Do you know that most people go to Redfin or Zillow for their home valuations? Here's the hard truth...most of those calculations are not very accurate. The reason why is because AVM's or Automated Valuation Models calculate home prices based on features without any sort of adjustments, do not factor in market expectations, and also sometimes averages prices on old inventory or inventory that don't apply to those types of properties. As a result, home pricing valuations from those AVM's are skewed and incorrect.

Pricing property according to Fannie Mae or ANSI standards is a very finnicky thing. That is because it is not an exact science and must be held in high regard to mimic a potential Real Estate Appraiser's report as close as possible. Real Estate Sales Professionals like myself utilize CMA's, or Comparative Market Analysis, to come up with a price range and eventual price figure so that we can best sell our client's homes for top dollar or make the best offer on properties for buyers.

Appraisals


Like I mentioned, appraisals are ordered from the banks when buyers attempt to finance a home purchase. Home sellers and buyers are both at the mercy of these appraisers so it's a wise idea for a real estate agent to develop good relationships with them. This is so that they are able to make accurate CMA's or ask for a review with the lender(s) should they believe the appraisal has been adjusted incorrectly.

If a seller sells her or his home at a market premium, and for some miraculous reason it sells, but it is a bank-financed mortgage-contingent purchase, the appraisal has the final say. Let's say the appraiser comes out and says the home is worth much less than what was priced for; now the buyer has to either pay in addition to the down payment out of pocket, or the seller has to come down in price or offer concessions to make the sale.

This also affects the buyer as well because let's say that he lowball offers for their dream home; they will most likely not even get a response from the seller. Let's say the buyer over pays for the house...and the seller accepts their offer, but they don't have a mortgage contingency clause...Now the buyer is legally obliged to purchase the home.

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Conclusion


Home pricing correctly the first time is a necessity. As a result of all the ins and outs of the Real Estate transaction process, and because markets are always changing, pricing right the first time gets more offers and eyeballs on home seller's homes. Or it will provide for buyer's the opportunity to look at your home that fits their criteria and market expectations. It is very similar to the stock market in the sense that at certain price points, assets are in high demand whereas in other price points there is low liquidity and there is hardly a market for it. Oftentimes, there are poor suckers that get trapped into buying an asset too high, and are unable to sell it for long periods of time. This is why pricing is so important for buyers and sellers alike. Make sure to keep everything in the proper perspective so that you don't have any oversights that might cost you money!
How To Price Your Home & The Stock Market How To Price Your Home & The Stock Market Reviewed by Alex Sung on June 07, 2020 Rating: 5

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