Saturday, August 14, 2010

Pricing Your Home

Pricing your home is not rocket science. And chances are, you already know what a fair price is.

There is an old joke that goes like this:

At a cocktail party, a philosopher is conversing with a young socialite. The philosopher is an older, portly gentleman with a full beard and unkept hair. The socialite is young and buxom and part of the smart set. The philosopher asks the socialite, "Would you sleep with me if I paid you a million dollars?"

The socialite thinks about this. Considering how much she gets from her trust fund, a million bucks would be nice to have. She says, "For a million bucks? Sure!"

The Philosopher then says, "Well, how about for $100?"

Shocked, the socialite slaps him across the face hard, and says, "What do you think I am? A prostitute?"

"Madam," he replies, "We've already established that fact. Now were are merely haggling over price!"

This joke illustrates that it is possible to put a price on almost anything, and also it is very easy to establish a range of price, as we shall see shortly.

Many folks, when listing their home, claim not to know what price to put on it. They interview real estate agents and often pick the one who oohs and aaahs about their house the most and also tells them the highest price for it.

This can be a huge mistake, as such a house will languish on the market for months, if not years, and often the seller, desperate at that point, will take a price lower than what he could have gotten for the property if it was properly priced to begin with.

Not only that, the seller loses out in a second way, in that he paid interest and expenses on the house for the year it was on the market. Such costs can easily be in the tens of thousands of dollars.

So properly pricing your home is important, to insure that it sells in a timely manner. You do not want to languish on the market, incurring added expenses as months elapse, and you do not want to end up desperate to sell later on and taking a lower price than you should have.

So how do you come up with a price? It is not hard. Chances are, you already have a number in your head - or multiple numbers. As in my pricing guide for invention licensing, there are usually three numbers - the number you'd like to get in your dreams (but never will), the number that you realistically expect to get (which you probably will) and the lowest number you will begrudgingly will accept (which you hope not to take, but will if you overprice your home!).

First, as in our philosopher joke above, you can establish a coarse range fairly quickly. If you are an average middle-class American, chances are your home is worth somewhere between the $100 and $1M range our philosopher offered the socialite to sleep with him.

"But wait!" you say, "That doesn't help me at all! That doesn't narrow the range very much!"

Au contraire. Compared to infinity, a range between $100 and $1,000,000 is quite a narrowing.

But you are correct that such a range is still somewhat idiotic. So narrow it further, in increments of $100,000. Pretty soon, chances are, you will fall into a fairly narrow range, as defined by a number of factors:

1. What you paid for the house
2. What your neighbors paid for their houses
3. What similar houses are selling for
4. What people can realistically afford in your area
5. Appraised values

We paid $350,000 for our home, added $100,000 plus in improvements. The market in our area has stayed largely flat since we bought the home. The house is clearly worth at least as much as we paid for it, and most likely more.

But it also clearly ain't worth a million bucks, or even close to that. Houses selling in our area for the $750,000 and up range have hundreds of feet of lake frontage and are directly on the water. So clearly, we cannot list in that upper range bracket. Even houses $500,000 and up usually are on the water.

A neighbor's house recently sold for $340,000, with 1/5 the acreage, no barn, and other amenities and no lake improvements (dock hoist, etc.). It is also a smaller house. That provides yet another data point, which seems to point to the $400,000 range as a likely selling point.

So you can see, starting at the extremes allows you to zero in rather quickly.

Still confused? Order an appraisal. We did, and we've done it in the past. Appraisals can be self-serving, to be sure, but they do provide some concrete documentation of values in the area, in a written format that involves some contemplation and calculation. It is well worth spending $300 or so to get this data, if you are at all unsure.

Finally, look at your carrying costs for a property, particularly if you already have bought your next home. If you have a mortgage payment of $1500 a month, utility bills of $250 a month, repairs, taxes, insurance and other expenses of $250 a month, then the house has a real cost to you of about $24,000 a year. Perhaps less, as some of that money does pay down the mortgage amount.

But if you are in this situation, you should think carefully about overpricing your home or turning away "low ball" offers. Yes, maybe you can "hold out" and get $20,000 more for a property. Maybe not - you might get less. What is certain, though, is that if you wait 9-12 months to "get your price" you are really doing little more than breaking even, if you incurred $20,000 in expenses in the interim.

That is the conundrum we are facing. Based on the numbers above (but not the appraisal, which has not come in yet), it would appear that our house would sell in the mid $400K range. However, if we could sell it quickly, we would make as much money on a lower-offer than we would by keeping on the market for 6 months to a year. It is costing us nearly $40,000 a year to keep this house, so if we could sell it sooner, rather than later, we would end up saving money. A "low-ball" offer that is $40,000 less than our asking price is really the same thing as a full-price offer a year later.

And yet, that is the opposite of what usually happens - people over-list their houses, they sit on the market for months, and then end up taking a lower offer.

Another important thing to bear in mind about home pricing, as I have mentioned in the past in this blog, is to consider price range.

Talk all you want about marketing and staging your home, open houses, or full-page ads. They don't sell homes. Local folks interested to see what their home is worth (or to go through your house and admire your squalor) are the only folks who read all that stuff. Real estate agents do all that work, because it raises their profiles and gets them listings.

No, what sells homes is price. Put it on the MLS, price it attractively (you don't have to GIVE it away, just price it realistically) and it sells. Listen to Edith Lank on this one - price is what moves homes, not granite counter tops.

And ranges can cause you to miss buyers. For example, if we listed this at $520,000 it would be a bit of a reach, perhaps, for this house. It also means that a real estate agent pulling listings for buyers (this is what sells homes) would then pull your listing when looking at homes in the $500,000 to $600,000 range. Those are some nice homes and you might end up looking pretty shabby next to them.

On the other hand, a buyer looking in the $400,000 to $500,000 range will never see your home, as the agent won't pull your listing when he runs the MLS for the area. So a buyer who would jump on your house never sees it, because the one criteria, price, has excluded it.

If you are near one of these price breakpoints, it may be better to move your price slightly under. $499,999 is a number that snags the "$500K and below" crowd. And let's face it, if you are listing at $520,000, chances are, you'd take $499,999 any day.

So understand the price break points and price within them, when reasonable. Your agent should have a good idea of these break points in your area. Usually, they are in $50,000 increments, except perhaps at the very top and bottom of the market.

We will wait for our appraisal to come in next week before making a final decision. But I suspect that it will be somewhere in the mid $400,000 range. It may break $500K, but I doubt it, based on comparable sales in the area. I suspect our three numbers will be $475,000 (if we can get it), $450,000 (a realistic number) and $425,000 (if we have to).

Like I said, it ain't rocket science.

Note, the only exception to this rule is if you are in a market that has changed drastically lately (Florida, for example) or you are not up on the latest Real Estate trends. Most folks, however, seem to know exactly what houses sold for on their block - as gossiping about Real Estate prices is one of the major topics of conversation in most places.

Occasionally, you do end up with people who are so clueless about pricing that they absolutely give a house away. But that happens rarely. More often the opposite happens - people convince themselves their house is the Taj Mahal, and that it will sell for a million bucks. Such folks waste everyone's time, including that of buyers, Real Estate Agents, and even their own.

Price it realistically, and watch it go away.