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Market Value, List Price and Sales Price

For buyers and sellers there are a bewildering array of home valuations - Zestimate, assessed value, appraised value, market value, list price, and final sale price. In this post we'll break down the various valuations you will see when you are looking to buy or looking to sell a home.

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In this post we'll look at the three that most directly affect buyers and sellers - market value, list price and final sale price - and explore the relationship between them.

Market value

Market Value (sometimes referred to as the Fair Market Value - FMV) has a rigid definition - it is an estimate of the market value of a home, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market. In order to estimate the FMV agents prepare a Comparative Market Analysis (CMA). The quality of these CMA's varies by agent but after reading the document it should be clear to a home owner how much their home should sell for. MA Properties prepare what we feel is the most comprehensive and accurate CMA in the industry today. There are three areas where we improve on the traditional CMA. Firstly, the included homes secondly the readability of the document, and third is a video explaining the methodology and how the homes used in the report compare with your home - we structure the deliverable so that the homeowner can see how the estimate of the market value of their home was determined, along with analysis of current market conditions in the town.

It is common practice for CMA's to include homes that are similar to the home being estimated (i.e. if the subject home being estimated is a Cape then the comparable homes are also Cape's). In a market that would be considered a sellers market the ability to compare homes based on style is not really relevant. Buyers don't have the option of choosing a home based on their preferred style but are more likely to choose a home based on its size, # bedrooms and bathrooms. To compare styles only means that these homes don't accurately reflect what the buyer would consider when looking for a home to buy. Buyers will look at more than the style of a home and they will include the characteristics of a home (these include proximity to  town center, accessibility of public transportation, number of bedrooms  and bathrooms, size of the home and lot, condition of the home etc.) in their search.  So, we use relevant homes - ones a prospective home buyer would also consider if they were looking at your home.

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We classify each relevant home based on the following scale of relevance to your home:

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  • The home will sell for less than your home

  • The home is relevant to your home but should sell for less than your home

  • The home is relevant to your home

  • The home is relevant to your home but it should sell for more than your home

  • The home should sell for more than your home

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Based on these classifications we bracket the home being estimated to determine a price range (dependent on the price range of the home we try to keep this range to an appropriate range).

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In the CMA we also include a detailed description of the relevant homes and this allows a home owner to better understand how the estimated FMV is derived. Now that we have an estimate of what the home should sell for, what price should the home be listed at?

List price

Many towns have seen an appreciating market since the lows of 2009 and there is a temptation for home owners to say "it's a sellers' market at the moment and my town is hot! Let's try for a higher price".  However compelling this sounds resist the temptation! Even in a hot market there are still homes that sit on the market not selling - so, how do you ensure you are not one of those homes?

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Price is just part of the equation to getting the best price for a home. The MA Properties Team use a five key strategy to maximize the final sale price:

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  • Smart Decisions – understanding the market, an analytical market analysis, and seasonality components are just some of the factors that work toward maximizing sale price.

  • Preparation - prepare the home for today's buyers.

  • Staging – stage the home for today’s buyers.

  • Market - market the home through a mix of traditional print and digital marketing channels including photos, video, 3D tours, floor-plans, website, social media, targeted email campaigns.

  • Teamwork – having the whole team working to create a product that the buyers will love.

 

The key rule of the Smart Decisions component is to never price higher than the estimated FMV (just think about the game show The Price is Right -  guess too high and you're out). The price should be close to the estimated FMV and at or below a search boundary. No surprise - buyers search in well-defined price ranges (e.g. less than $600,000 or $600,000 - $800,000) and so a price of $600,000 will be seen by buyers with $600,000 as their maximum, but will also be seen by buyers who have their search range of $600,000 - $800,000.  Whereas pricing the home at $599,000 will mean that the buyers who can afford more than $600,000 won’t even know the home is on the market, and conversely pricing same home at $610,000 will mean that these buyers who have $600,000 as their upper limit of the search won't even know the home is on the market.

Final sales price

So, how well do agents/home owners follow this advice? Turns out not very well. The following graph shows the relationship between the list price and the final sale price (the List Price/Sale Price ratio).  100% means the home sold for the list price.

A large number of homes do indeed sell for at, or above, the list price but even in a hot real estate market with typically high demand a large number sell for below the  asking price even in a hot real estate market. Why is this?

Priced too high?

If a home is priced too high initially it suffers from death by a thousand cuts (price reductions) before it eventually sells. In the modern internet/Information age buyers are extremely knowledgeable about the market. So, buyers dismiss a home because it's over-priced compared to other relevant homes (remember back to the CMA). The price then needs to be reduced through a series of price cuts, but the home is now stale - ever hear yourself ask - "what's wrong with the home that it still hasn't sold?" Finally the price is reduced sufficiently below the estimated FMV that the serious buyers begin to consider it as an option again - they now  see it as reasonable value and it now sells for well below the estimated FMV because it's been on the market so long. Result - unhappy sellers!

Priced just right?

If a home is priced just right, then competition kicks in. The buyers see that the home is priced realistically. Because other buyers also consider it is priced realistically, they also realize there will be competition to buy the home and they offer more than the estimated FMV in order to 'win' the home in the bidding war. Result - happy sellers (and buyers)!

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Clearly the right pricing strategy makes a huge difference to a seller's bottom line but it is just part of an overall marketing strategy when selling a home. Please contact us if you would like to understand more on how the MA Properties Team can maximize the sale price of your home.

If you would like an estimate of what your home would sell for in today's market I would be more than happy to come by, have a look at your home, and then provide a CMA (comparative market analysis) which will provide you with an estimate of what your home should sell for, along with a marketing plan to get maximum exposure for your home

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