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How do I set a value on a home for sale?

Why is the Zillow value so far off?  Why do real estate agents disagree on my value?  What is my home worth?  Really?

Finding a price on a single family detached home is truly the easiest of all comparison models, and yet the most often done wrong. Try to keep these things in mind:

1) Always calculate the Market Velocity in the subject property’s neighborhood before pricing the house.

2) You don’t need to use price per square foot to correctly price a house. Price per Square Foot is horribly misused: the most common thing you see agents do is to simply take an average right off the MLS for the neighborhood, take the number of square feet in the subject property and multiply to come up with a price. That is NOT properly qualifying the information.  Only use price per square foot to calculate the difference in value between house A and house B.  In order to comp it out right, consider that there can be significant values to things like a 3rd car garage, plus/minus for a pool, plus/minus for the fireplace, plus/minus for a tile roof, plus or minus for conditions, and age, etc. .

3) When defining the neighborhood for calculating Market Velocity and pulling comps, NEVER cross a busy street.

4) When comping out a house, NEVER compare a 1-‐level home to a 2-‐level home and vice versa. There is no adjustment that can be made to make them comparable.

5) When comping out a house, NEVER compare houses that have more than a 20% difference in size. The bigger the house, the lower the price per square foot, all other things being equal, and there is no formula to correctly adjust for it. Start by looking for exact model matches; those are your most powerful comps.  From there, expand to +/- 10% of the square footage.  If you still don’t have enough (you need a minimum of 6 to make any determination at all), go up to +/- 20%.  If there are still too few, rather than expanding the search outward, go back in time and try to keep the physical houses comparable.

6) When comping out a house NEVER compare houses that are more than 5 years apart in age.  There is no formula to compensate for differences in building codes or building materials.

How to Calculate Months of Supply, Also known as Market Velocity

The most important thing to figuring out the market value of a house is being able to calculate the market velocity for any neighborhood. This is true whether you are on the buying side or selling side.  The months of supply/market velocity is also known as the absorption rate or turnover rate, and it is very important in order to understand how to interpret the comps because comps will only be valid in relation to the velocity.

To Calculate Market Velocity for a City Zip Code, or even a community, use the following formula:  Months’ Supply/Market Velocity = Number of Active Listings / (Number of Sales Last 6 Months / 6)  This formula will work accurately with as little as one sale per month, balanced market or not.

Remember that one neighborhood can be a lot more or less active than another nearby neighborhood.  When selecting the neighborhood, NEVER cross a busy street.  When working in smaller neighborhoods there usually won’t be many sales per month and the number of sales can fluctuate wildly from one month to the next (for example zero sales one month and three the very next). To get a better idea of the market velocity look at the number of sales over the last six months in the neighborhood and divide by six to get the average number of sales per month over the last six months.

  • A 6 Month Supply = Balanced Market (No pressure on prices to move up or down). A 6 month supply is always a perfectly balanced market, there’s no price movement either way when you have 6 months of supply.
  • An 8 month supply or more favors buyers via a downward pressure on prices.
  • A 4 month supply or less favors sellers due to a gentle upward pressure on prices.

These benchmarks do not apply to the luxury market (homes $1,000,000 or higher) where it’s normal for the Market Velocity to be much slower.

Market Velocity is more important than the comps because the Market Velocity tells you whether you should price the home higher than or above, lower than or below, or equal to or in-­line with the comps.  In a rapidly rising market, you can price any house ahead of the comps and sell it. In a rapidly declining market you can’t sell any house for what the comps have sold for.

Next, look for recent changes in Market Velocity.  Run your numbers again using just the most recent 30 days, or Months’ Supply/Market Velocity = Number of Active Listings / Number of Sales in the Last Month.  See if there’s a difference, and if so if the neighborhood is speeding up or slowing down.  Also look at the number of Pending and UCB listings to look for changes in market velocity.

Location, Location, Location!

How we Comp Out YOUR Subject Property

We always start by printing up the tax info for the subject property.  Then we pull up pull ALL Active, Pending, Sold, Canceled, and Expired in the neighborhood for the last 6 months. We want to see the Cancelled and Expired because they show clearly what will NOT work.  Try to stick with going 6 months back, by subdivision, and Assessors Book Number.

When pulling up the subdivision, we will use the MLS wildcard tags, which are asterisks (*).  For example, “*village at canyon* will give you results that include ANYTHING typed into the MLS before the word “village” and ANYTHING typed into the MLS after the word “canyon.”  This is important because so many agents make errors when inputting data to the MLS.  The purpose of adding the Book number is to eliminate redundant subdivisions.  In example, there are more than one subdivision in metro Phoenix called Anthem.  However there is never more than one subdivision with the same name in the same book of maps, this is done deliberately by the assessor’s office so that statement can be relied upon.  The problem at this point is often too much data or too little data.

If we get more than 15 listings, we will run it again with additional criteria.   Next, we go through every single one of the Active, Pending, Sold, Cancelled and Expired listings we have.  We’re going to take every single house that is approximately the same size as the subject and put an equal sign by it or a greater-­than sign (will sell for more than their house) or a less-­than sign (will sell for less than the subject). We are trying to figure out which listings to pull out and print the full Plano on.

Once we have picked, and printed out our comparable properties, it is time to make adjustments; plus/minus so many dollars for the 3rd car garage, plus/minus for a pool, plus/minus for the fireplace, plus/minus for a tile roof, and so on.  We will create a price bracket for the subject this way.  Lastly, adjust the price for the market velocity (months’ supply).

One of the hardest things for an agent to do is to calculate an oversized lot, waterfront lot, or golf course premiums when you don’t have recent comps. If you have to, you can calculate the waterfront lot premium in the neighborhood by finding waterfront homes that sold more than 6 months ago and compare them to non-­waterfront comps that sold within 90 days of each of the waterfront houses. Find about three to get the waterfront premium.  This is the method you have to fall back on if you simply don’t have recent information.

Other adjustments are fairly straightforward.  You need to look at the comps in an area to tell you with any degree of confidence what an attribute will be worth.  Having said that, in our specific specialized portion of Gilbert, it is fairly safe to use the following adjustments:  A fireplace is worth about $3,500.  A pool is about $10 per square foot of surface area.  A bedroom is worth between $10,000 and $15,000.  A garage space is worth between $5000, and $10,000.  A busy street costs about 10%, and power lines also take off about 10%.  These numbers are NOT set in stone, so it is the responsibility of the person who is looking at comparable properties to look at the data and understand it.  Experience does play a role here; as much as we wish it was something that could be automated, it simply cannot.

When to Change the Price

A properly priced listing should get an offer written, on average, after 10 showings.  If we get 10 showings a month, we’re on target, although holidays will skew those numbers.  If a property is not getting 10 showings or more then we have a price issue.

If you’re running way under 10 showings, you’re overpriced. How Overpriced?

No Showings = Minimum 10% overpriced

Showings but No Offers = Minimum 5% overpriced

Those numbers work every time.

For a free market valuation of your property, please contact Vince Davis or Nicole Drew of the Helping Hands Team at 480 385 9107 or at vince@agentswithoptions.com.  Call within 30 days and ask about a free home warranty to be placed on your home immediately if you list your home for sale with us!

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