Fair Market Value
Neither agents nor sellers determine a propertyâ€™s market value: Fair market value is determined by that (highest) price a qualified, reasonably knowledgeable buyer is willing to payÂ at a specific point in time, to a seller not under duress, after the home has been properly exposed to the market.
An agentâ€™s comparative market analysis (CMA) attempts toÂ estimateÂ todayâ€™s fair market value by an honest assessment of the following:
- General Area and Specific Location within Neighborhood
- Size, Appearance, Condition & Emotional Appeal
- Attributes & Amenities: Views, Parking, Yard, etc.
- Recent Comparable Sales
- Competitive Properties on the Market
- Properties that DidÂ NotÂ Sell
- Current & Projected Market Trends
- Likely Buyer Profile
Property Strengths & Weaknesses
The purpose of this analysis is toÂ priceÂ the property appropriately to maximize market response and the final sales price.
Buyers â€“ for any product, including homes â€“ donâ€™t find the issues of what a seller wants, needs or has invested germane to fair market value, so those issues shouldnâ€™t play a role in a CMA or pricing the property.
Older appraisals or refinancing appraisals performed by appraisers not intimately acquainted with the propertyâ€™s specific market area often do not accurately reflect current fair market value.
Pricing and Buyer DynamicsÂ
The vast majority of buyers and agents will not make offers on homes they consider significantly overpriced. The vast majority of home sales in San Francisco do not sell more than 3% to 5%Â under theÂ lastÂ asking price (including any price reductions): If the home is not priced within that narrow range, buyers simply move on to other listings.
If priced outside that range, the listing is generally ignored by the market and generates no offers, regardless of the quality and appeal of the property.
Well-priced homes create aÂ sense of urgencyÂ in the buyer/broker communities to act quickly with strong, clean offersâ€”and help produce the competitive bidding situations that generate the highest sales prices.Â
The Effects of OverpricingÂ
Overpricing wastes the optimum period of buyer and broker attention: when a listing first comes on the market. This level of attention cannot be recaptured or recreated later.
Overpriced homes kill any sense of buyer urgency to act and spend much longer periods of time on market, on average 2 to 3 months longer, than well priced properties. This significantly reduces perceived value in buyersâ€™ minds and makes competitive bidding unlikely.
This sample breakdown of San Francisco home sales below illustrates the large discount off original list price and the big increase in days on market, as well as the significant proportion of listings that donâ€™t sell at all, when the listing is overpriced to begin with. The exact sales price percentages and days-on-market figures will change based upon market conditions, but theÂ differencesÂ in results between properties priced correctly and incorrectly stay relatively the same over time.
Brown & Tyson,Â House Selling for Dummies
Overpricing actually helps sellÂ competitiveÂ listingsâ€”which stand out as good values in comparison.
Choosing a Listing Agent
In order to win the listing, some agents suggest a list price considerablyÂ higherÂ than what they believe market conditions and comparable sales justifyâ€”believingÂ thisÂ is what the seller wants to hear. This dishonesty is a violation of both the Realtor Code of Ethics and agentsâ€™ fiduciary duty: they are putting their interests â€“ winning the listing â€“ above the clientâ€™s interests, i.e. achieving the best price and terms within a reasonable period of time.
Do not choose an agent based upon how high he or she is willing to price your home.Â Thatâ€™s analogous to choosing a stock broker by whoever quotes the highest value for your stock portfolio. In both cases, the market alone — what a buyer is willing to pay — determines value.
Choose an agent based uponÂ experience; the results they’ve generated in the past and the client references that substantiate those results; the quality and honesty of counsel delivered; the quality of the market analytics they provide to help you in your decision making; the comprehensiveness of their marketing and home preparation plans; their transactional and negotiating skills; and the explicit commitment to work hard to protect your interests.