Setting a Listing Price
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Agent's role
The first question you may have about setting a listing price is, 'Whose job is it?'
The answer is straightforward: it's the sellers' responsibility to set the listing price for their home.
They make the final decision about the price they want.
However,
Overpriced listings
Let's take a closer look at the problem of overpricing.
When a home's listing price is inflated, buyers who can afford that price are disappointed in the home.
They've seen other houses in the same price range that offer much more.
These buyers quickly re
Competitive market analysis
A competitive market analysis (CMA) compares the seller's house to similar houses that are on the market or which have sold recently.
The agent uses the CMA results to help the seller choose a listing price.
Clearly, either overpricing or underpricing a l
The Meaning of Value
Value is not a constant characteristic or quality; it is created by people and it changes according to their wants or needs.
For example, in some parts of the country rains are heavy and water is plentiful to the point of occasionally causing floods.
Else
Types of value
In other words, the value of an item changes according to how people view the item.
Its value also changes depending on what type of value we are concerned with in a given situation.
For example, the value of a piece of real estate may vary depending on t
Value in Use
(Utility value)
Value in use is the subjective value placed on a property by its owner.
The value of a property to its owner or to a user.
To illustrate this, let's consider two basic types of value that appraisers distinguish between:
1.value in use and
Value in Exchange
(Market Value)
Value in exchange is the objective value placed on a property by an average buyer on the open market.
Value in exchange is commonly referred to as market value.
Let's look at an example to see how value in use and value in exchange can diff
Market Value
(Exchange value)
Market value is the value of a property to a buyer on the open market.
The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting
Value vs. price or cost
It's important to remember that value is not the same as either price or cost.
A property's market price or sales price is how much someone actually paid for it.
Sometimes the price paid for a property will indicate its actual market value and other times
Price
Sales price is how much a property sells for.
The price may, and very often does, differ from the market value.
Cost
Cost is the amount paid for anything in money, goods, or services; for example, the cost of constructing a building.
Competitive Market Analysis 2
When you help sellers price their property, you should have two goals in mind.
One goal is, of course, accuracy.
You want the listing price to closely reflect the property's true value.
You don't want the listing price to be too high or too low.
A seconda
Based on sales comparison approach
So you need a simple, reliable method of valuing property, one that's easy for you to use and easy for your sellers to understand.
Competitive market analysis meets these requirements.
Real estate agents developed competitive market analysis by adapting t
Principle of substitution
According to the principle of substitution, no one will pay more for a piece of property than she would have to pay for an equally desirable substitute property, provided there is no unreasonable delay in acquiring the substitute property.
A CMA works bec
How to prepare a CMA
Here are the main steps involved in preparing a CMA.
1. Collect and analyze information about the seller's property.
2. Choose comparable properties.
3. Compare each comparable property to the seller's property and adjust the value of the comparables acco
Analyzing the seller's property
The first step is to gather and study information about the seller's property.
(In this context, the seller's property is often referred to as the subject property.)
You have to complete this step before you can choose properties to use as comparables.
Ob
Subject property
The seller's property is often referred to as the subject property.
Neighborhood analysis
When analyzing a neighborhood, you should take the following considerations into account:
-the percentage of owner-occupancy,
-the number of vacancies,
-overall conformity and
-stability,
-topography,
-the presence of utilities or
-nuisances,
-the general
Neighborhood Considerations
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Owner-occupancy
Evaluate the degree of homeownership in the neighborhood.
Check to see whether the majority of the homes are owner-occupied or rentals.
Owner-occupied homes tend to be better-maintained than rental properties, and they hold their value better.
Neighborhoo
Vacancies
Determine the number of vacant homes and empty lots in the neighborhood.
Full occupancy and bustling construction activity tells you that there is a lot of interest in the neighborhood.
However, unless a neighborhood is in the construction stage, unoccupi
Conformity
Homes retain their value better in a neighborhood where there is a reasonable degree of conformity among the homes.
They should be fairly similar in terms of style, age, size, and quality.
Private deed restrictions often promote this kind of conformity.
Y
Stability
As you drive through the neighborhood, ask yourself whether it is in transition.
If the type of land use is changing, property values tend to be unstable.
For example, if gas stations and convenience stores are creeping into a neighborhood that was once s
Topography & Streets
Check the topography of the neighborhood.
If it is built on a steep slope or excessively hilly land, there could be problems with water runoff and soil instability.
On the other hand, a completely flat neighborhood is considered monotonous.
Mildly rolling
Utilities
Find out what utilities are available in the neighborhood.
Obviously, most neighborhoods have electricity, telephones, and water.
But you should check on the availability of gas, sewers, and broadband Internet and cable.
Nuisances
Nuisances can have a serious impact on a neighborhood.
These can range from man-made nuisances such as freeway noise, industrial pollution, or factory odors, to natural nuisances such as high winds or fog.
For instance, many waterfront neighborhoods suffe
Reputation
Some neighborhoods are known for certain characteristics.
For instance, one neighborhood may be considered a wonderful place to raise children.
Another neighborhood may have a reputation for privacy and quiet streets.
A neighborhood with a good reputation
Schools & Public Services
Make sure you find out what schools serve the neighborhood.
For many potential buyers, the quality of the neighborhood schools is extremely important.
Also check on the other public services available.
Does the neighborhood have adequate police and fire p
Governmental Influences
A variety of governmental influences can affect a neighborhood.
For example, do zoning laws for the neighborhood enhance property values?
How high are the property taxes compared to the taxes in nearby communities?
Neighborhood data form
As you complete your neighborhood analysis, you'll want to record your data using software or some kind of paper form, such as the one on your screen.
Record information about the properties adjacent to your subject property.
You can also note what stage
Four-phase life cycle
Neighborhoods go through a series of changes as they age.
According to appraisal theory, a neighborhood has a four-phase life cycle.
The four stages are integration, equilibrium, disintegration, and rejuvenation.
Integration
Integration is the initial stage, when the neighborhood is being developed.
Equilibrium
Equilibrium is a period of stability.
The neighborhood is changing very little.
Disintegration
The equilibrium phase is generally followed by disintegration or decline, when the economic usefulness of the properties in the neighborhood is almost over.
Rejuvenation
(Revitalization)
(Rebirth)
Rejuvenation is a stage of renewal.
Structures in the neighborhood are rebuilt, and sometimes the properties are put to new uses.
Site Analysis
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Site analysis
When analyzing a property, there are several factors you should think about, including:
-width,
-frontage,
-depth,
-area,
-the shape of the lot, and
-the topography of the lot.
After you've gathered information about the property's neighborhood, you will
Width
The property's width is the distance from one side boundary to the other.
Some lots are pie-shaped, so their width changes from front to back.
Frontage
A property's frontage is the length of the front boundary of the lot.
It can be a measure of the property's access or exposure to something desirable.
Frontage is an important consideration for residential property only when the lot fronts on an amenity s
Depth
A property's depth is the distance between its front boundary and its back boundary.
The depth may or may not have an impact on the property's value.
Suppose Lot 1 is the same as Lot 2, except that Lot 1 has greater depth.
Lot 1 probably won't be more val
Combining lots
Sometimes developers add two or more adjoining lots together to increase their value.
Usually, this is done only when it will create a property that is more valuable than the sum of the two individual lots.
For example, suppose Lot 1 is worth $100,000 and
Plottage
The extra value that results when two or more lots are combined is called plottage.
Subdividing lots
Combining two residential lots rarely increases their value enough to make it worthwhile.
Developers generally divide residential property into as many lots as possible, because the more lots they have to build on, the more money they can make.
Typically,
Area
The area of a residential site is usually measured in square feet or acres.
It is calculated by multiplying the width by the depth.
For a residential site, area is usually a more important factor than frontage, unless the property borders a lake or river.
Shape of the lot
The shape of a site has a significant impact on value.
Usually a lot with a standard shape, such as the traditional rectangle for residential sites, is more valuable than an irregularly shaped lot.
This is primarily because a standard shape is more versat
Topography
As you might expect, the topography of the site is even more important than the topography of the neighborhood.
For residential property, rolling terrain is usually preferable to flat, monotonous land.
On the other hand, a lot that is steeply sloped will
Other considerations
How the site is situated in relation to its surroundings can be very important.
Does the site have a view?
Does it get plenty of sun?
Is it windy?
Is it exposed to traffic noise?
If the property has title problems, its value may be less.
Easements and enc
Site data
Site analysis requires recording data about the land that the improvements (if any) sit on�the size, shape, square footage, and type of street it fronts on.
You can also note your observations about the landscaping, topsoil, drainage, and frontage.
Make s
Building Analysis
When analyzing the building on the property (which for most residential properties means a house and a garage), you should consider the following factors:
-quality and age,
-square footage,
-room count,
-energy efficiency,
-type and size of the garage, an
Building data
In the building analysis, important factors to look at include:
1. Construction quality: Good, average, poor?
2. Age/condition: Is overall condition good, average, poor?
3. Size of house: Square footage of improved living area
(exclude garage, basement, o
Quality and age
Two important factors are construction quality and age.
Construction quality includes both materials and workmanship.
Often, looking at the details will give you an indication of construction quality.
-What kind of trim is used around the windows?
-Are th
Square footage
Calculate the size of the house in terms of square footage.
Include all improved living areas, but exclude the garage, basement (if any), porches, or any additions built without a valid permit.
Room count
Get a total room count for the house.
Don't include the bathrooms or the basement rooms in this total.
The number of bedrooms is very important.
If two houses are similar in all other respects, the one that has three bedrooms will be worth a lot more than
Energy efficiency
If you are working in a region where it gets hot for more than a few weeks each year, whether or not the house has air conditioning will be important.
And the energy-efficiency of a home is important in any climate.
Note whether the house has double-paned
Garage
Note the features of the garage.
An enclosed garage adds more value than a carport.
Two-car garages are the standard now.
One-car garages are much less valuable.
In some areas, three-car garages are common.
Attached garages are usually more desirable than
Layout
The last feature is the overall design and layout of the home.
The floor plan should be functional and convenient.
Any obvious design deficiencies will detract from the home's value.
We'll say more about design shortly.
Building data form
It's helpful to use a form such as the one shown here for your building data.
In the top portion of the form, fill in the address of the home, the age, square footage, number of rooms, quality of construction, and style.
The next portion of the form is a
Principles of design
You don't have to be an architect to recognize a well-designed house, or to be able to point out some of the more common design deficiencies.
Understanding a few basic ideas about design will help you evaluate and compare the homes you are examining.
A we
Design deficiencies
Once you have a general idea about the overall design, you should look for some of the more common design deficiencies, such as these:
-the front door opens directly into the living room;
-there's no front hall closet;
-the back door is difficult to reach
Neighborhood
A neighborhood is an area that contains similar types of properties.
It may have one of several different types of boundaries.
For instance, a neighborhood may be enclosed by physical obstacles such as a major thoroughfare or a river.
A neighborhood may a
Comparables
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Selecting comparables
The second step in completing a CMA is to choose properties that have characteristics similar to those of the subject property.
These similar properties are called comparables.
A comparable is a property that has characteristics similar to those of the su
Comparing features
The third step in completing a competitive market analysis is to compare each comparable to the subject property, note the differences in their features, and make adjustments to the comparable's price for the differences.
When choosing a comparable proper
Location
We've already emphasized how important location is to the value of a given property.
The best comparables are ones that are in the same neighborhood as the subject property.
However, if you can't find enough comparables in the same neighborhood, you must
Physical characteristics
As you examine the physical characteristics of the comparable properties, you will be looking at all of the elements we discussed earlier:
-age,
-construction quality,
-condition,
-size,
-design,
-number of rooms, and
-energy-efficiency.
To qualify as a c
Date of sale
Now let's look at the characteristics that come into play only if the comparable property is a recent sale rather than a current listing.
The date of the sale matters because unless a sale is recent it will not reflect current market values accurately.
Ma
Terms of sale
The financing terms of a transaction are also important in deciding whether to use it as a comparable.
If the financing terms were standard for the community and did not affect the price paid for the property, the financing is referred to as cash equivale
Cash equivalent
Financing is referred to as cash equivalent if the terms of the financing are standard for the community and do not affect the price paid for the property.
If the financing terms were standard for the community and did not affect the price paid for the pr
Conditions of sale
When looking at a comparable sale, you need to take the parties' motivations into account.
A sale can be used as a comparable only if it took place under normal market conditions:
-it was an arm's length transaction (between unrelated parties),
-neither p
Arm's length transaction
A transaction between two parties that have no relationship with each other and who are negotiating on behalf of their own best interests.
A fairly negotiated transaction and reasonably representative of market value.
Normal conditions
A sale under normal conditions means that the parties are unrelated, both parties understand the property's merits and shortcomings, neither party is acting under unusual pressure, and the property has been exposed on the open market for a reasonable leng
Making Adjustments
If the comparable has a feature that the subject property lacks, deduct the value of that feature from the comparable's price.
If the subject property has a feature that the comparable lacks, add the value of that feature to the comparable's price.
Never
Valuing features
It can be difficult to gauge the value of particular features.
In the previous example, you needed to know that the third bedroom was worth about $30,000.
How would you know that?
Sometimes reliable data on the value of certain home features in the releva
Adjust comparable's price
When you make adjustments for differences between comparables and the subject property, always make the adjustment to the sales or listing price of the comparable.
Never try to make the adjustment to the value of the subject property.
If the comparable ha
Estimating market value
Now you have an adjusted price for each comparable.
The next step is to use these figures to estimate the market value of the subject property.
First you must evaluate the reliability of each comparable.
The comparables that required the fewest adjustment
Reconciliation
The last step in completing a competitive market analysis is reconciliation: using the adjusted prices of the comparables to estimate the market value of the subject property.
In turn, this estimate of market value is the basis for a suggested listing pri
Preparing a CMA
When you present your CMA to the seller, it is helpful to use a standard CMA form such as the one shown here.
The form is easy to use and explain.
It will help you show the seller what buyers can pay, will pay, and will not pay for a similar home.
The fir
The Problem of a Low Appraisal
A low appraisal is an estimate of value that is below the price the buyer and seller have agreed on.
It often causes a sale to collapse, especially if the sale is dependent on financing.
We'll discuss how to handle a low appraisal.
It's a problem that eve
Request for reconsideration of value
An appraiser's estimate of value can be appealed by submitting a request for reconsideration of value to the lender.
The request must be supported with at least three comparable sales that indicate a higher value estimate is in order.
If the request for r