Most sellers want two things: the highest possible price and the shortest possible time between listing to close. Hot markets (like the current one!) can be hard on sellers. Sure, inventory generally sells quickly, and bidding wars skyrocket offers higher than list prices. But one of the greatest threats to sellers during sellers' markets is low appraisals — a by-product of those same bidding wars and accelerating home values. Given all these fast-paced challenges, how should you price your home in an extreme market?
Protect Against Low Appraisals
In the first quarter of 2021, the National Association of Realtors reported that appraisal problems were the greatest cause of terminated contracts. Mortgage companies generally protect themselves by only lending as much as a home is worth, which is determined by an appraisal; when an appraisal comes in below the sale price agreed to by both seller and buyer, someone has to make up the difference or the deal will fall apart.For example: If a buyer and seller agree to a selling price of $300,000, but the home appraisal comes back at $275,000, the $25,000 difference must be made up by either more money offered from the buyer, a lower price from the seller, or a combination of both in order to keep the contract alive.Sellers can protect themselves from a low appraisal by selecting buyers prepared to put down 20% or more, or by accepting buyer contracts that guarantee the sales price regardless of appraisal outcome. A larger down payment reduces the lender's risk exposure, thus maximizing the chances of a successful deal.Low appraisals also occur when prices are rising quickly. Appraisers use three "comps"―sales of homes near and similar to a house being appraised. Appraisers generally use comps from sales within the preceding 90 days but can be as old as twelve months.
Calculate an Accurate Home Value
Knowing the current value of your home provides you a point of reference to help you assess offers. Before you price your home, use comparable home sales in your area to guide an accurate number. You can calculate current comps for your home by looking at the following:
- sales closed within the past 90 days
- square footage within 20% of your current home
- homes within one mile of your home
- same number of bedrooms and bathrooms
The homes.com Home Evaluation Report generates an estimated home value based on several automated valuation models (AVM) to help you determine what your home is worth.
Your real estate agent can get this data from the local MLS and prepare a Comparative Market Analysis (CMA) for you using those comps, tax data, your property's previous sale and listing data, information from local homes currently for sale that are similar to yours, and micro market trends. Using the data you have gathered and the CMA, your agent can then help you estimate a current value for your home.Buyers surf website listings like Homes.com by price as well as location, and often organize listings by price brackets so they can easily find homes within their budgets. On Homes.com, for example, you can search by $25,000 increments up to $10 million, so it’d be helpful to calculate a list price that fits in the middle of a bracket.
List the Right Price From the Start
First impressions are crucial when selling your home. Your largest pool of buyers will be exposed to your listing in the first two weeks after putting it on the market, generating the most interest within that time frame. When you price your home, ensuring it reflects the actual value that you've worked so hard to establish is essential to attract — and motivate offers from — eager buyers.In March 2021, most new listings stayed on the market for 18 days, down from 20 days in February, and 29 days in March 2020. Eighty-three percent of homes sold in March 2021 were on the market for less than a month. If you’re still on the market for more than one month and haven't generated serious interest, you may not have opportunity to change course.
If your home enters the market overpriced, many buyers will overlook it from the start because it will be out of their range. By the time you reduce the price to fair market value, many potential buyers will have already found something else, leaving others to wonder what's so wrong with your property that you had to cut your price in the middle of a boom.Conversely, if you price your home reasonably, you stand a good chance of igniting a bidding war, and that's where sellers are making the big bucks today. In January, well over half of all buyers, 56%, faced bidding wars, up from 52% in December 2020.
Remember: A Correction is Coming
The pandemic boom is showing some signs of wear. Soon, price increases will level off, sales will keep falling, and we will enter a period of correction. It will not be a great time to sell a home. "Home prices are overheated, mortgage rates are rising, the supply of homes for sale is anemic and consumer confidence in the housing market is falling,” said CNBC’s Diana Olick. “In fact, it looks like the perfect storm for a correction.”Sellers with overpriced listings may find themselves in a falling market. "Many a seller has lost thousands, even tens of thousands of dollars chasing a market down after setting a listing price that was outside what the market was willing to bear," Margaret Goss, a Broker with Baird & Warner, also told CNBC recently.