How to Price a Home in a Flattening Market

By MICHAEL EDLEN | Special to the Palisadian-Post

I am often asked why we don’t simply use Zillow, Redfin or other online evaluation systems in doing our pricing recommendations, rather than doing a detailed market analysis to come to an opinion of value. Others ask why we seem to make it so complicated, when it is common knowledge that homes around here generally sell for around $1,000 per square foot.

There are several answers to those questions and these issues become increasingly more important to understand in a market that has now shown for more than four months that it is steadily slowing down. Also, in a market that is normalizing with less advantage to sellers now, it can be highly risky for a seller to set the asking price significantly higher than where the actual market value is.

The various online valuation systems have been proven to be highly unreliable, especially in such a diverse community as the Palisades. In fact, at any point in time, I have discovered variances between their different evaluations ranging as much as 10 to 15 percent—a disparity that should be considered unacceptable, especially for sellers and agents considering what price their home should be listed at.

In a market that has flattened out, as we recently have verified has occurred here, the online systems can result in even greater risks because some of them may include more inappropriate sales from when the market was higher than it is today.

The almost mindless use of some specific number such as $1,000 per square foot can be even more useless than the online systems. Such a simplistic approach does not take into any consideration how old the home is, how big its property is, how good or poor its views are, etc.

Furthermore, since many of our sales have been made to investors who are only buying the land to develop, if the home on that lot is relatively small, the price per square foot of house could easily be $2,000.

Also, the specific neighborhood the home is in can make a large difference in its sale value. For example, a home in The Huntington might sell for twice as much per square foot than it would have on the same size lot in The Highlands.

The answer lies in time-tested comparative market analysis, which seasoned agents generally have learned how to do in preparation for meeting with potential listing clients. When this process is properly completed, it takes into consideration all relevant sales of the most comparable properties in the most recent several months and nearby locations.

It also will include comparison with homes under contract in escrow, as well as those currently on the market as active listings. It takes a great deal of thought, experience and analysis to arrive at a reasonably accurate estimate of expected value, especially in a market transitioning from seller to buyer market.

Once a reasonable probable range of value is arrived at, a skilled and seasoned marketing expert can help guide the seller to make a far better informed pricing decision. Ultimately the seller should be making such crucial decisions, as it is their home that is being sold, not the home of the agents.

In general, most people feel it is wisest for a seller to set the price just above theoretical market value, allowing for a little negotiating room. Unless the seller specifically wants to maximize their chance of getting multiple offers by strategically setting the price below market, the best result might be attained by setting the price right at the level expected it will sell at.

If a home is priced 10 percent or more above the market value, it may only serve to help other listings sell sooner. If priced 10 percent or more below actual value, it might result in multiple offers but not sell for as much as if it had been listed closer to current value.

In most cases the ideal level to set the price might be just ahead of where the market values are trending. Thus, in a balanced market, such as we seem to have now, pricing approximately 1 to 2 percent below current theoretical value might be optimal.

Ultimately the buying public eventually sets the price, as we all know. If a home is overpriced, most active buyers know that it is and often won’t even take the time to look at it then.

Also, listings that are well above fair market value tend to dampen real estate agents’ attitudes, so they will be less likely to show the home. Those who do show it may use it to help show their buyer how much better a value another listing is in the same price range.

The longer a listing is on the market, the more “stale” it becomes once beyond a seller’s “window of opportunity.” This “window” of time will vary from one neighborhood and price range to another, and it can range from a few weeks to several months, depending on market conditions.

If a home remains on the market too long, it will be gradually perceived as having less value by active buyers. Also, one of the most common and first questions a buyer or their agent will ask when viewing a home is how long it has been on the market.

If a seller has been convinced by themselves or an agent that a high price is justified, the seller may not even recognize a good offer, which is based on comparable sales when it is received.  Even in the active seller’s market we have experienced since 2013, one out of five listings failed to sell—usually because of the price asked.

This is the best time in history to be a seller, with prices at all-time highs and an ample supply of motivated and well-qualified homebuyers. Depending on the location and price range, prices may continue to inch up even higher before the market is fully in a correction phase.

However, danger signs are quite clear today, thus making the pricing decisions even more crucial than have been for many years. Inventory of homes available is 28 percent higher and the rate of sales 12 percent slower than at this time last year, and prices have begun to slip in recent weeks as price adjustments have become more common.

In next month’s issue, we
will take a careful look at where this unusual real estate market is headed.

Michael Edlen has sold $1.5 billion in homes since 1986 and is considered one of the most accurate pricing specialists in the market. He and his team have developed a system of evaluation that is accurate within 5 percent, 98 percent of the time. He can be reached at 310-230-7373 or michael@edlenteam.com.