Pricing and Contingencies
Setting the Price for Your Home
Several factors, including market conditions and interest rates, will determine how much you can get for your home. The idea is to get the maximum price and the best terms during the window of time when your home is being marketed.
When selling a home, there's the price owners would like to get, the value buyers would like to offer and a point of agreement which can result in a sale.
The value of your home relates to local sale prices. The same home, located somewhere else, would likely have a different value. Sale prices result from real estate supply and demand. If the community you live in is booming, with an expanding job base and a growing population, the prices for houses will most likely be on the rise.
The question you ask yourself when you are ready to sell is not how much you want for your house, but how much will a buyer want to pay for your home. Buyers don't care how much you paid for the home, how many memorable moments you and your family shared in the home, how much cash you need for the down payment on your next home or how much time and money you've invested in your home's hardwood floors, fresh paint, lush landscaping or other improvements.
The following are things you may want to consider when setting the price for your home:
CMA Many realtors will be willing to prepare a comparable market analysis (CMA) for you as a marketing service with the goal of getting your business whenever you decide to move. A "comparative market analysis" (CMA), shows the prices of comparable recently sold homes, on-the-market homes and homes that were on the market, but weren't sold. You should invite at least three real estate agents to visit your home and give you their opinion of its likely selling price. A market-savvy realtor can give you a rough idea of what your home would be worth, given its size and condition and local market conditions. Some agents will tell you to under-price your home in hope of sparking a bidding war. Others will suggest a flatteringly high price to "buy" your listing only to demand a price reduction a few weeks later. Price recommendations based on CMAs aren't gospel. The decision about how much to ask, though, is always yours.
Appraisals An appraisal is different from a CMA in many ways. One difference is that an appraisal is only based on past sales. Also, unlike a CMA, a professional appraisal usually costs a few hundred dollars. A formal written appraisal can be useful if you have unique property, if there hasn't been much activity in your area recently, if co-owners disagree about price, or if there is any other circumstance that makes it difficult to put a value on your home. In a normal home sale, a CMA is probably enough to let you set a proper price. Appraisers rely on an in-person inspection of your home, recent sales of comparable homes and other data to arrive at an opinion of value. The appraiser's report is a full-blown description of your home and the criteria used to formulate the valuation.
Neighborhood Open Houses Visiting open houses is a good way to compare your house to other homes that are for sale in your neighborhood. While you're there, try to make an impartial assessment of how those homes compare to yours in terms of location, size, amenities and condition. If both homes were selling for the same price, would you buy your home or someone else's? Chatting with other real estate professionals about your local real estate market will also help you get a good grasp on what the reasonable price range for your house is.
Offering Incentives Sometimes a little something extra is needed to attract buyers. Here are a few examples on how you may be able to sweeten the deal: - Closing escrow quickly will attract buyers who want to move in right away.
- Offering seller-financing will appeal to buyers who need to stretch their financial resources.
- A lease-option can help first-timers who need down payment assistance.
- The more creative and flexible you can be in meeting the buyer's needs, the more success you'll have in pricing your home to sell.
- House improvements such as repairing the roof, or repainting the house, or leaving behind the washer and dryer may also offset having a higher sale price.
- Offering to pay some or all of a buyer's closing costs and discount points required by the buyer's lending institution is a way to offer a cash incentive besides just lowering the price.
- Another way to speed up the sale of your house is to offer of a bonus to the selling broker, in addition to their commission.
Even after all the above has been done, the selling price is ultimately decided by the owner. Some owners may choose to set their selling price at the absolute lowest they are willing to sell because they hate to haggle. Others are willing to 'see what happens', and may set the price a bit higher. The above tips are all for information gathering purposes, and when all the information has been gathered, the price for your home should be set at a level you are comfortable with.
How To Determine Your List Price
Setting the list price for your property involves evaluating various market conditions and several financial factors. During this process you need to be objective. Buyers aren't concerned with how much you paid for the home, how much cash you need for the down payment on your next home, or how much time and money you have invested in remodeling and other improvements. If the price is too high, your home may not be selected for viewing and if you price too low, you'll short change yourself.
Your Realtor will assist you in setting the list price and reviewing the following:
Comparable Sales Ask for a Comparative Market Analysis (CMA), which shows the prices of comparable recently sold homes, homes currently on the market, and homes that were on the market but did not sell. The recently sold homes will have the most impact on your home's value, while the homes currently on the market are your competition. While CMAs are not perfect, they are your best guide of what the buying public has been willing to pay, recently, for a home similar to yours.
The CMA differs from a formal appraisal in several ways. One major difference is that an appraisal will be based only on past sales, while the CMA will also include properties under contract and on the market.
A formal appraisal may be useful if you have a unique property, if there has not been much sale activity in your area recently, if co-owners disagree about price, or if there is any other circumstance that makes it difficult to put a value on your property.
Market Conditions Consider the condition of your local market and how quickly homes are selling. Think about your timing for selling the home, interest rates, and the local economy and job market. The CMA often includes an analysis of Days on Market (DOM) for each comparable home sold. In a strong or booming real estate market, prices are rising and homes sell quickly. Conversely, in a slower market, the average DOM can run into several months. Your Realtor can help you determine whether you are in a buyer's market or a seller's market. In a seller's market you can price a little high and gauge the reaction. In a buyer's market, if you need to sell quickly, offer an attractive price.
Offering Incentives Some sellers choose to list their home at the lowest price that they are willing to accept, because they dislike negotiating. Other sellers may add on thousands to the estimated value and then wait to see the reaction. If you list high, and have the luxury of time to feel out the market, work out a schedule with your Realtor in advance.
If your home is not generating any interest it may be time to drop the price.
Sometimes buyers have needs that go beyond the bottom line and other incentives are as effective as lowering the price. You may offer to pay some or all of the buyer's closing costs and discount points. You may want to participate in a seller assisted down payment program. If possible, offer seller financing to appeal to buyers who need creative financial resources. If you are in a hurry to sell, you may want to add a bonus offer to the selling broker, in addition to their commission.
Net Proceeds Once you have received an estimate of market value by your Realtor, you can get a general idea of how much cash you might walk away with when the sale is completed. This can be especially useful as you start to look for your next home. To calculate your net proceeds subtract the following items from the estimated sales price:
- Principle and interest amount on your current mortgage(s)
- Prepayment penalty (if applicable) - Attorney's fees (if applicable)
- Real Estate commissions
- Unpaid property tax
You also want to factor in the following fees that you may be responsible for paying:
- Title insurance
- FHA non-allowable items
- Transfer taxes
- Survey fees
- Inspection repairs
- Recording fees
- Closing fees
- Homeowner Association transfer fees and document preparation
- Home warranty
As far as closing costs are concerned, you and the buyer may agree on any arrangement that suits both parties. Your Realtor can assist you in estimating your final closing costs.
Perils Of Overpricing
When selling a home, the price you set is a critical factor in the return you'll receive. The correct price is determined by the size, condition and location of your home, what comparable homes are selling for at the time you list your home, and the balance of supply and demand in your area. Overpricing your home is one of the biggest mistakes you could make.
If you know what your home is truly worth, you should set your price no more than 5% higher. That gives you plenty of room for negotiation. There are several reasons why overpricing won't work to your advantage, namely:
- Limits Buyers Prospective buyers that you want to attract won't see your house because they are only looking at homes within their price range. Other buyers who may see your house realize that they can get more for their money elsewhere.
- Limits Showings Other real estate agents may be reluctant to show your property if it is overpriced.
- Sells The Competition Agents may use this home to sell against other homes that are more attractively priced. If your home is the highest priced in the area, it may sit unsold until all the similar homes have sold. Because new homes keep coming on the market, this could continue until you reduce your price.
- Lose The '30-Day' Advantage A home sells best the first 30 days after it goes on the market. There is typically a backlog of buyers waiting to look at homes as they first come on the market. If your home is initially overpriced, you'll lose these buyers and the 30-day advantage.
- Listing Gets Stale When a home is on the market beyond the average selling time, buyers may think that there's something wrong with the property.
- Difficult To Finance Even if a buyer is willing to pay the high price, an appraisal at that price may be difficult to get and lenders may not be able to provide a loan.
- Lower Price To eventually sell the home, you may have to reduce the price, sometimes, several times. In the end you lose twice, a lower sales price and a slower sale.
Do I have to consider contingencies?
If you are a seller in a seller's market, in which there is more demand than supply, you probably won't have to entertain too many contingencies. But if you are selling in a buyer's market, when buyers are few, prepare to be very flexible. Granting contingencies also depends upon what kind of price you want to get and on the condition of your property, most experts agree. Remember, contingencies are written into the contract and are negotiable during the negotiation phase only.
Can a home seller sell a home for less than its mortgage?
Yes, in some case you can sell your home for less than what you still owe on the mortgage. But it is complicated and depends on the lender. This situation is known as a "short sale." Sometimes a lender will be willing to split the difference between the sale price and loan amount, which still must be paid.
A short sale may be more complicated if the loan has been sold to the secondary market because then the lender will have to get permission from Freddie Mac, the two major secondary-market players. If the loan was a low down payment mortgage with private mortgage insurance, then the lender also must involve the mortgage insurance company that insured the low-down loan.