How to Determine List Price? Essential Tips - Frederick Real Estate Online (2024)

Home valuation can be an issue fraught with uncertainty and doubt for many homeowners. The quest to determine the accurate worth of one’s property often feels like navigating through a maze of conflicting information and ambiguous indicators. It’s not uncommon for confusion and concern to loom large, casting shadows of doubt over the entire process. If you are trying to determine a list price for your home, read on.

🤔How to Determine the List Price of Your Home

Q: How can I determine what my home is worth? An online estimate website says my property is worth $350,000, but my agent says it’s worth only $300,000! I’m listed at $325,000, and my price is comparable to other similar listings. What’s your input on how to determine the list price?

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This is a great scenario to answer all the issues that come up when we talk to potential home sellers about how to determine a list price. One of the most important points we like to make about selling a home is that it is always best to get the home priced correctly from the start. Since it is a critical aspect of home selling success, let’s discuss how to determine a home’s value.

Online Estimates of Home Values

While online valuation tools offer a convenient starting point for homeowners eager to ascertain their property’s worth, it’s crucial to approach these estimates with a discerning eye. Despite their widespread use and accessibility, these tools are not without their limitations, often painting an incomplete or even misleading picture of a home’s true value.

One of the most glaring shortcomings of online valuation tools is their propensity for generalization. These algorithms operate on a one-size-fits-all approach, crunching numbers and spitting out estimates based on broad strokes and aggregated data. Consequently, they may overlook the unique characteristics and nuances that distinguish one property from another within the same neighborhood or market.

Consider, for instance, a charming Victorian nestled among a row of modern townhouses. While online estimators may assign a value based on the average price of nearby properties, they fail to account for the historical charm and architectural significance that set the Victorian apart. Relying solely on such estimates could lead homeowners to undervalue—or worse, overvalue—their property, perpetuating misconceptions and miscalculations.

The Most Popular Online Valuation Tool: Zestimates

There are several online valuation algorithms, but Zillow is the most well-known, with the most website traffic of all the similar websites. Zillow publishes statistics that disclose to the public that their estimate is limited and very generalized, even though they claim they are as accurate as any other valuation. They use mathematical algorithms based on public data.

Does anyone remember the class-action lawsuit against Zillow a few years ago? Buyers and sellers sued because of inaccurate “Zestimates”, believing that they had suffered a financial loss for selling their homes for less than they were worth because of Zestimates.

Zillow Zestimates have been the topic of many blog posts and news articles. The Washington Post published an article in 2014 following an in-depth study by McEnearney Associates, of Washington D.C. They found that

“The Zestimate is within 5 percent of the actual sales price roughly half the time. As real estate agents, if we got within 5 percent of the value of a home that infrequently, we’d be out of business. So if consumers want to base their valuation of a home purchase or sale on what they find on the Internet, we suggest they take out a coin and flip it. Heads — that value is within 5 percent (high or low) of what the home is actually worth. Tails — that value could be 10 percent, 20 percent or more off target. ” ~David Howell, executive vice president and chief information officer at McEnearney Associates.

Criticisms of Online Valuation Tools

• Transparency:Zillow’s Zestimate algorithm is a “black box”, meaning that it is not publicly known how the algorithm works. This makes it difficult for homeowners and real estate agents to understand how the Zestimate is arrived at, and to identify and correct any errors.
• Bias: Online estimates have been accused of being biased against certain types of homes, such as those in minority neighborhoods. A study by the University of California, Berkeley found that Zestimates were lower for homes in minority neighborhoods than for similar homes in white neighborhoods.
• Impact on home prices:Zestimates have been criticized for potentially impacting home prices. Some homeowners have reportedly used Zestimates to set their asking prices, which could lead to homes being overpriced. Additionally, some real estate agents have reportedly used Zestimates to convince sellers to list their homes at lower prices.

Additional Problems With Online Home Valuations

• Online estimates are based on historical data, so they may not be accurate in rapidly changing markets.
• Online estimates do not take into account the condition of the home or any improvements that have been made.
• In our experience, online estimates do not neighborhood nuances into consideration. For instance, comparing a home on 5th Street in downtown Frederick, to a Home on 2nd Street. Even though they are 3 blocks away, the values of the homes are vastly different. An algorithm could not make that distinction…at least not yet.

The data can give us a general idea of a home’s value, but cannot be used as the sole basis in a discussion about how to determine list price. Any data is missing the local nuances that can only be applied by local neighborhood experts.

(These websites have lots of value for consumers, I’m not disparaging them in any way, they just don’t take the place of a local, trustworthy, and experienced Realtor®)

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The Market Determines Values

The real estate market determines the price of a home for sale. In very general terms, the market determines the value of a home through the interaction of supply and demand. When there are more buyers than sellers, the demand for homes is high and prices tend to go up. When there are more sellers than buyers, the demand for homes is low and prices tend to go down. We often use the terms buyer’s market and seller’s market.

There are several factors that can affect supply and demand, including:

• Economic conditions:When the economy is strong, people are more likely to buy homes, which increases demand. When the economy is weak, people are less likely to buy homes, which decreases demand.
• Interest rates: When interest rates are low, it is more affordable to borrow money to buy a home, which increases demand. When interest rates are high, it is less affordable to borrow money to buy a home, which decreases demand. We have just seen the effects of very low-interest rates over the last several years, and now we are witnessing the effects of higher rates on demand. *If the inventory were not so low, we would see even more of a difference in the supply/demand effect.
• New construction: Generally, when there is a lot of new construction, it increases the supply of homes, which can put downward pressure on prices. When there is less new construction, it decreases the supply of homes, which can put upward pressure on prices. *However, this has not been the case with new home construction through the pandemic, because the demand still outweighed the supply.
• Demographics: The age and composition of the population can also affect demand for homes. For example, if there is a growing population of young families, there will be more demand for homes with more bedrooms, and less demand for smaller homes.
• Local Economics: If business is declining in an area, companies are moving to other locations, or some other economic factors are causing people to move away from an area, this could put downward pressure on home values.

The market value of a home is constantly fluctuating, as the factors that affect supply and demand are constantly changing. It is important to keep an eye on these factors when you are thinking about buying or selling a home. Here are some additional things to keep in mind about how the market determines the value of a home.

The Appraiser Doesn’t Determine a Home’s List Price

The market value of a home is not always the same as the appraised value. The appraised value is determined by a professional appraiser, who considers a variety of factors, including the location, size, condition, and recent sales of similar homes. Lenders typically require an appraisal before they will approve a mortgage loan. This is to ensure that the property is worth the amount of money that the borrower is borrowing.

A home appraisal can help you determine the fair market value of your home. This information can help set a listing price that is likely to attract buyers, but alone, it is not always the full picture. It depends on what is happening in the local market.

An appraisal is based on recent sales. In a market where prices are escalating rapidly, sometimes an appraisal can be lower than what the market will bring. It is an accurate number of what has happened in the recent past, but not necessarily what is happening at the moment.

Even if you price your home in a comparable range with others on the market, this does not guarantee your home is properly priced for the market. The real evidence of what a home will sell for is in the recently sold homes, not in the homes that are currently listed. Although those list prices are important to take into consideration, they don’t tell us what the homes sell for.

If you are thinking about buying or selling a home, it is important to get an understanding of how the market determines the value of a home. This will help you make informed decisions about your real estate transaction.

Buyers Determine What a Home is Worth

This is sometimes an uncomfortable truth. What a buyer is willing to pay has the ultimate effect on what your home is worth. If you price your home based on anyone’s opinion, a Realtor, an appraiser, your gut, or the competition… and you don’t get an offer from a buyer… your home is not worth that amount in the current market.

The willing buyer-willing seller principle is the idea that the price of a good or service is determined by the amount that a buyer is willing to pay and the amount that a seller is willing to accept. In the case of a home, the value of a home is determined by what a buyer is willing to pay for it.

If you overprice to have negotiating room, that strategy may cost you more in the long run, depending on your local market conditions. Buying and selling real estate is not at all like buying and selling other commodities. It’s not like haggling over items at the flea market. Many more issues go into the negotiations when buying a home.

As well as the purchase price of the home, buyers, and sellers may negotiate closing costs, repairs or improvements requested after the home inspection, the inclusion of certain appliances or furniture, the timeline for closing, contingencies such as home inspections or appraisals, and any potential concessions from the seller such as covering some of the buyer’s costs. It’s a complex transaction, and probably the most expensive item most people buy and sell int their lifetime.

A Buyer’s Agent Knows an Overpriced Home

Sellers should remember, that buyers are looking at homes with a local buyer’s agent, who knows the values of homes in your area. The buyer is getting advice from their agent, and they will be aware if a home is overpriced.

Home buyers are looking at homes in a price range. As they view other homes in the same price range as an overpriced home, they will come to the conclusion that the list price is too much compared to similar homes. Overpricing a home is the best way to sell your competition’s home instead of your own.

Realtors have been helping people buy and sell homes for over 110 years. We have lots of statistics. One pertinent metric is this: For every 11 showings, a house that is correctly priced for the market will receive one offer. This is a generalization, of course. In a hot seller’s market, like we have been experiencing, a well-priced home in great condition will receive multiple showings and multiple offers.

Dangers of Overpricing

Overpricing a home can have significant repercussions that go beyond simply setting an unrealistic asking price. Here are some insights into how overpricing can deter potential buyers and prolong the selling process:

1. Limited Buyer Interest: When a home is priced above its perceived market value, it may fall outside the budget range of many prospective buyers. As a result, the pool of potential buyers who can afford the property shrinks significantly, reducing the likelihood of receiving offers.
2. Perception of Poor Value: Overpriced homes often create the perception among buyers that they are not receiving good value for their money. Even if the property has desirable features or amenities, the inflated price tag may lead buyers to question its worthiness, causing them to overlook or dismiss the listing altogether.
3. Comparative Analysis by Buyers: In today’s digital age, buyers have access to a wealth of information about comparable properties in the market. When assessing a home’s value, they conduct thorough comparative analyses to ensure they are getting the best deal. If a property is overpriced relative to similar homes in the area, savvy buyers are likely to bypass it in favor of more competitively priced options.
4. Extended Time on Market: Overpriced homes tend to linger on the market for extended periods, attracting fewer showings and generating less interest from buyers. As each passing day contributes to the property’s perceived staleness, sellers may find themselves forced to make price reductions in a bid to reignite buyer interest—a cycle that can further prolong the selling process.
5. Stigmatization of the Property: In some cases, an overpriced home may become stigmatized within the real estate community, with agents and buyers alike viewing it as a “problem property” that has been languishing on the market for too long. This stigma can be difficult to overcome, even if the price is eventually reduced to a more realistic level.
6. Negotiation Challenges: Overpricing can also hinder negotiations with potential buyers. When sellers begin with an inflated asking price, they may find themselves forced to make substantial price concessions during negotiations—a process that can erode trust and goodwill between the parties and ultimately result in a less favorable outcome for the seller.

Overpricing a home can have far-reaching consequences that impact both the speed and success of the selling process. By pricing their property competitively and realistically from the outset, sellers can attract more qualified buyers, generate greater interest, and increase their chances of achieving a timely and successful sale.

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The Agent with the Highest List Price

Sometimes sellers will interview several agents and choose the one with the highest list price. In some markets that can be the best choice, in other markets it can be detrimental. Sellers will benefit if they can understand the local market and how a home is valued in their market.

Choosing a real estate agent based solely on their proposed list price can be a risky endeavor fraught with pitfalls. While it may be tempting to select an agent who promises the highest list price for your home, this approach often overlooks the crucial factors of market knowledge and integrity, which are paramount in achieving a successful sale. Here are some insights into the potential pitfalls of this approach:

1. Misleading Promises: An agent who promises an unrealistically high list price may be motivated by a desire to secure the listing rather than a genuine commitment to achieving the best outcome for the seller. Such promises can create false expectations and lead sellers down a path fraught with disappointment and frustration when their home fails to attract offers at the inflated price.
2. Lack of Market Understanding: Setting an appropriate list price requires a deep understanding of local market dynamics, trends, and comparable sales data. An agent who lacks this knowledge may inadvertently misprice the property, resulting in missed opportunities and prolonged time on the market.
3. Lost Trust and Credibility: Sellers who choose an agent based solely on their proposed list price may find themselves disillusioned when the reality of the market sets in. This can erode trust and credibility between the seller and agent, damaging the relationship and hindering effective communication and collaboration throughout the selling process.
4. Extended Time on Market: Overpricing a home based on inflated promises from an agent can lead to an extended time on the market. As the property languishes unsold, sellers may incur additional carrying costs and experience heightened stress and anxiety about the outcome of the sale.
5. Missed Opportunities: Pricing a home too high can deter qualified buyers and limit the pool of potential offers. In a competitive market, this can result in missed opportunities for sellers to capitalize on favorable conditions and secure a timely and lucrative sale.

Personal Anecdote

I once worked with a seller who was swayed by an agent promising an exceptionally high list price for their property. Despite my warnings about market conditions and comparable sales data, the seller opted for the agent with the inflated promise. Unfortunately, the property languished on the market for months without attracting any offers. Ultimately, the seller had to relist the property with a more realistic price, resulting in a significant loss of time and resources.

Industry Statistics

According to a survey by the National Association of Realtors (NAR), overpricing is one of the most common mistakes made by sellers, with 77% of agents citing it as a major challenge in the selling process. Additionally, homes that are initially overpriced tend to sell for lower prices than those priced correctly from the outset, according to data from the Multiple Listing Service (MLS).

In conclusion, choosing a real estate agent based solely on their proposed list price can have detrimental consequences for sellers. Instead, sellers should prioritize agents who demonstrate a deep understanding of the local market and a commitment to integrity and transparency in pricing strategy. By doing so, sellers can increase their chances of achieving a successful sale at the best possible price.

Here is my favorite explanation: If I get someone to list a home for $10,000 more, I would make an extra $250 to $300 in commission, that is IF the house sells. In truth, I’m not willing to sour the relationship when the seller finds out, and they eventually will. Not for a promise of $300, that probably will not materialize.

“If I give you stellar service and you are happy, you’ll might tell 2 people about me. If I give you bad service, you’ll probably tell 10 people about it!”

Not worth it. At Chris Highland, in any given year, 75% to 80% of our business comes from referrals and repeat clients. A good reputation is worth so much more than $300:)

How to be 100% Sure?

The only way to be 100% sure of what your home is worth… is to sell it. I know…not what you wanted to hear. Some homes are very easy to find comparable sales: homes that are one of many in a neighborhood and of which there have been several sold in the recent 3 to 6 months. But for homes that don’t have close comparisons or that haven’t had many comparable homes sell in recent months, pricing the home correctly for the market takes local experience, and some savvy.

Your real estate agent should do a comparative market analysis (CMA) taking into account lots of local data…recent home sales, current listings, market trends, current supply and demand, and other factors. This is why you want to list with a local agent, not an agent who is not familiar with the real estate market in your area.

The best way to position your home on the market is to think in terms of a range, from a top price to a lower price. Then you have to be flexible, listen to the feedback from other agents and their buyers, and adjust the price strategically. You don’t want to linger on the market too long with an overpriced home.

“That’s why we say “selling or buying a home is a process, not an event.”

Sometimes a truly unique home will need to have an appraisal to derive a range for the list price. Even then, sellers must remember that a home is only worth what a buyer will pay for it. The best valuations still need to be tested in the market. Determining the right list price for a home is integral to the entire marketing strategy. It often takes more art than science. It takes experience.

Conclusion

Once you have a good understanding of the market value of your home, set a realistic price. Be prepared to negotiate with buyers. And finally, market your home effectively to reach as many potential buyers as possible.

Pricing your home correctly is essential to selling it quickly and for the best possible price. By following the tips in this blog post, you can increase your chances of success.

Does your agent have the experience or the resources of an experienced team to help you sell your biggest investment for the best price and in the least amount of time for your market?

If you’d like a CMA, Comparative Market Analysis, to find out what your home might be worth, no obligation,contact us, Chris Highland has more than 30+ years of experience in the Central Maryland area and is happy to help.

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