Wednesday, November 01, 2006

How to Price Your Hemet Home so it will Sell

With all of the discussion about the Real Estate market, I feel that many people are being foolish when it comes time to consider if they should sell their home or not. Let’s assume for this discussion that we can all agree that the market has turned flat and in some isolated areas, values have started to slip. So the question remains, “Do I get out now?” or “Do I ride the storm out and see what happens in the next couple of years?

Of course, there will always be sellers who have to sell now, regardless of market conditions. Several examples of these sellers are those who are being transferred out of the area; those who have gone (or are going through) a traumatic life change, i.e. divorce, death, illness, and even the kids going off to college; and then there are those that are financially strapped – perhaps they got into their existing home with some exotic mortgage that did not live up to its expectations.

In any event, this article is not written for the above individuals specifically, although every thing I will discuss here is sound advice and should be considered by everyone who is even remotely thinking of selling their home.

If you read my article from yesterday, you’ll see that I identified a large number of homes for sale in the East Hemet zip code of 92544 – 291 to be precise. When you consider that only 40 homes closed escrow in all of October 2006 it becomes obvious that there is an existing inventory that will take more than7 months to sell, if no new home came on the market.

QUESTIONS TO ASK BEFORE YOU SELL

So, if you want (or need) to sell your Hemet Real Estate, lets first start with some questions to ask yourself. They may include:

What condition is the real estate market in my neighborhood? How many homes sold this year compared to last year? What is the current inventory? Are prices going up, staying the same or going down?

Do I need a Real Estate Agent, or should I do it myself?

Am I selecting a Real Estate Agent based on the services he (or she) will provide, or am I shopping on price for a Realtor? (see yesterdays post that shows the difference between how many homes sell, are listed and expire – broken down by commission)

Is my opinion of my homes value based on good solid comps from my neighborhood or am I on a diet of pie in the sky?

How many different homes would I be competing with in my neighborhood? What condition is mine in, compared to the competition? Am I lacking amenities? Have I over-improved my property for the neighborhood?

Since I bought my home, which improvements that I have made have actually increased the value of my home? Which improvements did I do for my own pleasure and not for the increased value?

Am I being motivated by my personal financial needs, or is my decision a sound one based on the real facts?

Does it matter what I paid for my Hemet home? Is the original purchase price going to influence my pricing strategy?

Do I have what it takes to price my home right for today’s market, and stand firm on the price?

If I sell my current Hemet property then I will have to buy a new home. Do I know how the current market will influence me when I am ready to buy? (sell first and then buy – but that’s another article)

How important are the benefits of moving now if I have to sell my home at the current market price.


Who Is the Best Hemet Realtor?


As much as I wish I could tell you I am, there really is no clear cut answer. The real question is who the best real estate agent for you is. Today’s market place has become very diverse. Not long ago, your choices were all the same, just different brands. The big national franchises dominated the real estate industry and other than a few small boutique offices all of the competition was between the mega-brokers.

With the internet and all of the tools available today, the entire process is evolving, yet it really remains the same (again another topic for another article).

My suggestion is to find a Hemet Realtor that 1) you feel comfortable working with and 2) you feel confident in their abilities. Do a gut check and run with your instincts.

The one criteria you should NEVER use for the selection process of a Realtor is what the real estate agent tells you they can sell the home for. A real estate agent NEVER has control over the market conditions. Many Realtors will ‘pitch’ their services based on an over-inflated price so they can get the ‘listing’, knowing full well they will be back in several weeks for a price reductions. A professional Realtor will always give you the facts along with candid feedback so that you can price your home to sell, within the current market.

Comparative Market Analysis

Any Hemet Real Estate agent worth their salt will prepare a 'Comprehensive Market Analysis' (CMA) that will provide you with the tools necessary to make a sound decision on setting the price of your home. Remember, the decision is all yours.

At a minimum, the CMA will look at different types of listings on the MLS. I believe the local Hemet MLS actually has 10 different classifications of listings. They all boil down to one of 3 different general classifications that need to be considered when pricing your Hemet house for sale.


EXPIREDS

Expired listings are listings that have been on the market, ran the course of the contract period and the contract has expired. These are homes that the market has rejected – typically because of price.

Lets look at the overall numbers from yesterdays article:

Overall Market - EXPIRED
Number of Listings: 41
Average Price: $427,807
Medium Price: $385,000
Total Inventory: $17,540,090
Days On Market: 134.73

Overall Market - SOLD
Number of Listings: 40
Average Price: $346,325
Medium Price: $264,500
Total Inventory: $13,853,000
Days On Market: 87.55

Big difference! These are real numbers from the Hemet MLS for single family residences, covering the period of October 2006, for zip code 92544 in East Hemet.

Notice, just about as many listings expired as sold last month (40/41) – but check out the other numbers. The difference between the Average Price is $81,412. The medium price is even more extreme - $120,500. (Read yesterday’s article for discussion on the difference between the Average Price vs. the Medium Price.)

The sad news is that the Expired listings sat on the market for over a month and a half longer (48+ days), with the seller cleaning their home every day for showings that typically did not happen – dashing their hopes of moving some time soon.

Other MLS categories that can be considered with a similar bearing on the MLS are those that have been ‘Cancelled’ and ‘Withdrawn’.


ACTIVE


Active listings make up the greatest number of listings, as these are the homes that are currently for sale. These properties are considered to be ‘Inventory’ for all Realtors belonging to any MLS. By listing a home in the MLS, the listing agent is contractually bound to pay the selling agent a commission, as it is posted in the MLS. This is perhaps the biggest advantage to listing your home with a Realtor, because through the MLS, your Hemet real estate agent can market your home across town, across the state, across the country and even around the world. The MLS is that powerful. (Remember, buyers use a Realtor for free to help them buy their home, so the Realtors have the buyers.)

Pricing in the Active category can be misleading. It has often been referred to as a fantasy value – it is what the buyer wants to sell for and in many cases it is an over inflated value a real estate agents suggested to get the listing.

One of the best criteria you can use for examining a MLS listing is the ‘Days on Market’ (DOM). The DOM will tell you if the home has been on the market for a long time. Once the DOM exceeds the average DOM, you know without certainty there is a price or other issue.

The current single family residences stats for the Hemet MLS, for the East Hemet zip code of 92544, for looks like this:

Overall Market - ACTIVE
Number of Listings: 291
Average Price: $391,904
Medium Price: $339,900
Total Inventory: $114,044,131
Days On Market: 84.67

Compare these numbers to the SOLD summary above and you will see there is $45,579 difference, representing an approximate 13% difference in price. Even between the Medium value, there is a $75,400 disparity.

Other MLS sub-categories that will include homes that may still be sold are the ‘Back-Up’, ‘First Right of Refusal’, and ‘Hold – Do Not Show’.


SOLDS

Sold listings tell us the real value of the current market. Looking at the numbers tell us what price point is selling, how much inventory is available, what commission points are selling, and most important what price specific homes in specific neighborhoods are selling for.

These are the actual sales price which offers the best evidence to base the decision of where to price your home. Remember, you want to find homes as similar to yours and as close to yours as possible. This is often very easy to do in established tract home neighborhoods. However in areas like east Hemet where we have so many custom and semi-custom homes we are often left with the task of making numerous adjustments.

For example, when I prepare a CMA, some of the standard adjustments I will use to make the homes appear more similar are:

Square Footage $100 per sq foot
Lot Square Footage $2 per sq ft
Bedroom $10,000 per bedroom
Bathroom $2,500 per bathroom
Age of Home $2,000 per year difference
Pool (in ground – gunite) $20,000
Spa (in ground – gunite) $2,500
View $2,500

There is nothing concrete about these numbers. It really depends on the price range of the home and a number of different factors. The key is to be consistent when comparing the subject property (your home) to the comps.

Of course, the numbers have to be either added or subtracted, depending which side of the equation the difference is on. For example if your home is 2,000 sq ft and the comp is 2,100 sq feet then the 100 sq ft difference would be multiplied by the $100 per sq ft for a $10,000 adjustment that would have to be deducted from the comp in order to make the homes more similar.

Again, I cannot strongly emphasis enough how subjective these numbers are and how open to interpretation they are. As a Realtor, I use my professional opinion. An appraiser goes through a very similar process, but an appraiser is licensed for this specific task and lenders rely on their network of licensed and certified appraisers. Never substitute or confuse a Realtor (or self) prepared CMA with a professional appraisal.


Trends in Value in the Market


In a ‘Hot Market’, like we saw in the earlier part of this decade it was not uncommon for a Hemet home to go on the market priced above the current market value. This overpricing actually helped drive the market.

If a home were realistically valued at $340,000 in a hot market, the seller may decide they have the time for the market to catch the price, so they list it at $350,000. In theory they got top market price for their home as soon as they sold it for the higher price. It may have stayed on the market a little bit longer, but in essence what it did was help establish the higher value in the neighborhood.

Again, this is an effective technique when we are seeing double digit appreciation of our real estate, but into days market it is not recommended at all. If you were to price your home at $10,000 over the market value, it will likely sit on the MLS until it either expires or you do a reality check and lower the price. However, if you let it sit on the market at a higher price and then drop the listing price on the MLS, you will have lost valuable exposure that you may never get back again. I’ll discuss this concept in more detail shortly.


Real Estate Evaluation Principals

There are several principals that must be understood and considered when pricing your Hemet Home to sell in today’s uncertain market.


COST

– You must know the amount you actually paid for a property. Be sure to include and significant improvements you have made since the time you purchased the Hemet home. Do Not Include equity you have pulled out of the home in a refinance o\r a 2nd mortgage. The loan amount is not relevant at all. Only include the amount you actually used to upgrade your home with a capital improvement. (This does not include maintenance –a new roof is maintenance. Any buyer expects a home to have a solid roof – so the $30,000 you spent on a new roof does not add any value.)


PRICE

– This is the amount you will accept for your property. Typically it is expressed in dollars, but there have been transactions that have included other assets as well. In this case, the value has to be converted into dollars for tax and government reporting purposes.


VALUE

- Depending on the specific circumstances, Value is the amount a buyer is willing to pay for a specific property.


MARKET VALUE

– Assuming an ‘Arms Length Transaction’ between two entities (people) who have no relation with one another and where one does not have an advantage over the other in negotiations, an arms length transaction represents the market value of a piece of real estate. It is a value based on what similar properties have sold for and what a willing buyer will pay a willing seller.


REGRESSION & PROGRESSION

– These are the principals that tell you it is better to have the smallest house in a neighborhood of big houses than to have the biggest house in a neighborhood of small houses. This principal addresses the effect that surrounding homes sizes have on your property. Regression will de3crease your value when you are overbuilt for a neighborhood and Progression will increase your value when you are surrounded by larger more expensive homes.


SUBSTITUTION

– This is the principal that addresses specific amenities. It is similar to the adjustments we made on a CMA, and often amenity adjustments are also made on a CMA. For example, two identical homes with the exception for a kitchen remodel. Same age, same square footage, and the same lot size. One house has a Formica floor and Formica counter tops. The second home has 18” ceramic tile in the kitchen and granite counter tops at a cost of $25,000. I’m not swaying because the second homeowner spent $25,000 in upgrades that the second home is worth $25,000 more. I’m sure we can all agree though, the second home is worth more than the first (again all other things, including maintenance are equal).

There are some improvements that will return dollar for dollar when the home is sold, but most will not. Yes they will typically increase the value of a home but not necessarily dollar for dollar on the amount spent on the improvement.

An important consideration is that the value is not determined by the amount invested in the amenity but rather by the value derived from it.

Let’s look at a different example. Let’s look at two of our rural home sites. Both are on an acre, on a paved road, both built the same year with the same square footage of living space and on the surface both properties appear to be worth exactly the same. Thy only difference is the well.
The first homeowner has to drill 100 feet to find drinking water at a cost of $10,000. Unfortunately for his neighbor, the second property has to go 250 feet to find an adequate water supply, at a cost of $50,000.

So, is the second property now worth $40,000 more because he had to pay that much more for his well? No, both properties are equal in value. However, had this information been available to both homeowners before they purchased and developed the land, the second vacant lot would have been worth less than the first because of the expense of the drilling to obtain a suitable drinking resource. Now that they have been developed and have like amenities, there is no adjustment for the cost of the amenity.


What Happens When a Hemet Home is Overpriced?

It is critical to price a home properly when it is first listed on the market. If a seller takes the attitude that they can put it on the market for a higher price and then reduce the price if it doesn’t sell right away is much more detrimental than any other pricing strategy.

More often than not, by the time an overpriced listing is reduced to the actual market value it will have become aged. Unlike a fine wine, aging is not good when you are trying to sell your Hemet home for top dollar.

Remember, the shopper who is looking at your home is just like you, and that’s a good thing. But stop for a moment and remember what it is like to shop for a home. Do you remember ever asking the question of how long a home has been on the market? Did you make your own conclusions when you were given a long time period? Maybe you thought you could do a little negotiating at that point… or…

Some sellers will take the attitude that ‘they don’t have to sell right now’ and that ‘they have time’. This is a disaster in the works.

In an escalating market, it may be O.K. to price a home just over the market value, knowing that the market will catch up soon and you will receive top dollar for your home (assuming it’s in top condition and you don’t mind keeping it in showing condition until the market does catch up. This strategy is a good one if you want to make absolutely certain that you squeezed every possible dime out of your property. Remember though, it only works in an escalating market – not the pre-holiday market of November 2006.

This strategy will never work if the home is dramatically over priced. No reasonable amount of time will generate a buyer for a home that is 25% overpriced. Even if an offer comes in from a buyer who falls in ‘love’ and ‘must have’ your perfect dream home, remember that there is not a lender in the world who will make that type of risky loan. Every home has to be sold twice, first to the buyer and then to his lender.


So, Why are Homes Overpriced

I am hoping that you will agree that most of what I have shared with you is very basic principals of real estate and life in general. Now that you have thought about the concept a bit, I am hoping it is as obvious to you as the nose on your face.

Let’s examine some of the reasons why sellers still overprice their home…


OVER IMPROVEMENT

– This is a case of putting much more into a house than the neighborhood will ever bear. A classic example of the principal of Regression that I discussed earlier. I just sold a home that was worth around $450,000 for the house alone. However, the seller is a contractor that does custom rock work. He built am oversized rock pool and put in a plush tropical landscape complete with a wrap around deck, fire pit, BBQ, waterslide and so much more. We had an estimate of $500,000 to duplicate it from another contractor – so the house was a steal at $695,000 right? Unfortunately for my seller, it’s still only a $450,000 neighborhood and the best we could do after a year on the market was $520,000


NEED

– Often an owner will have a need or desire to raise cash and the only way they can do it is through the sale of their home. Repeat after me, “So What!” As we discussed under ‘Market Value’ a home is only worth what someone is willing to pay for it, not what you need. This often surfaces after a seller has stripped all of the equity out of the property through refinancing and then as the market flattens they try to bail, thinking the buyer and real estate agents should pay the closing costs and commissions.


BUYING A MORE EXPENSIVE HOME

– One of the elements that make Hemet so desirable is that our housing is so affordable compared to the rest of Southern California. However, when you move from Hemet to a more expensive area, do not allow the price you will pay for your new home influence the price you will ask for the Hemet home. Value is location specific


PAID TOO MUCH WHEN THEY BOUGHT

– This is a tough one. Chancesare when youboughtyourhomeit was’Market Value’, otherwise it would have been hard to get a loan. However the market does change. Imagine you are buying you home right now, at fair market value and the next year sees the bottom fall-out of the market and it takes a 10% decline in value. If you were going to sell next year, would you be able to sell for your purchase price or the fair market value?


THEY LACK THE FACTS

– Pricing a home should never be a gut reaction but should be based on recent documented sales.


THEY NEED ROOM TO NEGOTIATE

– Being the melting pot we are in the United States, we have many cultures represented that negotiate as a way of doing business. However, please consider it is much easier to negotiate from a fair market value then it is from an over-inflated price. At least with fair market value pricing, you will have more of a chance to start the process then if you are in left field.


DON’T HAVE TO MOVE

– My least likeable seller. They often have a very blasé attitude and unless everything is perfect for them, and remains perfect throughout the entire escrow, they will often kill a transaction. Even if the move is not urgent, it is very important that your home should be priced correctly in order to preserve your options and marketing opportunities if and when the move becomes more urgent.


LET’S GIVE IT A SHOT…

Many times I have heard from a seller who has an over inflated number in their minds that “we should give it a shot for a couple of weeks, and let’s see what happens”.

It is very important to properly price your home for sale right from the beginning. The biggest reason is that most showing activity takes place it the first two weeks of being listed on the MLS.
The reason for this is most Realtors maintain an inventory of buyers that are cultivated over time. These re buyers who come to the real estate agent through any different channels of marketing, including the internet, open house, advertising , referrals and from the Realtors personal sphere of influence.

When a home is first listed, agents look at it the hardest. In the not so distant past, Realtors would make arrangements so see houses of interest up close and personal. This was good for the seller to see, because the seller knew that agents were coming through. Today with the internet, many times a home is reviewed online and never actually previewed until a buyer has expressed a specific interest in this home or type of home.

However, the point remains the same, most of the activity is in the first two weeks. Realtors are spending time studying the changes in the market and letting all of their interested buyers know about the property. Once the first couple of weeks of activity diminish, the only activity is typically when a new buyer enters the market.

Because of the initial influx of activity, it is critical that the home is in it’s top condition and priced to sell right from the very beginning.


PRICING & the MLS

Another important aspect of pricing the home to sell from the beginning is how searches are made in the MLS. In its very simplest form, the MLS is nothing more than a big database of homes for sale, with many search variables.

Buyers on the Internet and Realtors have access to basically the same information. The data the Realtors access is more complete than what is available on the Internet.

When a search is made, the normal variables are the city, the number of bedrooms, square foot of the home and lot, perhaps what school the kids will go to and so on. Many of these are range searches, meaning they may look for homes with 4 to 6 bedrooms, when a 5 bedroom is ideal.

Price of course is a major criteria to search for in a home. Unlike the square footage of the lot or the number of bathrooms, price often cannot be adjusted past its limit. Unlike the difference between 5 bedrooms and 6, a home buyer can only afford what they have been approved for. If a buyer is qualified for a $400,000 home with a 15% down payment, it does them absolutely no good to look at homes priced at $405,000 with the hopes they will be able to negotiate down. Especially when there are so many homes available in their approved price range.

If your home is valued at $400,000 and you increase the list price by just 5% - that’s $20,000 above what the home is worth. No one who is approved at the $400,000 level will be looking at your $420,000 listing – even though it may be the perfect home for this buyer. Your prized possession simply will not show up in the searches made. Remember, no one wants to waste a lot of time house hunting.


BUYING UP IN A DOWN MARKET

This is the beautiful part about a down market, even if it is often misunderstood – buying up!

Let’s say you bought your home 5 years ago, or longer and you have not already taken out your equity. Let’s say you paid $250,000 way back when. Last year your neighbor sold his home, which is not as good as yours for $550,000; so you thought yours was worth at lest $600,000 then.

For sake of discussion, we’ll assume we have taken a 10% decrease in value over the past year, when your home peaked at $600,000, this means your home today would be worth $540,000 ($290,000 in equity before costs).

Now let’s assume that you found a real gem of a home last year for $1,000,000 that would have made your entire family very happy. This is a $40,000 gift for you. Let me explain…

Yes, when you sell your home, you will receive $60,000 less than if you sold it last year. But now, because the market has dropped 10% across the board your million dollar dream home is only $900,000. Had you sold your home at the peak of the market, you would have been buying at the peak of the market.

Now, with the difference in the $60,000 hit you took on your home it equates to a tax free $40,000 windfall offset by the $100,000 hit the seller of the new home took in selling it to you for only $900,000. As an added bonus, your new property taxes will be 10% less every year, had you bought at the peak of the market.


PROPER PRICING HAS ITS ADVANTAGES

To wrap things up, let’s review the benefits of pricing your home to sell…


IT WILL SELL FASTER

– A home that is priced right will sell quicker which reduces the carrying costs you have to pay every month in the form of mortgage, insurance, maintenance and other costs of ownership.


IT’S LESS INCONVENIENT

– It is so much easier to sell your home quicker. Save the energy of keeping your home in a model ready state of showing. Having a home listed for sale changes your lifestyle.


YOUR HOME WILL BE EXPOSED TO MORE BUYERS

– There are more people who can afford the market value of your home and you will be showing them instead of the buyers who are comparing your home to the one with amore legitimist higher market value.


MORE REALTOR ACTIVITY

– Remember, the Realtors control the buyers and the more excited you can make a Realtor about a listing the more activity you will generate.


BETTER ADVERTISING RESPONSE

– When price is not an issue, your real estate agent will get more calls from the advertising which will mean more showings


HIGHER OFFERS

– Buyers are much more likely to offer a full fair price offer then a home is priced right because they don’t want to insult the seller or lose the home to a better offer.


MORE MONEY TO THE SELLER

– The market will produce a higher sales price if the home is priced correctly. This means you will Net more dollars and you will have less carrying costs.



For more information please don't hesitate to contact me and allow me to help you gather the data to price your Hemet home to sell.

John Occhi, Realtor

951.443.6259

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