A client recently asked me how sellers decide how to price their home. Setting the right asking price for a home is a critical decision a seller will make. It can mean the difference between selling quickly and lagging on the market, or even selling below market value. But how exactly are asking prices determined, and what factors should sellers and their real estate agents consider? In this post, I'll walk through the intricacies of asking price determination, the methods used by professionals, and what to watch out for when pricing a home.

Understanding the Real Estate Pricing Game

Real estate pricing is part art, part science. It requires a deep knowledge of the local market, a clear understanding of a property's unique features, and sometimes, just a dash of intuition. There are multiple prices that come into play in any real estate transaction:

• Assessed value: This is what the county believes your property is worth for tax purposes. In Arlington, it is usually adjusted every year in January. The county assessor does not examine every property every year - that would be impossible. Rather, they make blanket adjustments for entire groups of properties or apply a certain percentage increase from the year before. 
• Appraised value: An appraiser’s estimation of your property’s value, usually carried out for the benefit of a lender. You can ask three different appraisers and you can get three different answers, but they should be close to each other. 
• Fair Market Value (FMV): This is the most likely price that a property would sell for on the open market.
• Asking price: The initial price at which a property is listed. Depending on the strategy, this could be at market value, below market, or above market. 
• Sales price: The agreed-upon price between buyer and seller, which may be different from the asking price. The final sales price could be more or less than the asking price depending on a number of factors. 

For the same property, all of these can be different! 

The Science of Real Estate Appraisal

Appraisals are a common tool in the real estate world, as they provide a neutral professional opinion on a property's value. Appraisers use several methods to arrive at a figure.

The Cost Approach

For newer properties, especially those without a significant number of comparable sales, the cost approach can be used. This is a straightforward calculation that estimates the cost to replace the property with a comparable one, while adjusting for depreciation. This method can be used for single family homes, but rarely for a condo.

The Income Approach

Primarily used for income-producing properties, the income approach assesses what a potential buyer could earn from a property over its lifespan. If you know the income a property is producing and the going cap-rate for the area, then it is a straightforward calculation. This is often used for larger commercial projects but not individual condos. 

The Sales Comparison Approach

This method involves looking at recent sales data of similar properties in your area. Adjustments are made to account for differences, such as square footage, upgrades, number of bedrooms, view, outdoor space and floor level. This is by far the most common method used for residential properties. 

How a Realtor in Prices a Home

Real estate agents employ a variety of techniques to suggest an asking price. One common method is the Comparative Market Analysis (CMA).

Comparative Market Analysis (CMA)

A CMA involves looking at the sale prices of similar, or "comparable," homes in the area within the past few months. This method is very similar to an appraiser's Sales Comparison Approach. Every piece of real estate is different - even condos in the same building and stack. However, for condos, it is usually a little bit easier to find comparable properties.

For my CMA's, I don't go back more than 6 months to find comps. Markets change constantly and going back further in time could put you in a very different market. If possible, I like to pull comps from the same building, but I still include several from nearby buildings as a check. 

Knowing what buildings to use for comparables, is part of the art. In Arlington, you can have a luxury, highrise building with an average price over $1M next to an older, walk up building with an average price of $250K. They might be right next door to each other, but they don't make good comps. 

The most common items I make price adjustments for with condos are:

• Square footage
• Bedrooms
• Bathrooms (full and half)
• Parking spaces
• Outdoor space 
• Condition
• View

What Not to Include When Determining Your Asking Price

There are several factors that don't, or shouldn't, influence the asking price, but some sellers get stuck on them:

What the Seller Paid

The purchase price of does not necessarily reflect its current value, given changes in the market and property conditions. Some sellers get stuck on this because they don't want to 'lose money'.

I like to use a stock market analogy. As I write this, Apple stock is trading at $170/share. If I wanted to sell some shares I bought 5 years ago, would it matter what price I paid then? No. Today's market dictates a price of around $170. Real estate works the same way. 

What a Seller Needs

Your financial needs should not dictate your asking price. Buyers are only interested in the fair market value, not the seller's personal finances.

What the Neighbor Says

Each property and owner’s situation is unique. Your neighbor's selling price isn't the best indicator for your own property's worth.

What the Seller Wants

Similarly, personal desires or the need to recoup past investments should not drive pricing. The market sets the value.

Market Factors to Watch

The real estate market is dynamic, and paying attention to current trends and influences is critical.

Buyer's Market vs. Seller's Market

The balance of supply and demand in real estate impacts whether it’s a buyer's or seller's market. In a buyer's market, properties generally take longer to sell and the prices may need to be lower to attract buyers. Conversely, in a seller's market, prices can push higher due to demand.

How do you know what market you are in? Several market stats I like to follow are:

Supply

Measured by the number of months it would take to sell the current inventory at the present rate of sales, this is a leading indicator of market activity.A balanced market is considered 4-6 months of supply. Below that is a seller's market and above that a buyer's market. 

Original Price to Final Sales Price Ratio

Are seller's getting what they ask for? Even more? This ratio can provide insight into market conditions. A lower percentage suggests a more flexible market, where final sales prices are further below initial asking prices.

Days on Market

This will fluctuate throughout the year because of seasonality so it is important to compare year over year and not just month to month. 

For the Arlington condo market, you can find these up-to-date market stats at

https://ArlingtonCondo.com/market

Pricing Strategies to Consider

Finally, sellers and agents need to choose a pricing strategy that reflects the market and seller's goals.

Overpricing

While tempting, this strategy can lead to a property sitting on the market for too long, which can potentially reduce its value in the eyes of buyers.

Underpricing

Intentionally listing below the CMA can create a sense of urgency and competition among buyers. However, it's crucial to carefully manage expectations and potential price shifts.

Competitive Pricing

This approach aims to attract multiple offers and can lead to a quicker sale. It involves pricing the property at market value or even slightly below market value.

Although difficult to achieve, pricing your home exactly at its perceived market value can attract serious buyers quickly and potentially lead to a higher final sales price.

In conclusion

Setting the right asking price for your home is a complex yet pivotal process. By combining the scientific methods used by appraisers and the nuanced approach of experienced real estate agents, you can ensure that your property is competitively priced for a successful sale in any market. Remember, it's not just about what you want for your home but also about what the market will bear.