You might think in a tight sellers’ market that sellers are setting the bar for the market value of real estate in your neighborhood. In reality, market value is the price that most buyers will pay for a given property that a seller will accept under ordinary conditions. Both parties have a role in pricing trends. To simplify, you could say that sellers set the price and buyers determine the value by the actual agreed upon price they end up paying. Let’s break down what does and doesn’t determine value.
Things that Determine Market Value
1. Price of similar homes sold in the same area within the last six months. Generally buyers will not pay much higher than what someone else paid for the same type of home nearby. And sellers won’t accept much lower than what another seller received for the same type of home.
2. Level of competition. If there are only a few other available similar homes for sale nearby, competition is stronger among buyers and sellers set higher prices. If there are many similar homes for sale, competition is stiffer among sellers and buyers expect lower prices.
3. Location. The more sought after the area, the higher value buyers place on homes there.
4. Condition and features of the property. The better the condition and the more desired features that exist, the higher buyers are willing to pay.
5. Market condition and interest rates. The demand for homes and the interest rates lenders charge for home loans both affect the affordability of home ownership. Generally, lower interest rates mean a greater number of buyers enter the market to find a home, while higher interest rates decrease the number of active buyers.
Things that Don’t Determine Market Value
1. The cost of your home improvements plus the price you paid for the house. Home improvements generally help increase the value of a home, but renovators don’t always recoup dollar for dollar. And what you paid for the house might have been under totally different market conditions than today’s. There are too many other factors that determine value.
2. How much you owe on your mortgage or how much profit you want to make. Buyers don’t determine what they’ll pay for a home based on your personal financial needs or wants.
3. Others’ opinions. Buyers who are informed about market conditions and similar homes sold in the area don’t rely on your friends’ or neighbors’ opinions about your home’s price.
4. Appraisals. Although home appraisals are supposed to reflect fair market value, they can be off. Also, recent improvements to a property (after an appraisal was done) or a sudden jump in demand for a particular area can increase value.
Setting/Offering the Right Price
Every property has the ability to sell regardless of its condition, location, layout, features, age of mechanical systems, foundation issues, size, and competition. There are buyers for every price range looking for a home throughout the year. The big question is how to price it. Sellers want to get as much as they can and buyers want to pay the lowest acceptable amount.
The key to setting (or offering) the right price is understanding what’s going on in the neighborhood where you’re selling or buying. Homes that are priced many thousands above other similar homes in the area will get few lookers and no offers. Buyers are more interested in bidding on property that has a chance to be negotiated and sold. Homes priced in “the sweet spot,” that range where data shows the price is right, sell quickly and close to asking price. For sellers, the first thirty days are the most critical to getting the price right since buyers tend to view lack of activity over time as a negative. Work with an experienced Realtor® to ensure you have all the right data on recent home sales.