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You are here: Home / Buying a Home / Cost Versus Market Price in Home Sales

Cost Versus Market Price in Home Sales

April 20, 2012 by khproperties Leave a Comment

Voltaire - Paris, France

The French Enlightenment writer, Voltaire, said, “Each player must accept the cards life deals him or her: but once they are in hand, he or she alone must decide how to play the cards in order to win the game.” Too often sellers of homes misplay their hands because they act on emotion and not objectivity. Most often it’s because they do not understand or purely disregard the relationship of cost versus market price. A good Realtor can help in recommending the right price for your house with a Comparative Market Analysis (CMA) – but it’s up to the seller to make the winning decision. What you paid for the home plus the cost of any any updates or upgrades you may have made while you lived in the home do not equal or determine the listing price.

Let’s back-up for a moment and establish the correlation of cost and market value to the quote above as it relates to home selling and making the right decision. One could say that when selling your property, the cards you accept are the cost of your home – what you paid for it based on location, size, and amenities, coupled with any improvements. The hand you play is how you obtain a market price and sell your home – determining what a reasonable group of buyers would pay to purchase your home based on interest rates, recent home sales, and current sales prices of similar properties in the last six months (and in a hot market even less). Similar in order of significance traditionally means location, size, and amenities. Accordingly, winning the game is obtaining the fair market value in the shortest amount of time.

The only way to do this is by listing your property at the current market value based on a CMA. Again, that means at a similar price to properties with comparable location, size, and amenities to each other. The CMA is an opinion and not an appraisal. Good agents can generally estimate if a home will appraise at its current listed price. Appraisals are done by a licensed appraiser and are only good for six months. Lenders will not provide funds that exceed an appraisal which is another reason to properly price your home.

Back to the CMA…on average, you want your listing price to be at the top of the recently sold and at the bottom of properties currently on the market. Why? Homes accurately listed at market value provide more prospective buyers. Savvy buyers have access to vast amounts of information and tend to have a better appreciation of market value. If your home is overpriced, buyers will not waste their time viewing it. You will also attract the wrong set of buyers as they are expecting more for their money. Your house will generally stay on the market longer which leads to negative perceptions of your property in buyers’ minds. Why hasn’t it sold? What’s wrong with it? It’s been on the market so long the seller’s must be willing to accept a low offer (below market value). Additionally, the process will continue to take time away from other endeavors. So why do sellers often avoid accepting the agent’s opinion on the current market value of their home?

Sadly, most people fail to recognize the hard fact that cost and market price are not related – the two concepts are totally independent. Just think, if you inherited a house for nothing (your cost) would you give it away for nothing? You would want to sell it at market value. How about the stock market? Do you always get the same price you paid for a stock when you sell it? No, sometimes it’s more and sometimes it’s less. The result is based on the market. Selling and buying homes is no different. In any real estate transaction, the objective is to sell at the price most people will pay – not the highest price that one person might pay. An expert Realtor is your best bet for obtaining the best price – but that’s predicated on you taking their advice. The current market sets the price, not the Realtor. All the real estate agent does is provide you a snapshot of the market at that time and filters it through various factors, similar to how a doctor provides an x-ray as an assessment tool.

Believe it; a good Realtor has no interest in overpricing your house. It’s as much a drain on their resources as it is yours. Typically the more your house sells for the higher the commission for the agent, right? However, if your house never sells then the Realtor never receives a commission. Real estate professionals want to maximize time, get the best deal for all involved, and earn a living like everyone else. It’s your job to make the best decision based on their advice. Understanding several pitfalls to avoid can help you remain focused on making the right decision.

Seller enthusiasm can be a detriment when it comes in the form of emotion. “Our home is better than others, we paid more when we bought it, we need more for it based on our improvements, or we are moving to a higher priced home and need the money!” These are all common thoughts. Objectivity is paramount – this is where the CMA comes into play. If you don’t like the answer, then it’s time for a tough choice. You must decide if you can hold onto the property until the market changes or sell at the current market value. Other faulty preconceived notions are that by inflating the price a seller may catch the lone foolish buyer or that building in additional bargaining room will offset low offers. Executing these concepts will only extend the time your house is on the market and thereby lessen the enthusiasm buyers have for your home, as well as negatively affecting everybody’s time and resources. If you are able, there can be an advantage to selling in a challenging market, especially if you are looking to buy.

Most people selling their home are also preparing to buy a home. Real estate statistics show that most people go up about 50% in price when buying another home. For simplicity’s sake, let’s say you see a 10% reduction in the market price of your current home – you paid $400,000 and you sell it for $360,000. However, the house you are purchasing is also in the same market and was priced at $600,000 but now sells for $540,000. In this example, you would have saved around $20,000 – you may have lost around $40,000 on the sale of your house, but you saved $60,000 on the purchase of your next home. This is one of the hidden advantages to selling and buying in a challenging market.

In the end, it’s not what you paid for the house, it’s what the market will pay for your house. Being objective about your home will equal a faster sale, assist in helping you finalize plans for your next house, provide less inconvenience, provide more prospective buyers, and serve as a magnet for good offers. In the best cases, it will provide higher net equity. It’s your choice to make, so make an informed decision based on the current market price of the home.

image courtesy of ktylerconk

Related Posts

  • CMAs, Appraisals, and The Value of Your HomeCMAs, Appraisals, and The Value of Your Home
  • Listing your home is not a game.Listing your home is not a game.
  • What’s my home worth?  The “unzillowable” factor.What’s my home worth? The “unzillowable” factor.
  • Appraisals, Assessments, and Fair Market ValueAppraisals, Assessments, and Fair Market Value
  • Appraisals: The Good, The Bad and The UglyAppraisals: The Good, The Bad and The Ugly

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