If you’re thinking about selling a contemporary houses by owner, otherwise known as “for sale by owner” (or FSBO), one of the primary factors that will determine your success is how to price a house. Setting your price too low, will get your house sold quickly but will transfer wealth (in the form of equity) from you, the seller, to your buyer. Set your price too high and you will have too few prospects looking at your home and even fewer offers. Set the price way too high, and many buyers may feel that as the owner, you’re set on your price and will be difficult to work with. As a result, they may decide it’s just better to not even bother with your house. So, if your goal as a seller is to capture as much equity as possible by getting as high a price as possible for your home, then you need to understand the factors that buyers will take into account when determining what is a fair value for your home.
There is a normal tendency by homeowners to overestimate the value of their house because it’s very hard to be impartial to the house. Let’s face it, as a homeowner, we’ve lived in it for many years, made improvements to the house, invested our hard-earned money in it to make it better and more comfortable, and now we feel that it’s a great home to live in and anyone looking to buy it should see that. And because homeowners have such a stake in the outcome of the sale, it’s sometimes hard to accept some cold hard truths.
The most difficult concept for homeowners to understand when considering how to price a house is the concept of Supply and Demand. When there is high demand for a product, and not a lot of supply, the product is scarce and so people are willing to pay MORE for the product. Because they’re willing to pay more, the product is worth more. When the demand for a product is low, and there is a large quantity of the product up for sale, the price people are willing to pay will be much lower because they can easily get their hands on the product of their desire.
The same concept applies to your house. When the number of buyers looking for houses is greater than the number of houses available for sale (or the supply of houses for sale), the demand is greater than the supply and homeowners will be able to get a higher price for their house. When there are more houses for sale than there are buyers, the supply exceeds the demand, so prices will be forced lower. A good way to measure supply and demand of housing in your area is to ask a local realtor about the absorption rate for your area. The “absorption rate” is a measure of the local area’s ability to “absorb” the supply of houses on the market and is calculated by dividing the number of houses on the market for six months and dividing it by the number of houses that sold during the same period. For example, if there were 1200 homes for sale over the course of a year, and 100 homes sold every month, it will take 12 months to sell all of the homes currently for sale. If the absorption rate indicates that it will take 6 months or less to sell the available supply of houses on the market, the demand is said to be greater than the supply, and it is termed a “Seller’s Market”. Conversely, if absorption rate indicates that it will take more than 6 month to sell all of the houses on the market, then the supply of housing is greater than the demand, and a “Buyers’ Market” will be in place. A Buyers’ Market leads results in homeowners having to accept lower prices for their homes in order to sell them.
The second most important factor that buyers consider when looking for a houses is what value they will be getting for the price of YOUR house compared to the value they would get if they bought someone else’s house at a similar price. As an example, consider the following question; would you pay $75,000 for a car that’s designed and built for just basic transportation – low horsepower, manual features, and a minimalistic interior? The most likely answer is probably not because you can get a “luxury” brand automobile for that same price, giving you better styling, more horsepower, more room, a more comfortable leather interior, better stereo, and just about better everything (with the possible exception of miles per gallon of gasoline).
Similarly, when thinking about how to price a house, you also need to consider the other houses that your house is competing with. These competing properties are called comparable properties, or in realtor terms, “Comps”.
There are two types of Comps – Active Comps, and Sold Comps. Active Comps are other houses that are similar to yours in terms of bedrooms, bathrooms, square footage, style, condition and neighborhood and are also on the market looking for buyers. Active Comps give you a very good idea of what prices other homeowners are asking for. Sold Comps, on the other hand, are other houses that are similar to yours in terms of bedrooms, bathrooms, square footage, style, condition and neighborhood that have sold within the past 3, 6 or 12 months. It’s important to look at sold comps because they will tell you what buyers were actually willing to pay for a house that is similar to yours. Look at how the other active comps are being priced. Are their prices similar to the houses that sold, over-priced, or under-priced?
When looking at your Active Comps to determine whether they are priced correctly, you will want to look at Days on Market, or DOM. Days on market will show you how long it took for houses listed at a certain price to sell, or how long houses currently listed for sale have been on the market and have not yet sold. A general rule is that a house should sell within 90 days of it being listed. If it takes longer than that, it’s generally an indication that it may be priced on the upper end of the price scale.