Pricing a home correctly is quite possibly the most important step a home seller can take for a quick sale at a satisfactory price. Unlike other types of assets, a home doesn’t have a fixed value. In reality, a home’s value is defined by constantly and rapidly changing conditions, such as the health of the local real estate market, interest rate trends, buyer’s preferences and local crime rates.
I once spoke with a real estate agent who told me that price was the only thing that kept her from being able to sell a piece of property. When I challenged her assertion, she replied with, “Honey, I could sell the Chernobyl Nuclear Plant if it was priced at $100!” Touché.
What is fair market value
The fair market value (FMV) of a home is the price that the market determines the home is worth at the time of listing. The listing price and the ultimate selling price may not be the same but the FMV is the price a buyer is willing to pay and a seller is willing to accept. FMV is not your original selling price from a few years ago plus the percentage the average home has increased in value!
The most effective way to price a home for a quick sale that satisfies the buyer and seller is to assess and approximate the home’s FMV and make that value the asking price. If those two numbers (the buyer’s and the seller’s) are far apart, someone isn’t being reasonable.
How to find your home’s fair market value
The most effective way to decide your home’s FMV is to perform a comparative market analysis (CMA) – a side-by-side comparison of the prices and features of your home compared to homes recently sold or for sale within a 2 – 5 mile radius. In most cases, the CMA you get from your agent consists of two sets of data:
Comparable homes currently on the market in your area
You or your agent should compile a list of homes (and their prices) that have been listed within the past 3–6 months and are still on the market.
Comparable homes that have sold recently in your area
This includes homes that have been sold within the past 6 – 12 months, though agents sometimes include data from as far back as two years.
Your agent should compile these two lists for you and discuss your home’s fair market value as well as your listing price. Make sure your agent’s CMA includes specific details about each property, such as its asking or selling price, location, square footage, lot size, school zone, number of bathrooms and bedrooms, special amenities (stone fireplace, basement, garage, deck, pool), and the price per square foot.
Other sources for finding your home’s FMV
A thorough CMA from your agent should provide enough information to determine your home’s FMV. However, if you want even more data before setting an asking price, consider:
You can hire a professional independent appraiser to give you an unbiased estimate of your home’s FMV. Appraisals usually cost $250–500 and take several hours.
You can attend open houses in your area to see for yourself how properties similar to yours compare, inside and out. Many home sellers find it difficult to be 100 percent objective, however, and emotions can rule the day.
Several websites provide free, instant estimates of FMV based on data such as the home’s location and selling price history. One such site is ElectronicAppraiser.com.
How to set the right price for your home
Your asking price should not necessarily be exactly equal to your FMV. Instead, use your FMV as a starting point, adjusting your asking price up or down based on:
- Your urgency – If you must move as soon as possible, you might consider lowering your asking price 5 – 15% below your home’s FMV. The lower price will likely attract more buyers and speed the sale.
- Local inventory –Your agent should be able to provide you with historical data on the inventory of unsold homes in your area. If the current numbers point to a glut in the marketplace and, therefore, a buyer’s market, it’s probably a good idea to set your asking price 10–15% below the FMV to attract bargain hunters.
If you’re operating in a seller’s market, you can more easily set your home’s listing price above the FMV. If you’re not in a strong seller’s market however, pricing your home above the FMV will more often result in frustration on the part of the seller and the listing agent. Remember that most buyers work with agents and those agents have access to the same FMV data that you and your agent have. As a result, buyers and their agents can easily spot overpriced homes immediately and usually ignore overpriced listings.
Frustrated sellers respond by gradually ratcheting their prices down to align with the FMV, but in that time, new listings pop up that overshadow the languishing mispriced listings. To make matters worse, sellers who misprice their homes lose negotiating power to buyers who know how long the home has been sitting on the market. In short, it’s best not to set your asking price more than 5 percent above your home’s FMV.