The seller can put a price on the home, but the buyer ultimately determines the value. A buyer might pay over market value because they love the location, the elevation of the home, or the proximity to something important to them. A shortage of available homes may increase competition among buyers, which could also drive the value higher.
Most experts agree, to get the highest sale price, the best bet is to price the home accurately from the get-go. If a home starts out too high, it's likely to stay longer, ultimately resulting in a lower sale price because it gives the impression that there must be something "wrong" with the house because it didn't sell immediately.
So, how does a seller determine what price to put on the home? It has nothing to do with what the seller needs to get out of it. Nor does the price the seller paid for it make any difference now. Even if the seller made considerable improvements, they might not affect the value of the home.
There are three common sources for a seller to determine market value: an appraisal, a broker price opinion, or an automated value model found online.
AVM, automated value models, are mathematical estimates that analyze limited public record data to determine a value. While this process can easily compare square footage, age, the number of bedrooms as objective data, it is much more challenging to make adjustments for subjective data like appeal, quality of construction, floorplan, and updating. Zillow Zestimates are the most common AVMs, but there are many others providing similar services.
Appraisals can only be made by a licensed appraiser. Most mortgages require an appraisal as part of the underwriting process to verify that there is ample collateral to secure the mortgage if the borrower defaults. FHA, VA, FNMA, Freddie Mac, USDA, and most private lenders, require an appraisal, especially for high loan-to-value mortgages. In some situations where the risk is lower, some lenders may use an AVM.
An appraisal requires the appraiser to visit the property, perform a visual inspection, analyze the property considering three approaches to value, and accurately report the correct property information.
Broker Price Opinion, BPO, as the name indicates, is a price opinion on a property made by a licensed real estate agent. The determination of whether the estimate accurately reflects the market will depend on the agent's experience with that type of property and market area. A BPO is often more sensitive to the actual market because they take into account homes currently for sale and recently expired properties as well as comparable sales.
While all three methods use recent, comparable sales to arrive at a value, the appraiser and the real estate professional can make a series of adjustments for the differences in the comparables. While the appraiser is highly trained in this technique, the real estate professional adds credibility to this process based on their experience in how the buying public might react to specific features and the home in general, including positive and negative influences.
The current condition of the property is critical for several reasons. In some price ranges, a buyer may only have the necessary down payment and closing costs but cannot make improvements like paint, floor coverings, appliances, or other significant items. In this situation, a buyer would have to live with the house in its current condition until they could afford to make improvements.
Investors may not be deterred by making an additional investment in the home after purchasing it but will probably be motivated to do so only if it increases the potential profit.
An AVM is a tool that a homeowner, prospective buyer, mortgage officer, appraiser, or real estate agent can use to get a quick idea of price, but there are inherent limitations that can only be considered by personal examination balanced with experience in the market place.
Experience and understanding of the subject property and the marketplace are critical to having confidence that a value is accurate. Any person could go through the same steps to arrive at a value, but an experienced, well-trained professional is far more likely to assess all of the variables more accurately. If you are curious what your home is worth, give us a call at (479) 575-0000.