What’s too little? What’s too much?
Why can’t a home seller just ask for the amount they want and lower the price later if it doesn’t sell?
Most of us wish we could, but a smarter way to avoid pitfalls is to use the available tools designed to price a home accurately from the start.
The National Association of Realtors reports that over 15 percent of home sales are delayed, renegotiated or canceled due to home appraisals falling short of the contract price. Imagine thinking that the home had sold only to have negotiations fall apart over price. And worse, having to start again, at the beginning, with listing the house and seeking a new buyer. Or imagine asking too little for a home and suspecting later that it was undervalued. Even if the house hasn’t sold yet, a seller or real estate agent usually won’t be able to increase the listing price.
The pitfall of using automated valuation models (AVMs) for pricing a home
Thanks to the popularity of online property websites such as Zillow, realtor.com and Trulia, many homeowners believe they can simply look up their address to determine the current market value of the home. Although it’s true that such sites provide a rough estimate of the value of a home — known as automated valuation models, or AVMs — it’s also true that this type of estimate is often inaccurate.
AVMs use mathematical algorithms to determine the value of a home based on certain characteristics, such as location, size, number of bedrooms and bathrooms, etc. The AVM also looks at the selling price of similar homes in the area, as well as what the home sold for in the past, to help determine a value.
The problem with AVMs is that they can’t take into account relatable factors that affect the home’s value, such as the interior condition and layout of the house or condo, and even upgrades. The result is that, in some cases, an AVM estimate could differ from the true value by as much as 5 to 20 percent.
So, if the AVM estimate alone was used to price a home, the seller could either leave a lot of money on the table or significantly overprice the property.
Another resource that sellers might use to price their homes is a comparative market analysis, or CMA, which is often created by real estate agents. Similar to AVMs, comparable home sales don’t take into account the condition of the home, improvements and additions, or other features specific to the property. And, because the person who creates the analysis isn’t trained to appraise property, it’s not the most accurate tool either.
It’s notable that banks do not consider CMAs or AVMs to be accurate tools for home valuations — banks lend based only on appraisals.
Preappraisals take the guesswork out of home pricing
The only way to accurately and confidently determine what a home is worth is to hire a professional appraiser to evaluate the home before selling. A home appraiser will visit the property and assess the size and condition both inside and out. The certified appraiser will also note any amenities, such as a swimming pool, an upgraded kitchen or a great view that could raise the value of a home.
A preappraisal is very similar to the appraisal performed on behalf of the bank, but it doesn’t contain the loan component necessary for buyers. This lack brings down the cost of a preappraisal and makes it less expensive than the cost a buyer pays after the sale. All preappraisals are done by certified or licensed appraisers and can be used to price a home accurately.
The seller, the buyer or the real estate agent can purchase a preappraisal. Some agents find that offering a preappraisal to their clients helps them win the listing. A preappraisal is the only way to be confident that sellers and real estate agents are pricing a home to sell without selling themselves short.
Michael Abdy is president of Housefax, the leader in residential real estate home history reports and services. Michael is a successful entrepreneur who has extensive background in both real estate and new technologies. Through his investment fund, Michael has financed and deployed many B2C and B2B products and service platforms, including Housefax.