Home's value just one ingredient in sales recipe

Editor’s note: The following excerpt was a post written and submitted by Sellsius Real Estate at the Inman News Blog. It opens an interesting dialogue about the difference between property valuation and a home’s final sales price. To offer your opinion, click here to join the online discussion.

We read an interesting post at Joel Burslem’s Future of Real Estate Marketing blog about the MyCurrency valuation site. (See Inman News story, “New valuation site relies on wisdom of crowds.”) Valuation, the apparent Holy Grail of pricing real estate, always fascinates us since we have experienced so many cases where valuation had little to do with the final sales price.

It is often said that thevalue of a home is what someone will pay for it. While it may not be technically true, i.e., the sales price may be above or below generally accepted fair market value, it encompasses what real estate sales is all about — selling the property. It’s really not about valuation. This is not to say valuation is without value. It’s just not determinative, and very possibly of little value. We shall pontificate (leave now while you still can).

We all know the cases. An estate sale or one with a motivated seller will likely render a sale price below generally accepted fair market value. On the flip side, two buyers in love with the same house will bid up the price over generally accepted fair market value.

This relationship between value and sales price is the agent’s Gordian Knot. Valuation sites try to unravel the knot by data manipulation. Sounds like a way to go. But it doesn’t work to sell real estate. Maybe instead of trying to unravel the knot, we should, like Alexander, just cut it.

Valuation does not determine sales price or sell real estate. There, we said it. Real estate is best sold by experienced local professionals who know how to market and have good sales and people skills. Thus will always be. Valuation is but one ingredient in the sales recipe and it does not make the dish — it may be just a dash.

Here’s our problem with the underlying philosophy of equating valuation with price. Value does not equal sales price largely due to unzillowables, many of which, like market pool and local market conditions, may be in constant flux. A glut of golf course properties will render lower sales prices than the only one currently on the market. It has nothing to do with valuation (appraisal?) of the physical asset — it’s the market pool (supply) and desirability (demand). That’s why $10 snow shovels sell for $20 when a blizzard is coming and $5 in the middle of summer. Valuation is an indicator; price is a reality.

Consider the experts on “Antiques Roadshow.” They will give an opinion of value in fluid terms such as “at auction” (with the right buyers), for insurance purposes, or at retail (in the shop).

In real estate, any of those “values” may apply in a given scenario to affect, or indicate, a possible price. A quick example. During the boom in NYC a few years back, it was “auction value” affecting (not determining) the price, as we had to maneuver to outbid other offers, all over asking price to buy the home our client wanted. As seller’s agents we had to evaluate offers. Even more important than the offer price in many cases were other factors, like being able to close quickly or doing an all-cash deal (no mortgage contingency clause). To certain sellers, the certainty of a deal was worth more than the higher price. And what good would conceptual valuation have been to us? Had we gone to the seller and made an offer with a Zestimate, or even an appraisal, tucked under arms, we would have bought NO homes, nothing, nada thing. In such a market, the Zestimate, AND the appraisal, were worth zilch. So much for any “valuation,” whether crunched by a machine or made by a mob.

There is an Eastern saying, “Don’t mistake the finger pointing at the moon for the moon.” The finger is valuation; the moon is price.

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