Overpricing your listing can cause your property to sit on the market for months. How can you tell what the correct listing price is for your property?

Last week’s column looked at four of the most common mistakes that can cause sellers to overprice their property. Today’s column provides a case study that illustrates the steps you and/or your listing agent must take to properly set the correct price for your property.

If you’re like most sellers, you want to obtain the highest possible amount from your real estate sale. With the creation of online automated pricing tools such as those provided by HomeGain.com and Zillow.com (there are several others but we’ll use these as examples), many sellers have turned to these tools as a way to establish what their property is worth.

These tools can be a good place to start, but they can also be wildly inaccurate. For example, my current property valuation on Zillow is about 28 percent higher than what the property would sell for in this market. On a $400,000 sale, that would mean that my list price would be $112,000 too high.

To understand how to be more accurate about pricing your property, examine the following case study based on a 1,250-square-foot house situated on a 6,000-square-foot lot in California.

What do the online evaluation tools say the property is worth?

HomeGain’s value estimate ranges between $428,000 and $502,000, while Zillow estimates the value at $373,000. As a seller, I would love to get the $502,000. As a buyer, I would want to pay $373,000. Which number is correct?

For the property in this example, Zillow had 86 comparable sales that have closed in the last six months. The HomeGain site included 10, some of them dating back to 2007. Clearly, closed sales prices (also known as "comparable sales" or "comps") from 2007 are going to be substantially higher than sales from 2009.

The challenge is determining which set of numbers is the most accurate for this particular property. The first step is to make sure you have selected the most appropriate comparable sales. Is each of the comparable sales in the right area?

The property in this example has more value if it is south and west of the two major boulevards that divide the city. In this case, the closer the property is to the beach, the higher its value. …CONTINUED

The school district also makes a difference. For example, there’s an area in Los Angeles known as "Beverly Hills Post Office" (BHPO) that has a 90210 ZIP code. The students in BHPO attend the bottom-ranked Los Angeles Unified School District as opposed to the top-ranked Beverly Hills School District. Clearly, being in the better district dramatically increases property value.

A major mistake that both sellers and agents make is failing to follow the "10 Percent Rule." This means that the comparable sales that you use to price your property are equivalent in size to your property. Specifically, the square footage of the lot and the square footage of the improvements (structure) should be within 10 percent of the house being evaluated for sale. The 10 percent rule is important because you can drastically over- or underprice a property if you don’t follow it.

In general, the bigger the house is, the less you may get per square foot. If you compared the 1,250-square-foot house referenced above to a house that had 850 square feet, you would price the property too high. On the other hand, if you used price per square foot and compared it to a house that had 1,800 square feet, you would price the property too low.

When I went back through the comparable sales for the house in our example, only three of the 86 properties listed on Zillow met the 10 percent rule. The Zillow information had the price per square foot for these three comps at $385.72, $346.51 and $321.96. Taking the average of the three, the mean was $351.40 per square foot.

Since I have not seen the inside of the other properties, I don’t know if they are actually comparable on the inside. The house in the example was totally remodeled in 2007. The remodel included a new kitchen, new baths, new electrical, plumbing and sewer lines. So what’s the price of the property?

Using the three comps and averaging them, the price would be $439,246. Using the closest comparable sale in terms of square footage, the price would be $433,138. While it would be tempting to say that the best comparable sale would be the $351.40 per square foot ($482,150), this would probably be overpricing the property.

Buyers may be willing to pay more for a totally updated house, but it’s unlikely that they would pay $50,000 more in this price range. As much as I would like a higher price, the property will probably sell somewhere between $430,000 and $440,000. In this case, the Zillow estimated value may be low by $60,000 to $70,000.

As this example illustrates, correctly pricing your home can be complex. Using the price per square foot is a good starting place. Nevertheless, there are hundreds of other factors that will influence the price. There is no way that a computer can evaluate the desirability of the floor plan, the value of a full or partial view, or a host of other factors that influence the sales price.

This is the reason that it pays to use all the tools at your disposal. Check the online values, interview at least three experienced agents who work your area, and then decide once you have put together a comprehensive set of data from each of these sources.

Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author of "Real Estate Dough: Your Recipe for Real Estate Success" and other books. You can reach her at Bernice@RealEstateCoach.com and find her on Twitter: @bross.


What’s your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.

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