Knowing the difference among cost, price, and value
Determining your house’s resale value
Understanding a comparable market analysis
Finding out how real estate agent bidding wars ruin the pricing process
Step right up into the time machine, please. You’re about to be transported back to the day you began looking for your current home — the house hunt that culminated in the purchase of the home you now own. Ah, there you are, hesitantly wandering from one Sunday open house to the next with the classified ads in your hand and a puzzled look on your face.
When you first started your search, you didn’t have a clue about how much any of the houses you toured were worth. Do you remember how the asking prices were meaningless sequences of numbers to you? If, for example, you saw a house being offered at $274,950, you didn’t know whether it was a steal at that price or grossly overpriced. The experience you had is common. Everyone goes through that phase during the initial stage of the home-buying process.
A couple of months later you were confidently zipping in and out of open houses. You figured out property values by personally eyeballing as many houses as you could. Then you kept checking the status of the properties to see whether they’d sold and, if they had, at what price. You discovered that sale prices, not asking prices, establish a house’s value. Your hard work paid off. You became a market-savvy, educated buyer.
Okay, buckle up for your return to the present. How do you think things will change when you become a seller? Surprise. Where property values are concerned, the rules of the game are identical for buyers and sellers. Being an educated seller is just as important as being an educated buyer. You get educated exactly the same way — by touring houses comparable to yours that are currently for sale in your neighborhood.
Good news. You don’t have to spend every weekend between now and the sale of your house touring properties. If you choose to use the services of a good real estate agent, he can accelerate your learning curve by screening which houses you visit. After seeing no more than a dozen houses comparable to yours in size, age, condition, and location, you’ll be an educated seller. (You can spend the time you save gussying up your house for sale!) After you’ve made these tours, you can set a value on your own house, and this chapter aims to help you determine that price.
Defining Cost, Price, and Value
George Bernard Shaw is often credited with having wryly observed that England and the United States were two countries divided by a common language. Citizens of the two countries use the same words, but the words may have entirely different meanings in each country. For example, folks in Merry Old England buy bangers with pounds. “What an odd country,” Americans think. “They purchase hot dogs with weights?”
You don’t have to go all the way to England for a verbal joust. A similar breakdown in communication occurs here in the good ol’ USA whenever Americans use cost, price, and value interchangeably. This linguistic imprecision creates big problems during negotiations between homebuyers and house sellers.
The fact is: Neither cost nor price is the same as value. After you understand the meanings of these words and how they differ, you can say exactly what you mean and replace emotion with objectivity during price negotiations. Outfacting buyers is always better than attempting to outargue them.
Value is elusive
Value is your opinion of your house’s worth to you based on the way you use it now and plan to use it in the future. Note that, in the preceding sentence, the words your and you each appear twice. Because your opinion is subjective, the features you value may not be the universal standard for all of humanity.
You may, for example, be of the strongly held opinion that the one and only acceptable house color is beet red. Your neighbor may feel just as resolutely that only sky blue houses are gorgeous and all other colors are ugly. No harm done, as long as everyone realizes that a big difference exists between opinions and facts.
Two factors greatly affect value:
Internal factors: Your personal (internal) situation has a fascinating way of changing over time. Suppose that 30 years ago, when you bought your present house, you put great value on a four-bedroom home with a fenced-in backyard. The house had to be located in a town with a terrific school system. Why? Because 30 years ago, you were the proud parent of two adorable kids.
Now your children are grown and have their own homes. They left you rattling around in your house like a tiny pea in a gigantic pod. Without kids, you don’t need the big house, huge yard, or terrific school system. The house didn’t change — what changed were the internal factors regarding your use for the house and, thus, its value to you. Divorce and retirement are other examples of internal factors that compel folks to buy or sell houses.
External factors: Circumstances outside your control that can affect property values also change for better or worse. If, for example, commute time to the big city where you work is cut from 1 hour to 30 minutes when mass transit rail service is extended into your area, your house’s value increases. But if a toxic waste dump is discovered next to your house, the house’s value takes a hit.
The law of supply and demand is another external factor that affects value. If more people want to buy houses than sell them, buyer competition drives up house prices. If, on the other hand, more people want to sell than buy, reduced demand results in lower property prices.
Cost is history
Cost measures past expenditures — for example, the amount you originally paid for your house. But that was then, and this is now. The amount you paid long ago or the amount you spent fixing up the house after you bought it doesn’t mean a thing as far as your house’s present or future value is concerned.
For example, when home prices began skyrocketing in many areas of the country during the early 2000s, some buyers accused sellers of being greedy. “You paid $75,000 15 years ago. Now you’re asking $250,000,” they said. “That’s a huge profit.”
“So what?” sellers replied. “If you don’t want to pay our modest asking price, move out of the way so the nice buyers standing behind you can present their offers.” In a hot sellers’ market, people who base their offering prices on the original price paid for a property waste everyone’s time.
The market can change radically in a few short years. By 2008–09 in the midst of the Great Recession, prices had declined dramatically in many areas. Sellers would’ve been ecstatic to find buyers willing to pay them the amount they’d paid less than five years earlier when home prices peaked. In those areas, sellers who priced their houses based on the inflated purchase prices they’d paid years earlier learned a painful lesson: Your potential profit or loss as a seller doesn’t enter into the equation when determining your house’s present value.
Price is the here and now
You put an asking price on your house. Buyers put an offering price in their contract. You and the buyers negotiate back and forth to establish your house’s purchase price. Today’s purchase price becomes tomorrow’s cost, and so it goes.
Cost is the past, price is the present, and value (like beauty) is in the eyes of the beholder. Neither the price you paid for your house eons ago when you bought it nor the amount you want to get for it today matters to buyers. Don’t waste valuable time on fantasy pricing.
Determining Fair Market Value (FMV)
Every house sells at the right price. That price is defined as its fair market value (FMV) — the price a buyer will pay and a seller will accept for the house — given that neither buyer nor seller is under duress. Duress comes from life changes, such as divorce or sudden job transfer, which put either the buyers or sellers under pressure to perform quickly. If appraisers know that a sale was made under duress, they raise or lower the sale price accordingly to more accurately reflect the house’s true FMV.
FMV is a zillion times more powerful than plain old value. As a seller, you have an opinion about the amount your house is worth. Buyers have a separate, not necessarily equal, and probably lower, opinion of your house’s value. Values are opinions, not facts. FMV, conversely, is fact. It becomes fact the moment you and the buyer agree on a mutually acceptable price. Just as it takes two to tango, it takes you and a buyer to make FMV. Facts are bankable.
Need-based pricing isn’t FMV
Whenever the residential real estate market gets soft and squishy like a rotten tomato, many would-be sellers feel that FMV isn’t fair at all. “Why doesn’t our house sell?” they ask. “Why can’t we get our asking price? It’s not fair.”
Don’t confuse “fair” with equitable or favorable. Despite its amiable name, FMV is brutally impartial and sometimes even cruel. Need is not an integral component of FMV. FMV doesn’t give a hoot about any of the following:
How much money you need because you overpaid for your house when you bought it
How much money you need to replace the money you spent fixing up your house after you bought it
How much money you need to pay off your mortgage or home-equity loan
How much money you need from the sale to buy your next home
Here’s why need doesn’t determine FMV. Suppose two identical houses located right next door to one another are listed for sale at the same time. One house was purchased by Marcia for $30,000 in 1990. You made a $60,000 cash down payment when you bought the other house for $300,000 two years ago. As luck would have it, property values declined a year after you bought your house.
You clearly need more money from the sale than Marcia. After all, you paid ten times as much for your house. What’s more, Marcia paid off her loan five years ago. You, on the other hand, owe the bank big bucks on your mortgage.
Because the houses are identical in size, age, condition, and location, they have the same FMV. Under the circumstances, the fact that they both sold for $285,000 isn’t surprising. Marcia got a nice nest egg for her retirement. You barely cleared enough from the deal to pay off your mortgage and other expenses of sale. Fair? Marcia thinks so. You don’t.
FMV is utterly unbiased. It’s the amount your house is worth in the market today — not the amount you or the buyers would like it to be.
Median prices aren’t FMV
Organizations such as the National Association of Realtors, the Chamber of Commerce, and private research firms gather data on house sales activity in a specific geographic region, such as a city, county, or state. They use this information to prepare reports on housing topics, such as the average cost of houses in an area and the increase or decline in regional house sales on a yearly or monthly basis.
One of the most widely quoted housing statistics is the median sale price, which is simply the midpoint in a range of all house sales in an area during a specified reporting period, such as a month or a year. Half the sales during the reporting period are above the median, and half fall below it.
The median-priced house, in other words, is the one exactly in the middle of the prices of all the houses that sold during the specified reporting period. For example, the median sale price of an existing single-family house in the United States was about $265,000 in 2017 — meaning half the houses in the U.S. sold for more than $265,000 and the other half sold for less than $265,000. (In case you’re interested, the median sale price was just $118,000 in 1996 when the first edition of Home Buying Kit For Dummies went to press.) Unfortunately, all you know about this hypothetical median-priced American house is its price.
You don’t know how many bedrooms or baths the mythical median-priced house contains. Nor do you know how many square feet of interior living space the house offers, how old it is, whether it has a garage or a yard, or how well maintained it is. You don’t even know where in the United States this elusive median-priced house is located.
As a homeowner, you can use median sale price statistics to measure general property value trends. For example, suppose your local Chamber of Commerce says the median sale price of a house in your area was $200,000 five years ago when you bought your house, and it’s $240,000 today. Based on that information, you can safely say that median sale prices have increased 20 percent over the past five years.
Just because the median sale price of a house in your area went up 20 percent doesn’t mean the house you paid $250,000 for five years ago is worth $300,000 today. Median sale price statistics aren’t any more accurate for determining your house’s value than median income statistics are for calculating your paycheck.
You need much more precise information to establish the FMV of the house you’re about to sell.
Using a Comparable Market Analysis
The best way to accurately determine your house’s FMV is by using a written comparable market analysis (CMA) to see how your house compares to other houses like yours that have either sold recently or currently are on the market. If you hire a real estate agent to sell your house, you’ll likely get several CMAs during the selection process. You can use these CMAs to fine-tune your asking price.
The “Recent Sales” section of the CMA helps establish the FMV of your house by comparing it to all other houses that
Are located in the same or similar neighborhood as your house
Are of approximately the same age, size, and condition as your house
Have sold in the past six months
Houses meeting these criteria are called comps, short for comparables. Depending on the date you started looking at houses for sale in your neighborhood, you may not have visited all the sold comps. No problem. A good real estate agent can show you listing statements for the houses you haven’t seen, take you on a verbal tour of every house, and explain how each one compares with your house.
Every residential real estate office develops its own CMA format. Regardless of the way your agent’s office presents its CMA information, Tables 5-1 and 5-2 illustrate the elements that all good CMAs contain. Suppose you live at 220 Oak Street. These tables provide CMA information for your house (abbreviated as YH).
Slightly larger than YH, but nearly the same condition. Good comp. 1,850 square feet. $154 per square foot.
555 Ash
01/12
$282,500
3/2.5
2 car
Excellent
Smaller than YH, but knockout renovation. 1,740 square feet. $162 per square foot.
75 Birch
04/20
$293,000
3/3
3 car
Very good
Larger than YH, but location isn’t as good. Superb landscaping. 1,910 square feet. $153 per square foot.
TABLE 5-2 Sample CMA — “Currently For Sale” Section
Address
Date on Market
Asking Price
Bedrm/Bath
Parking
Condition
Remarks
220 Oak (Your House)
Not on market
To be determined
3/3
2 car
Very good
Quieter location than 123 Oak, good detailing, older kitchen. 1,880 square feet.
123 Oak
05/01
$299,500
3/2
2 car
Excellent
High-end rehabilitated and priced accordingly. 1,855 square feet. $161 per square foot.
360 Oak
02/10
$275,000
3/2
1 car
Fair
Kitchen & baths need work, no fireplace. 1,695 square feet. $162 per square foot.
140 Elm
04/01
$279,500
3/3
2 car
Good
Busy street, small rooms, small yard. 1,725 square feet. $162 per square foot.
505 Elm
1/15
$325,000
2/2
1 car
Fair
Delusions of grandeur. Grossly overpriced! 1,580 square feet. $206 per square foot.
104 Ash
04/17
$294,500
3/2.5
2 car
Very good
Best comp! Good floor plan, large rooms. Surprised it hasn’t sold. 1,860 square feet. $158 per square foot.
222 Ash
02/01
$319,500
3/2
1 car
Fair
Must have used 505 Elm as comp. Will never sell at this price. 1,610 square feet. $198 per square foot.
47 Birch
03/15
$319,000
4/3.5
2 car
Good
Nice house, but overimproved for neighborhood. 2,005 square feet. $159 per square foot.
111 Birch
04/25
$289,500
3/3
2 car
Very good
Gorgeous kitchen, no fireplace. 1,870 square feet. $155 per square foot.
When you analyze the sales in Table 5-1, you find that houses comparable to your house are selling in the range of $149 to $162 per square foot. Putting the sale prices into a price-per-square-foot format makes property comparisons much easier. As Table 5-2 shows, any price that’s way above or below the norm really leaps out at you.
The “Currently For Sale” section of the CMA compares your house to neighborhood comps that are currently on the market. These comps are included in the analysis to check price trends. If prices are falling, asking prices of houses on the market today will be lower than sale prices of comparable houses. If prices are rising, you’ll see higher asking prices today than sale prices for comps that sold three to six months ago.
Playing with the numbers
Suppose today’s date is May 15. You and your agent are sitting at the kitchen table looking at two sheets of paper. One page shows all the recent sales of comps in your neighborhood. The other lists houses comparable to yours that currently are on the market in your area. Each set of comps tells you something important.
“Sold” comps indicate probable FMV
Your agent says 210 Oak (refer to Table 5-1) is an ideal “sold” comp because it’s two doors away from your house, is roughly the same size as your house, and is in about the same condition as your house. Furthermore, no major changes have occurred in your local real estate market since 210 Oak sold two weeks ago for $155 per square foot. The only other recent sale at a higher price per square foot was 555 Ash, but that comp isn’t as good because the house is in better condition than your house (no offense).
Factually establishing your house’s probable sale price based on its square footage is easy after you know how. Multiply your house’s square footage by estimated FMV expressed in a price per square foot. In this case, because your house (220 Oak) has 1,880 square feet multiplied by $155 per square foot, it should sell for about $291,400. Simple.
“Currently For Sale” comps define asking price
You’ve toured every one of the comparable properties listed in the “Currently For Sale” section of your agent’s CMA. Having seen 104 Ash (refer to Table 5-2) with your own eyes, you agree that it’s more like your house than any other property now on the market in your area. Even so, it isn’t a perfect comp because 104 Ash is smaller than your house and has only two and a half baths versus three full baths in your house. You know enough about property values to realize that the house is priced to sell at $158 per square foot.
Even though 123 Oak and 360 Oak are closer to your house than 104 Ash, neither house is as good a comp as the Ash Street property. The house at 123 Oak is totally renovated, has a wonderful kitchen, and should sell for a higher price per square foot than your house. Whether they can get $161 per square foot remains to be seen. The house at 360 Oak, on the other hand, is smaller than your house, doesn’t show well, and has one less bath and a smaller garage. No way will 360 Oak sell for $162 per square foot.
All things considered, you decide to base your asking price on $158 per square foot. For one thing, that amount is the upper limit of the asking prices of comparable houses. The extra $3 per square foot over your house’s probable FMV gives you a little room to negotiate with buyers. Multiplying 1,880 square feet times $158 per square foot equals $297,040, which is an odd asking price. To make the asking price more exciting for prospective buyers, you round it down to an even $295,000.
This example is rather straightforward. Pricing in the real world, however, is usually somewhat complicated.
Give sale prices more weight than asking prices when determining your house’s asking price. Don’t guess about your house’s worth. Analyze the sale prices of comparable houses. Your CMA should note any price reductions made while the comps were on the market as well as the credits sellers gave buyers for corrective work repairs.
Interpreting CMA adjustments and flaws
CMAs beat the heck out of median price statistics for establishing FMV, but keep in mind that CMAs aren’t perfect. Buyers and sellers have used exactly the same comps and arrived at stunningly different opinions of FMV. Here’s where discrepancies can creep into your CMA:
Incomplete comps: Your CMA must be comprehensive. It should include all comp sales in the past six months and all comps currently on the market. Be sure the comp sales data reflects price reductions during the marketing period and credits given for corrective work repairs. Getting an accurate picture of FMV may be difficult if parts of the puzzle are missing.
Old comps: Like milk in your refrigerator, comps have expiration dates. Lenders rarely accept as comps houses that sold more than six months ago, because their sale prices don’t reflect current consumer confidence, business conditions, or mortgage rates. As a rule, the older the comp, the less likely that it represents today’s FMV.
Why six months? Because six months generally is accepted as long enough to represent a good cross section of comparable sales, but short enough to have fairly consistent market conditions. This time period, however, isn’t carved in stone. If, for example, the biggest employer in your area had a massive layoff three months ago, six months is too long for a valid comparison. Conversely, if houses in your area rarely sell, you’ll probably have to use comparable sales that occurred more than six months ago.
House condition: No two homes are the same after they’ve been lived in. Suppose two identical tract homes are located next door to one another. One, owned by an older couple with no children or pets, is in pristine condition. The other, owned by a family with five small kids and three large dogs, resembles a federal disaster area. It’s Guesstimate City when trying to determine the cost to repair the wear-and-tear damage in the second house. A good CMA, however, makes adjustments for this type of difference between houses.
Site differences within your neighborhood: Even though all the comps are in the same neighborhood, they aren’t located on precisely the same plot of ground. How much is being located next to the beautiful park worth to a buyer? How much will a buyer pay to be seven blocks closer to the bus stop during the rainy season? These value adjustments are subjective and, thus, imprecise.
Out-of-neighborhood comps: Suppose that, in the past six months, no houses sold in your neighborhood. Going into other areas to find comps forces you and your agent to make value adjustments between two different neighborhoods’ amenities (schools, shopping, transportation, and so on). Comparing different neighborhoods is a lot more difficult than making value adjustments within your neighborhood.
Noncomp house sales: What if five houses sold in your neighborhood in the past six months but not one was remotely comparable to yours in age, size, style, or condition? You and your agent must estimate value differences for three-bedroom versus four-bedroom houses, old versus new kitchens, small versus large yards, garages versus carports, and so on. If your house offers a panoramic view and none of the other houses have any view at all, how much does the view increase your house’s value? Guesstimates like these are highly subjective.
A valid comparison of your house to the other houses is impossible if you and your agent have only read about the comps in listing statements. Seeing is believing. Most listing statements (one-page property descriptions) are exaggerated to greater or lesser degrees. You don’t know how overstated if you haven’t seen the house for yourself. You may discover that a “large” master bedroom is tiny. A “gourmet” kitchen’s only distinction may be an especially fancy hot plate. That “sweeping” view from the living room may be visible only if you’re as tall as LeBron James. Of course, you won’t know any of these things if you only read the houses’ puff sheets instead of visiting each house in person.
Floor plans also greatly affect a house’s value. Two houses, for example, may be approximately the same size, age, and condition yet vary wildly in value. One house’s floor plan flows beautifully from room to room; the rooms themselves are well proportioned with high ceilings. The other house doesn’t work well because its floor plan is choppy and the ceilings are low. You can’t tell which is which just by reading the two listing statements.
Eyeballing — touring houses and noting important details inside and out — is the best way to decide which houses are true comps for your house and which differences you must adjust for in your comparable analysis. Regard with a certain degree of skepticism any written description of a house written by someone else. Check it out yourself.
Considering appraisals versus CMAs
If you’re the suspicious type, you may want to double-check your agent’s opinion of value before putting your house on the market. You can do so by paying several hundred dollars for a professional appraisal of your house.
Getting an unbiased second opinion of value is always reassuring. Appraisers, unlike agents, have no reason to tell you what you want to hear to get a listing. Whether your house sells or not, an appraiser gets paid. On the other hand, if you think a professional appraisal is vastly superior to your agent’s opinion of value, think again. A good agent’s CMA usually is as good as an appraisal for purposes of marketing your house. Conversely, if a professional appraisal is vastly superior because your agent is a lousy judge of property values, get a better agent.
In any given area, appraisers don’t usually see as many houses as do agents who focus on that area. Appraisers aren’t lazy; they use their time in other ways. Formal appraisals are time-consuming. An appraiser inspects a property from foundation to attic, measures its square footage, makes detailed notes regarding everything from the quality of construction to the amount of wear and tear, photographs the house inside and out, photographs comps for the house being appraised, writes up the appraisal, and so on. Agents can tour 15 to 20 houses in the same amount of time an appraiser requires to do one appraisal.
As a result, appraisers frequently call agents to find out about houses the agents listed or sold that may be comps. Regardless of how good an agent’s description of the house, eyeballing property is better. Any appraisal’s accuracy suffers if the appraisal is based on comps the appraiser hasn’t seen.
Agents also call each other about houses they haven’t seen, so don’t jump to the conclusion that appraisers are the only ones who do such things. Reading listing statements and picking other agents’ brains to find out about property is no substitute for firsthand eyeballing. If your agent hasn’t seen most of the comps used in your CMA, get an agent who knows your local market.
Unless you’re pretty darn uncertain about your house’s worth or are considering selling your house yourself, don’t waste money on an appraisal.
Bidding Wars
In a perfect world, buyers and sellers would use only facts to establish property values, and sales would be fast and easy. Unfortunately, the world is far from perfect. The following sections provide two reasons.
How buyers and sellers get to FMV
Buyers and sellers zero in on a house’s FMV from utterly different directions. Buyers bring their offering price up to FMV because they don’t want to overpay. Sellers, conversely, ratchet their asking price down to FMV because they don’t want to leave any of their profit on the table.
Even though sellers and buyers approach FMV from opposite directions, note that they end up at exactly the same place. That result is no surprise. If you and the buyers rely on the same data — the asking prices and sale prices of comparable houses — to determine FMV, you’re bound to reach the same conclusion sooner or later.
Why “buying a listing” ruins property pricing
One crucial aspect of selling a house is correctly establishing its initial asking price. If a seller prices a house near its FMV, the house usually sells quickly for top dollar. If, on the other hand, a seller grossly overprices a property, it tends to linger on the market month after month until the owner corrects the problem.
Why would you be tempted to overprice your house? Because an unprincipled real estate agent takes advantage of your legitimate concern about underpricing your property, or, perhaps, the agent just wants to exploit your greed. A bidding war develops among the agents who’re competing to list your house for sale. The first victim of this bidding war is, unfortunately, the concept of FMV. Here’s what happens:
“Thanks for giving me a chance to represent you during the sale of your handsome house,” says Tommy Truthful, an agent from Honest Realty. “As you can see from the CMA I prepared today, 142 houses sold in your neighborhood during the past six months. Two are considerably larger than yours, so they aren’t good comps. The 140 properties comparable to your house in size, age, location, and condition sold in a price range of $225,000 to $227,500. Based on this astonishing abundance of undeniable, irrefutable, incontestable, indisputable, incontrovertible, unquestionable facts, I recommend an initial asking price of not more than $229,500.”
“Wait just a second,” cautions Sally Slick from Aim to Please Realty. “You may be leaving money on the table if your asking price is $229,500. Comps aren’t everything. Your chimney is made of better quality bricks than any of those other 140 houses’ chimneys. Even more important, not one of the 140 houses has an ostrich-sized birdbath in its front yard. These special features, in my humble opinion, are easily worth an additional $20,000. I recommend that you ask $249,500.”
“Facts, schmacts,” oozes Otto Outrageous from Sky High Realty, who figures he won’t get your listing unless he outbids the other two agents. “I think $249,500 isn’t even close to what you should ask. We’ll feature your house on our web page linked to our affiliate offices in Paris, London, Rome, and Nome. Massive exposure is the key to maximizing your sale price. I’m sure that if we look long enough and hard enough, we can find a buyer in some secret nook of this vast planet who’ll pay $275,000 for your wonderful house.”
This deceptive approach — when several agents give a seller increasingly outrageous opinions of a house’s value — is called buying a listing. Agents who use this ploy think the best way to get listings is to tell sellers what they want to hear — that their house is unique and is worth way, way, waaaaaaaaaaay more than any comparable house. Greed conquers reason.
This ruse may be a successful tactic for getting listings, but it’s a rotten way to sell them. Property owners who succumb to fantasy pricing are condemned to waste their time until they finally return to real-world economics. These misguided homeowners confuse the act of listing a house with the act of selling it. Unless their listing agent intends to buy the house, the owners and agent are playing an expensive game of Let’s Pretend.
The price you and your listing agent agree on doesn’t really matter. Until you find a buyer who agrees with you, your house won’t sell. Resist the temptation to base your asking price on
The amount that you want your house to be worth
The amount you need to receive from the sale to be able to buy your dream home
Let the comps tell you the price your house is worth. Unlike unscrupulous agents, comps don’t lie.
Knowing the difference among cost, price, and value
Good news. You don’t have to spend every weekend between now and the sale of your house touring properties. If you choose to use the services of a good real estate agent, he can accelerate your learning curve by screening which houses you visit. After seeing no more than a dozen houses comparable to yours in size, age, condition, and location, you’ll be an educated seller. (You can spend the time you save gussying up your house for sale!) After you’ve made these tours, you can set a value on your own house, and this chapter aims to help you determine that price.
Cost is the past, price is the present, and value (like beauty) is in the eyes of the beholder. Neither the price you paid for your house eons ago when you bought it nor the amount you want to get for it today matters to buyers. Don’t waste valuable time on fantasy pricing.
Why six months? Because six months generally is accepted as long enough to represent a good cross section of comparable sales, but short enough to have fairly consistent market conditions. This time period, however, isn’t carved in stone. If, for example, the biggest employer in your area had a massive layoff three months ago, six months is too long for a valid comparison. Conversely, if houses in your area rarely sell, you’ll probably have to use comparable sales that occurred more than six months ago.
A valid comparison of your house to the other houses is impossible if you and your agent have only read about the comps in listing statements. Seeing is believing. Most listing statements (one-page property descriptions) are exaggerated to greater or lesser degrees. You don’t know how overstated if you haven’t seen the house for yourself. You may discover that a “large” master bedroom is tiny. A “gourmet” kitchen’s only distinction may be an especially fancy hot plate. That “sweeping” view from the living room may be visible only if you’re as tall as LeBron James. Of course, you won’t know any of these things if you only read the houses’ puff sheets instead of visiting each house in person.