How does one determine the ideal listing price of a home? Exactly what is the listing price supposed to represent and how do you calculate it? One argument is that the listing price should be the fair market value (FMV). That’s a good answer if the market has been stable for a long time, and if comparable homes have been selling within a narrow range of values.
In a stable market, it’s likely that the calculation of a home’s FMV by all industry professionals will end up being very close. In other words, an appraiser, a tax assessor, a real estate listing broker, a real estate buyer’s broker, and the comparative market analysis (CMA) software used by professionals will all come up with values that are within a fairly tight range.
There are multiple ways to do the calculations. Appraisers will use two methods and then try to reconcile the results. One method is a CMA of several other homes that sold within a maximum radius as required by their underwriters, like a one mile radius in a populated area. The sale must have occurred within a recent period of time backwards, like in the last six months. Of course, they try to find sales of homes that are truly similar, meaning similar in acreage, square footage inside the home, number of bedrooms and bathrooms, architectural style, and the year built. An appraiser will also use the “cost replacement approach” by calculating the cost of building the house brand new.
The county tax assessor regularly does tax assessments, which is similar to what an appraiser does, but it is not nearly as hands-on. The tax assessor does not actually go inside homes. The assessor’s office used to do drive-bys, and they may still occasionally do that, but mostly they let the computers run 24/7 using artificial intelligence (AI) to run comparative market analysis on each home.
When a listing broker tries to come up with a listing price, he is relying on a CMA, so he will use his MLS to run a market analysis similar to the appraiser’s standards. Most MLS systems have software that will do this for their broker members. All of this analysis with comparable homes is not so difficult if you have enough home sales and enough similar homes.
But if you’re in an unstable real estate market, or turning from a market bottom or a market top, or the market is in a major move, then all efforts to determine FMV will be behind the data and unreliable. The volatility of prices and the bigger range of values will make calculating a FMV or good listing price much more difficult.
The truth is, unless you have a depth of knowledge and experience that brought you through many market cycles, you’re unlikely to know how to gauge where the current market is until after the fact, sometimes months after the fact. Commonly used market cycle indicators are lagging indicators. Sometimes a home seller gets lucky with a sale last week across the street of a home exactly like theirs, and that sales price would be a reliable indicator of value. More often a home is unique in some ways, whether it is the floor plan, or the quality of materials and fixtures, or the land and the view, or its location. That can make it impossible to find a similar home that sold recently in the same area.
Unfortunately, the vast majority of real estate brokers are not trained professionally as appraisers and have to do a lot of guessing to arrive at a recommended listing price for their clients. This is precisely why listing brokers can be so wrong about listing prices when a market turns from a top and begins declining.
Frankly, one of the most reliable ways to arrive at value is to pour through the MLS and find properties that are similar enough to be included in a CMA. Then you have to differentiate the comparable homes that sold from the subject property. A broker who knows how to do that well, and many do not, and who has a lot of experience will have a feel for whether a suggested listing price is high or low or within a reasonable range of FMV. It can be a disaster to over price a home, not so much when the market is running up and is super hot, but certainly when a market is in decline. In the later case, many home sellers and their listing brokers chase the market down as they repeatedly reduce the listing price just a little behind the market themselves. I’ve seen listing brokers chase the market down with a listing month after month until their client has left a lot of money on the table when they finally sell it way below from where they started a year earlier.
By the way, a common gimmick, or should we say “dishonest approach” to getting listings is to be the highest bidder. I’ve seen listing brokers do this over the decades, and it’s a simple approach to almost guaranteeing the broker can get more listings than any competing broker. Here’s how it works. A homeowner interviews three brokers who are desperate to list the home, and the one who confidently quotes the highest FMV typically gets the listing, even though he knows he cannot sell at that price and that they will have to lower the listing price possibly several times before it finally sells. But the home seller never figures any of this out, so they just list with the highest bidder, and then they reduce the price several times until it sells, never realizing they were snookered by a slick listing broker.
What I do with my flat fee listing clients is work together to figure out a realistic listing price. That involves a lot of work by me in the NWMLS searching and comparing other similar sales, and it involves you as the homeowner informing me of sales and listings in your neighborhood that you think are comparable. Together we arrive at what we mutually agree is a reasonable FMV and that means a reasonable sales price in the current market.