price home

Pricing a Home Correctly

Pricing a home is more complicated than simply comparing the list price to the sales price. Clients often ask me how much they should pay for a home, and I tell them, “It depends on how much it’s worth!” For example, if a house is listed at $450,000 and you get it at $400,000 that may seem like a good deal…but not if the market data says it’s only worth $350,000. (I’m using large numbers here to make the point.) Similarly, if a house is listed at $450,000 and you get it for $450,000, but the market data says it’s actually worth $500,000…then you got a  good deal, even though you paid “full price.” See what I mean? 

By the way…that new home specialist at the builder’s model home you like will tell you that the $440K model home was originally listed at $520K…sounds like a great deal, right? But they won’t tell you that the last five homes they sold, with that exact floorplan, had an average sales price of $400K. But I will! I’m looking out for you…not the builder.


Home Value Is Not About Price Per Square Foot

Pricing a home is complicated because real estate market data is changing every month…so home values are changing every month as well. In addition, there is not one price/sf price for an entire neighborhood. Smaller homes in the same neighborhood will typically have a higher price/sf than larger homes in the same neighborhood. Homes with swimming pools and waterview lots are generally worth more in the same neighborhood than homes that don’t have those features. Three-car garage homes are worth more than two-car garage homes in the same neighborhood.

Pricing a home correctly is complicated…you can’t just work off of averages or price/sf. There is no “Kelly Blue Book” value for homes! When determining the value of a home, you should compare at least three recently Sold price (not asking prices) for homes that are comparable to the house you want. Comparable means the houses are all within the same size-range (+/- 300sf), have a similar number of bedrooms and bathroom, have similar garage sizes, have similar types of amenities and lot types, etc. Usually you will not find three homes that are exactly the same as the subject property, so adjustments must be made to the prices, and then the adjusted prices are averaged out. This gives you a good idea of a home’s current market value. See the example below.


By the way, cosmetic items such as granite counter tops, hardwood floors, updated light fixtures, special colors of paint…those items do not add value to a home. Appraisers do not make adjustments for cosmetic items. Other items that buyers like, such as a new roof, new HVAC system, beautiful landscaping…those types of items are rarely adjusted either because appraisers (and buyers) expect the home to have a good roof and working HVAC system. Those items may help a home sell faster, but they do not usually add value on an appraiser’s report.



New Construction Homes Cost More Than Comparable Resale Homes

New construction homes in a neighborhood make pricing a home correctly more challenging. Technically speaking, investing in a home is very different from investing in an automobile. Homes and real estate are generally “appreciating assets” while cars are generally “depreciating assets.” However, trust me when I tell you that no home buyer on the planet is going to pay the same price for a “used” one-year old home when they can buy a “fresh,” brand-new, never lived in home…where they get to choose all the finishes (paint colors, floors, counter tops, cabinets, etc.). Buyers like that “new home smell” just the same as they like that “new car smell.” And they are willing to pay a premium for the “new home smell” just like they are willing to pay a premium for the “new car smell.”

We all know a car loses value the minute you drive it off the car lot. Likewise, that a new construction home typically loses its value (at least in the short run) the minute that you move in. So do not compare new construction prices with a resale home prices when determining value.

And be prepared to sell your home for less than you paid for it if you bought it from a builder…at least until the builders move out of the neighborhood (and no new construction homes are available) or at least five years (or more) have passed since you bought it from the builder. It is almost impossible to compete on price with home builders when you are selling a resale home. They offer lots of “buyer incentives” to entice buyers to purchase…and they can offer a buyer something you can’t…a never-lived-in-home.

It can be hard to determine what new construction homes are selling for because builders do not always list them on the MLS. Since Texas is a non-disclose state, home builders can sell homes without ever reporting them to the MLS. This often conceals the fact that homes lose value after they are purchased by a builder. 

I know that some home sellers think their home is “better than new” because they have done this and that to the home. Home sellers like to price a home based on new construction home prices. But just like a used car, a used home is not usually worth as much to a buyer as a new construction home. 


Home Should Appraise for Sales Value

If you are like most home buyers, you are going to get a loan in order to buy a home. That means the lender’s appraiser is going to have a say in how much you can pay for a home. This is something that home buyers and sellers have to be reminded about. It really doesn’t matter if you are willing to pay $450,000 for a house if the lender’s appraiser says it’s only worth $420,000…unless you want to pay the $30,000 difference at Closing.

Remember that a lender is making an investment in you and your home when they loan you money to buy a house. They want to make sure the home is a good investment. They don’t want to invest more than the item is worth. Always keep this in mind when you are applying for a loan.

Always make sure you have a way to get out of the deal if the home doesn’t appraise for the sales price. That will give you leverage to renegotiate the price if the appraisal comes in too low. If you have a back-out addendum in place, and the appraisal comes in too low, then you have four options:

  1. Get the Seller to come down in price to the appraised value
  2. Meet the Seller somewhere in-between the sales price and the appraisal price (but you will have to pay your share of the difference at Closing)
  3. Pay the difference between the sales price and the appraisal value at Closing…on top of your other down payment and Closing costs
  4. Back out of the deal (but then you will not get back all the money you spend on inspections, appraisal, etc.)

Some people think they will be able to terminate a transaction if the appraisal comes in too low because they believe a lender will not approve the loan in that case. This is not, necessarily, true. If you have enough cash on hand to pay the difference, then the lender may still approve the loan.


Price Analysis

Pricing a home based on the “tax rolls” and tax appraised values does not work in Texas. Tax appraised values are usually not accurate for market value in this state. Plus, Texas is a non-disclose state and only members of the MLS have actual sales data. And even Zillow only gives themselves 1-star on their Zestimate’s accuracy (see here). 

zestimates not accurate

There is a method for doing a proper Comparative Market Analysis for a home that is similar to how a lender’s appraiser is going to determine a home’s value. Hire an experienced agent who knows what they are doing!

As your Buyer’s Agent, when you find a home you want to make an offer on, I do a complete CMA (Comparative Market Analysis) and provide you with the data that I have, to determine the realistic and accurate price for a home. This method is similar to how lender’s appraisers value a home. That way you don’t find yourself wasting a lot of time on a home that will not appraise for sales price.

Read more about “Buyer’s Agents”: The Agent Showing You Houses May Not Be Your Agent


Negotiating Price When It’s Too High

Often times a home is listed at a price that is considerably more than the CMA value. For example, a home that just hit the market may be listed at $550,000 and the CMA, which is based on comparable homes SOLD in the past six months) says it is only worth $500,000. But you, the Buyer, really want the house. What do you do? Well…

Neither the Buyer’s Agent or the Listing Agent can make a seller accept your reasonable offer. And if the house just hit the market, then it’s possible that the seller hasn’t “come to their senses” yet. Sometimes it takes time for a home seller to see that their home isn’t worth what they want for it. If the house sits on the market for months, then sellers either decide to lower the price (hopefully) or they take the home off the market, because they find out they can’t get what they want for it at the current time. (So they will wait.)

I have seen it time and again where a Buyer’s Agent shows the Listing Agent their data for the $500,000 offer and it doesn’t matter…until months go by. Then, eventually, the Seller finally sells the home at the price you offered (or lower)…after letting it sit on the market for 6 months. It is often the case that only TIME can motivate a seller to accept a reasonable offer.

So what do you do if you really want a house that is overpriced? 

  • Do you have time to wait? If so, give it a month or two and hope that another buyer doesn’t beat you to it. If you don’t have time to wait, then move on and find another home.
  • Pay the higher price. Sometimes it is worth paying more for a house to get what you want, when you want it. And besides…paying a higher price helps raise the prices in the neighborhood…thereby increasing the value of your investment.
  • Take a risk and offer the price the seller will accept while hoping the appraisal will come in low so you can renegotiate. Use the lender’s appraisal as your “checks and balances” for the price. This strategy can only work if you have the right to back out of the transaction if the appraisal comes in low. 

Sometimes an appraisal comes in much higher than what a Buyer’s Agent thinks the house will appraise for. This may be because the market has changed in the 4-6 weeks between the time the agent did the CMA and the time the appraisal is done..and more homes sold in that time. Or sometimes it seems that appraisers choose odd “Comparables” to make the appraisal come in higher (or lower). You just never know what a lender’s appraiser will do when valuing a home.


Negotiating Tips for Buyers

Here are some tips to help with negotiations:

  • Don’t let yourself “fall in love” with a house, making detailed plans for remodeling and decorating, before you have an executed contract. If you are emotionally attached to the home, then it will be harder for you to walk away from an over-priced home.
  • Don’t expect to get a seller to go down substantially in price when the house has only been on the market for a few weeks. Be willing to pay a reasonable price instead of getting a “killer deal” on a house that just hit the market.
  • Don’t low-ball a house in a HOT market when you may get in a competitive situation with other buyers. Be willing to pay a reasonable price (or slightly more) because other buyers will be willing to do so.

There is a funny saying in real estate: “You can’t fix stupid.” That’s just an irreverent way of saying that your Buyer’s Agent can’t prevent other buyers from overpaying for a home. Cash buyers commonly pay way too much for a home because they don’t have a lender’s appraisal holding them back. And you don’t know what the other buyer’s circumstances and motivation are…maybe they are too desperate to be conservative about price.

  • Always consider your “next best alternative” when making pricing decisions. If you are desperate to get a home because you have to move in six weeks, and you have been looking for several months without finding anything else that you like, then be willing to pay more to get what you want. Likewise, if you are not being forced to move in a short-time frame, or you have seen lots of other homes that you like, then you can be “stricter” with the price you pay for a house.
  • Do not take the CMA value of a home and then subtract from it all the cosmetic changes (paint, flooring, landscaping, pool, etc.) that you want to make to the home. It doesn’t work that way. Cosmetic items do not, generally, effect the value/price of a home. 
  • Remember that both CMAs and Appraisals are opinions of market value. If you have three different appraisers do an appraisal on the same home at the same time, you will probably end up with three, different values. 
  • Always remember that the price you pay effects the prices in the neighborhood where you are buying and investing. Driving too hard a bargain on your future home can have a negative impact on your home’s value too.


Beware of Internet Real Estate Statistics

The bottom line: No one knows an area better than a local, experienced real estate agent. Don’t gamble your biggest investment on automated Internet data.

It’s Not All About the ZIP Code…Or Shouldn’t Be

I love the Internet and I’m an information junkie, but I am constantly amazed at how WRONG the real estate info presented on the internet is for my area: Sugar Land TX. Sugar Land is a large city (population 85,000+) located in in Fort Bend County, just southwest of Houston TX. Like all cities of its size…some parts are very different than other parts…it is not completely homogeneous. Furthermore, it consists of multiple ZIP Codes: mainly 77478 and 77479 but new comers, 77487 and 77496, have been added. And, Sugar Land is adjacent to Missouri City, Stafford, Houston, and Richmond as well. So you can live is the Sugar Land area but technically have a Missouri City or even Houston address.

What really “bugs” me about the data available on the Internet is that most websites use ZIP Codes to determine demographics and “city data.” But you can’t do that accurately in Sugar Land since it has multiple ZIP Codes. And to complicate matters, Sugar Land is divided into multiple master planned neighborhoods and each of those may be split into multiple subdivisions. For example, First Colony consists of over 100 subdivisions, New Territory over 40 subdivisions, Greatwood and Riverstone are also divided into multiple (over 20 each) subdivisions. So you can have multiple neighborhoods and subdivisions within the same ZIP Code, but let me assure you that the demographics and average income for homes in Sweetwater is drastically different than those in Settlers Park (two subdivisions in the same ZIP Code).

Here are some examples that “bug” me…

At the time the above data was posted on the Internet, I checked the Multiple Listing Service (MLS) database which reported a median list price at $329,000…not $349,440 (as shown above). And besides that…I assure you that we have many subdivisions in Sugar Land where you can purchase a home for much less than that price! Or much more! So what’s the point of this information? And the “median” for 77478 is probably not accurate for a specific home in a specific subdivision.

From MLS

NOTE: Home prices are a constantly moving target…even within the same subdivision. The averages, medians, and such change monthly…depending on current market activity. You have to evaluate the value of a home at the time you are making a purchase. (Which is one of the main services that a real estate agent should provide.) Home appraisals are professional opinions only and are typically only considered accurate for six months.

Neighborhoods Need to Be Properly Defined

At least NeighborhoodScout is trying to look at the neighborhood level (see below)…but they fail miserably. The sections they have segmented are not actual Sugar Land neighborhoods…some sections contain multiple neighborhoods…so the data can’t be applicable for a specific home or subdivision. For example, if you click the area that is supposed to be for Telfair, you will see it includes part of First Colony and those subdivisions are zoned to different schools than Telfair. (And trust me when I tell you that schools are one of the most important variables in determining home values in our area!)

Inaccurate Data Misleads People

Here’s my least favorite source of data (city-data)…notice they report only 9 registered sex offenders in all of 77479. We wish!

FamilyWatchDog reports and maps 64 (unfortunately)!

I REALLY don’t like most of the info on city-data because it reports information from any unknowledgeable “joe” who wants to put it up there. For example, I searched for “telfair sugar land demographics” on Google and the top entry was a city-data thread. In it, various and misleading demographics were reported…

  Not accurate at all!


FBISD also consists of Houston addresses…not at all accurate stats for Sugar Land.

I think the City of Sugar Land has the best info on actual demographics for the city…they are getting it from the census data.

Each Neighborhood and Subdivision is Unique

As mentioned, each Sugar Land neighborhood may be zoned to multiple schools…depending on how large it is. For example, New Territory is zoned to two different high schools…one a highly rated and popular high school, the other, not so much. So if you want to live in New Territory and be zoned to the best schools, you will have to focus on the east side of Grand Parkway, and not the west side. But only a real estate agent can perform filtered searches that are complicated enough to search that way for home buyers (saving them time and frustration).

The hard fact is that you can’t really get accurate census type data at the neighborhood or subdivision level. Relying on the data for an entire ZIP Code in our area may be very misleading when it comes to the neighbors you will eventually live next to. The best alternative is to look at the demographics for the Sugar Land schools to which a home is zoned.

Only an Experienced Local Real Estate Agent Can Narrow and Focus Your Search

So if you are a home buyer in the Sugar Land area, you really need the guided expertise of a local real estate agent you can trust to help you buy a home in the RIGHT neighborhood at the RIGHT price. No online searches available to the general public–including, Trulia, Zillow,–none of them will allow you to do the complicated and focused searches that a real estate agent can perform. Today (October 15, 2013) there are approximately 325 active listings in Sugar Land reported on the MLS. Do you want to sort through all of them or do you want to focus on the top 20 that most closely match your requirements? And maybe you want to live in the Sugar Land area, but a Houston or Missouri City address will do.

Most Online Real Estate Pricing Data is Not Entirely Accurate and Should Not Be Relied Upon

Let me add that Texas is one of 14 non-disclose states. That means that real estate data is not public information…so the online companies like Zillow and Trulia don’t have access to real data. They use tax appraisal values which are usually lower than actual home values. So don’t rely on them! And since online companies can’t get the real MLS data, they report erroneous information. Here’s an example…

Here’s the data reported on Redfin on October 15, 2013…which says it is for the last 90 days and focused on one of our most popular neighborhoods: Telfair.

I ran the sales history on the MLS for the last 90 days, and got the following data. 
The top box is for Active Listings and the bottom box is for Sold properties.

So let’s look at the differences…

  Redfin Reported MLS Reported
Median List Price $502,946 $507,440
Median $/Sq Ft $143 List = $143.68 but 
Sold = $133.28!
Median Sale/List 96.5% 97%
Avg # Offers 1.0 No way to know!
Avg Down Payment 20% No way to know!
# Sold Homes 48 54

My first complaint is that two reported variables are almost impossible to determine: Avg # Offers and Avg Down Payment.Agents do not report the number of offers on a home. They only have to report an offer when it is accepted and goes “Option Pending” or “Pending” (and sometimes they don’t even do that.) So that variable is completely unreliable and shouldn’t be reported at all.

The Avg Down Payment bothers me too. Agents are supposed to report that number at Closing (when a house sells), but you would have to look at every single transaction (54 over the past 90 days) to record those numbers. I don’t see how Redfin could automate that for every neighborhood…so I don’t trust that number either.

Notice the Median List Price is off by $4,500 and the # Sold Homes is off by 12.5 percent. Also, they report the Median $/SqFt for List Price only…but notice that the SOLD SalesPrice$/SqFt is $10.40 less! So if a buyer used the number Redfin reported to price a 3000sf home, that could have led to the buyer overpaying by $31,200!

NOTE: It really doesn’t matter what the median list price is for a neighborhood…only the sales price should be used to price a home you want to purchase.

And then that gets me into a price discussion which is too complicated to address here. But let me point out that this the median SalesPrice/SqFt and the house you may want to buy could be an above-average home or a below-average home. Do you want to pay the average price for a below-average home? Do you think a seller will accept an average price for an above-average home? The best way to get an accurate view of the value of a specific home at a certain time is to hire a professional appraiser or to engage a really good real estate agent. Not all real estate agents are good at pricing homes…you need a PRO!