Seattle Real Estate Blog by David Monroe

Overpricing - The Inaccurate Comparative Market Analysis

This is part 3 of 3 on pricing your house to sell. This may seem like a lot of information on one topic, but it’s critically important in our current market.

In the previous post, I covered several mistakes that people typically make when setting the asking price for their house. I would like to address one reason why a real estate agent may cause a seller to price their house incorrectly:

Inaccurate Comparative Market Analysis (CMA): Real estate agents typically prepare a CMA to help the seller determine the best asking price for their home based on their situation. The CMA will typically include other houses in the area that have sold or are currently for sale, some market statistics, information supporting the suggested asking price, and other information that will vary from agent to agent. Here are some errors that can lead to an inaccurate CMA:

  • Comparable sales too old: In a declining market, comparable sales shouldn’t be more than six months old, and three months is actually better. Just because a house sold for a particular price in February doesn’t mean it would sell for the same price in October. Also, if a comparable house sold four months ago and the market has declined 8% in those four months for that area (King County prices declined nearly 8% from September to January), the comparable price should be adjusted down 8%. Some seasonal adjustments can also be made, which could vary depending on the area.

  • Not putting the proper weight on active listings: In an appreciating market, agents could rely almost entirely on comparable sold properties when determining the market value and still be in the ballpark. However, in a changing market, properties currently listed for sale are the current “pulse” of the market. Comparable sales combined with active listings will give a very good pulse on what direction prices in the neighborhood are headed. For example, if we found three comparable houses in your neighborhood that each sold for $400,000, but two comparable houses on your block just went up for sale at $370,000, it’s safe to say that it could be very difficult to get $400,000 for your house, even though similar houses had recently sold for that amount. The active listings are going to be your competition.

  • Using comparables that aren’t really comparable: Since I’ve been using the term “comparable”, I should clarify what really qualifies as a comparable house. A comparable house is house that is the same style (split-entry, one-story, two-story, etc.), in the same neighborhood (or nearby similar neighborhood if there isn’t enough to work with in your neighborhood), in the same age generation (not comparing a house built in 1965 with a house built in 2007), within 15-20% of the living area size, preferably on a similar-sized lot and in similar condition. It’s easy to miss one or more of these requirements, like comparing a split-entry house with a one-story rambler, comparing basement living space with above-ground living space, or comparing a recently remodeled house with a 30-year old house that has never been updated. While it’s rare to find perfect comparable matches, getting as close as possible then making the appropriate value adjustments for size differences, effective age, condition, lot size, and other features is the generally the best practice for single-family homes.

  • Not making seasonal adjustments: In the Puget Sound region, home sales and prices have historically spiked in the spring, continued to rise at a slower rate through the summer, then flattened out or declined slightly through the end of the year. Since there are typically fewer home sales during the winter months, it could take longer to sell during the winter unless the house is priced more aggressively. Also, don’t automatically assume that you can price your house higher when spring time rolls around. In a normal market, that’s generally the case, but it depends on current market conditions.

  • Competing for the listing: Believe it or not, there are agents that will inflate the value of your house so you’ll list your house with them instead of another agent that estimated a lower value. The agent may even know that it won’t sell for the price they recommended, but once they’ve secured the listing, they figure they can have you reduce the price when you don’t see the expected amount of buyer activity. Beware of an agent that says they can sell your house for a higher price than another agent. While good marketing and agent negotiation skills are important and can help squeeze more money out of the sale when executed properly, if they don’t have a buyer already in place who is willing to pay the asking price, there’s no guarantee that they will be able to sell it for their suggested asking price.

Also, some agents will use a “phantom buyer” to try to secure a listing. They may tell you that they have a buyer that’s interested in purchasing your house, but you’ll have to sign a listing agreement before they can bring the buyer over. If you’re only signing a listing agreement to see if that buyer is for real and you’re not sure if you can trust the agent (maybe because you just met them), you can optionally put an listing expiration date of a couple days out (instead of six months that agent may suggest). If that buyer purchases your house within six months after the listing agreement expires, they would still be entitled to a commission since they procured the buyer.

The market will eventually recover, but if you’re selling your house now, you need to price it based on today’s market. You’ll hear a lot of predictions on when the market will recover, but in order for any market to recover, the underlying problem needs to be fixed first. The last time the Seattle market declined year-over-year was in the early 1980’s. The problem was high interest rates (peaking at over 18%). When the problem was fixed and interest rates went down, the market recovered.

Historically, the real estate market has gone through cycles. If you graph real estate appreciation and mortgage rates together, you’ll find that real estate appreciation generally goes the opposite direction of mortgage rates. When mortgage rates increase, real estate markets slow. When mortgage rates decrease, real estate markets pick up. This is one of the few times in history that mortgage rates are low and the real estate market is also down.

The current problem was caused largely by mortgage companies lending to buyers that were not qualified to buy, and by lenders offering loans that were ticking time bombs—with large interest rate or payment increases scheduled 2-5 years down the road. That created an artificial buyer’s pool and skyrocketing prices due to high demand for houses. There was a lot of mortgage fraud—sometimes committed by the lender or loan officer and sometimes by the borrower. Now many of those houses need to be sold because the owners can no longer afford them, but there are fewer buyers, so that puts downward pressure on prices. Houses sold under distress, like foreclosures, also push prices down. It may be some time before our market gets back to its equilibrium, but it will happen.

One final piece of advice: If you’re meeting with a listing agent and the agent recommends an asking price but you insist on a much higher asking price, and the agent declines the listing because your price is too high, they’re probably right. Real estate agents don’t make money by listing properties. They only make money when they sell properties. Many agents even seem to forget this. If they’re so sure that your house won’t sell at your price that they’re willing to walk away, perhaps they know something you don’t.

Real estate is one of the few industries where everyone thinks they’re an expert, even if they don’t work in the real estate field. There’s a lot of real estate information available on the Internet, on the news, and in newspapers. There are television shows on fixing houses, flipping houses, decorating houses, and shopping for houses. However, the real experts are the real estate professionals who are in the field every day, seeing and experiencing things that you can’t see on TV or in print.


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Authored by David Monroe, Realtor and Pre-Foreclosure and Short Sale Specialist.
Access Seattle area short sale help and foreclosure resources including selling in foreclosure, and 8 Ways to Avoid or Stop Foreclosure.

Copyright (c) 2009 by David Monroe (Home4Investment Team at Keller Williams Seattle Metro West).
Overpricing - The Inaccurate Comparative Market Analysis

Comment balloon 0 commentsDavid Monroe • March 05 2009 02:37PM

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