The seller can put a price on the home but the value is ultimately, determined by the buyer. Individually, a buyer could pay over market value because they love the location or the elevation of the home or the proximity to something that is important to them. The shortage of available homes resulting in increased competition among buyers could drive the value higher.
Most experts agree initially pricing it properly will generally result in the highest sales price. If a home starts out too high, it could actually sell for a lower price after it has been on the market for a while. It gives the impression that there must be something “wrong” with the house because it didn’t sell immediately.
There are three common sources for a seller to determine market value: an appraisal, a broker price opinion or an automated value model found online.
AVM, automated value models, are mathematical estimates that analyze limited public record data to determine a value. While this process can easily compare square footage, age, the number of bedrooms as objective data, it is much more challenging to make adjustments for subjective data like appeal, quality of construction, floorplan, and updating. Zillow Zestimates are the most common AVMs but there are many others providing similar services.
Appraisals can only be made by a licensed appraiser. Most mortgages require an appraisal as part of the underwriting process to verify that there is ample collateral to secure the mortgage in case of default by the borrower. FHA, VA, FNMA, Freddie Mac, and USDA as well as most private lenders require an appraisal, especially for high loan-to-value mortgages. In some situations where the risk is lower, some lenders may use an AVM.
An appraisal requires the appraiser to visit the property, perform a visual inspection, analyze the property considering three approaches to value, and accurately report the property information that is verifiable.
Broker Price Opinion, BPO, as the name indicates, is a price opinion on a property made by a licensed real estate agent. The determination of whether the estimate accurately reflects the market will depend on the experience of the agent with that type of property and market area. It is possible that a BPO could be more sensitive to the actual market because it will consider homes currently for sale and recently expired properties as well as comparable sales.
While all three methods, used recent, comparable sales to arrive at a value, the appraiser and the real estate professional can make a series of adjustments for the differences in the comparables. While the appraiser is highly trained in this technique, the real estate professional also adds credibility to this process based on their experience in how the buying public might react to specific features and the home in general including positive and negative influences.
Current condition of the property is very important for a number of reasons. In some price ranges, a buyer may only have the necessary down payment and closing costs but is not able to make improvements like paint, floor coverings, appliances or other major items. In this situation, a buyer would have to live with the house in its current condition until they could afford to make wanted improvements.
Investors may not be deterred by making an additional investment in the home after purchasing it but will probably be motivated to do so only if it will increase the potential profit to be made.
An AVM can be a tool that a homeowner, prospective buyer, mortgage officer, appraiser or real estate agent can use to get a quick idea of price but there are inherent limitations that can only be considered by personal examination balanced with experience in the market place.