Your home's market value is directly related to distressed sales if those short sales and foreclosures dominate the neighborhood.
Prior to the real estate bubble of the mid-2000's, appraisers would often ignore the distressed sales when appraising a home. Since then, appraisers pay close attention to the number of distressed sales that have closed and those presently for sale. What's a regular seller with equity supposed to do to compete?
Pricing a Home With Equity Against Foreclosures and Short Sales
Pricing a home is at best a mix of facts, science and emotions. It's a combination of wearing a seller's hat and stepping into the buyer's shoes. Bear in mind that it doesn't matter much how much you think your home is worth if a buyer disagrees. Try answering these 3 questions:
- What would make a buyer buy your home over a foreclosure or a short sale?
- Why would a buyer's lender appraise your home for more than a foreclosure or short sale?
- How much more is your home worth than a distressed sale?
You might be surprised at the answers. The truth is your home is not worth a whole lot more than a foreclosure, even if you put in upgrades, if all the recent sales are foreclosures and short sales. Appraisers don't give a huge allowance for upgrades like they used to do.
Buyers want a good deal. They might buy a home that needs carpeting, for example, if adding the cost of new carpeting still makes that bank-owned home's price attractive. On the other hand, if your home, with equity, is in tip-top shape and priced within the range of distressed sales, a buyer is much more likely to choose your home.
However, say, a bank-owned home priced at $200,000 needs $10,000 worth of work or improvements. If your home doesn't need any work, a buyer might offer only $210,000 for your home.
Examine the Foreclosed and Short Sale Comparable Sales
- Look at every similar home that has sold in the neighborhood over the past three months to determine comparable sales. The list should contain homes within a 1/4 mile to a 1/2 mile and no further, unless there are only a handful of comps in the general vicinity or the property is rural.
- Pay attention to neighborhood dividing lines and physical barriers such as major streets, freeways or railroads, and do not compare inventory from the "other side of the tracks." Where I live in the Land Park neighborhood of Sacramento, for example, identical homes across the street from each other can vary by $100,000. Perceptions and desirability have value.
- Compare similar square footage, within 10% up or down from the subject property, if possible.
- Compare homes with similar ages. One neighborhood might consist of homes built in the 1950s, co-mingled with another ring of construction from the 1980s. Values between the two will differ. Compare apples to apples.
Tip: I suggest to my Sacramento clients that they price homes among distressed sales a little bit below market value. This tends to drive multiple offers as buyers outbid each other, resulting in a higher sales price for sellers.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.