A market evaluation is an analysis of the real estate market that a piece of property belongs to. Market evaluations are done to determine the value of a particular property (known as the subject property) – usually for the reasons of buying or selling real estate. Market evaluations are done with a specific area in mind, over a certain period of time and often other factors used to narrow down properties to compare to the subject property.
Market Value And The Listing Price
The listing price is a key component of the valuation and sale of a property in the marketplace. The closer the list price to market value, the more likely that a higher sale price will be realized within a reasonable period of time. A list price at or close to market value will attract the most number of serious buyers. A heightened demand will usually translate into a higher selling price.
Simply put, a buyer, upon seeing a well priced property, will become anxious to make a good offer before anyone else realizes the property’s excellent value. As a result, it will be the seller and not the buyer who will be able to negotiate from a position of strength. Therefore, under normal circumstances, it is very likely that the buyer will pay top price to get the property before anyone else does.
While there are no absolutes concerning listing prices, it is generally recommended that the list price be no more than 2 to 3% above the estimated value or value range. If the estimated value is $405,000, then perhaps a list price of $409,900 should be recommended. Of course you should also look at your competition in determining the proper listing price.
Often, sellers misunderstand the process of determining a listing price. You can often hear them say, “Lets list the property 10% higher just in case we get lucky or we need to list the property 10% higher to leave room for negotiations.” In both cases, a listing price 10% higher than the market value could very well be overpricing the seller’s property. If the list price is indeed too high, then the seller’s property will probably be eliminated by the serious buyer’s who otherwise would have considered buying it. In fact, serious buyers may either not look at the property at all or will use it to justify buying another property that is much better priced in comparison.
Of course a buyer may still make an offer on an overpriced property. However, in these situations, it is the buyer that will be in a position of strength in the negotiations as he/she will be aware that they will not be in competition for the property. Indeed they may be the only offer that comes along. As a result, they will often be able to negotiate a price at the low end of or below market value (depending on how long the property has been on the market and how frustrated and desperate the seller has become).
Some sellers will counter the argument that the listing price is too high by saying, “you can always lower the listing price later.” The problem here is that a property will after a time suffer from the problem of market staleness. As the weeks drag on, fewer and fewer buyers will look at the property. Buyers will often ask how long a property has been on the market for and be very suspicious of a property that has been listed for a while. Even where property is finally realistically listed after nine months of marketing, buyers will make remarks such as, “there must be something wrong with the home, it’s been on the market so long” or “the property has been on the property so long it must be overpriced” or “the property has been on the market so long, the sellers must be desperate.” The end results is often that an overpriced property is on the market longer than necessary and the price received is generally lower than it would have been if it had been listed realistically in the first place.
THE IMPORTANCE OF CONNECTING THE LISTING PRICE TO THE VALUE
On June 4, 20xx, you appraised 3 identical detached two-storey homes (Properties A, B, C) located on the same street with a value range of $420,000 to $427,000 and a final estimate of $425,000. The estimates were done for the purpose of listing and selling each home. The homes were all owned by different sellers.
Well priced homes in the neighbourhood are selling within 30 days. All three properties were listing on June 10, 20xx. Property A – $429,900; Property B – $449,900; and Property C – $475,900.
Joe Smith is looking to buy a house and is willing to pay up to $450,000 for the right property. Based on his criteria, Joe agrees to look at properties A and B. Property C does not even come up on the MLS search as it is above the price that Joe is willing to pay.
After inspecting Properties A and B, Joe realizes that A is a great buy as compared to B. As a result he is anxious to make an offer on Property A before other prospective buyers will put him in a competitive bid situation. On June 18, Joes agrees to buy Property A for $427,000 (the top end of your estimated value range) with a 60 day closing.
On July 19, Property B is reduced to an asking price of $429,900 and sells on July 28, 20xx, for $422,000 (the low end of your estimated range). On September 30, 20xx, Property C is finally reduced to $431,900 and sells on October 20, for $416,000 (below your estimated value range). Many of the prospective buyers looking at Property C after September 30, were wondering what was wrong for it to be listed so long or were commenting that it must be overpriced to be on the market for such a length of time. The owner of Property C was also becoming frustrated at the lack of showings and offers.
By being well priced from the beginning, Property A sells within a few days for top price. In being overpriced, Property B was used to sell Property A. Property B sold fairly quickly once it had been well priced but did not obtain such a good price due to some levels of overexposure. Property C’s eventual sale after 6 months of listing shows the classic signs of being stale and was only able to sell below market value given it’s long listing reputation and the owner’s frustration.
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