The Dangers of Overpricing your Home

sebfreyCharts and Statistics, North Monterey County Real Estate, Santa Cruz Real Estate, Silicon Valley Real Estate

The Truth about Overpricing your Bay Area home Click here to skip down to the charts and graphs for Santa Clara, Santa Cruz, and Monterey counties. Fair market value is that price a qualified, reasonably knowledgeable buyer is willing to pay, which a seller, not under duress, is willing to accept after the home has been properly exposed to the market. Many sellers, however, set a price higher than the market will bear – to their significant detriment. This article explores the dangers of overpricing your bay area home, with lots of facts, figures, charts, and statistics. Ironically, instead of getting more money… Over-pricing usually stigmatizes a property and reduces the eventual sale price to less than it would have been with more realistic pricing.”House Selling for Dummies Neither agents nor sellers determine market value: Only the market – willing and able buyers — determines market value. Agent and seller work together to create a plan which includes pricing, preparation and marketing — to maximize the conditions that reliably achieve the highest possible sales price. The vast majority of buyers will not make offers on homes they consider significantly overpriced. Either they don’t want to waste their time, or are uncomfortable with possibly “offending” the seller. In any case, they simply move on to other listings. Well-priced homes create a sense of urgency in the buyer/broker communities to act quickly with strong, clean offers, and often lead to competitive bidding between buyers – which is the most likely way to increase sales price. Overpricing wastes the … Read More

The Endowment Effect in Real Estate

sebfreySanta Cruz Real Estate

The endowment effect is a human tendency to value something more when we own it. Last year, economist Richard Thaler even won the Nobel Prize for his work regarding this behavior. But how does the endowment effect in real estate manifest itself? First, let’s give a simple example of how the endowment effect works.  Let’s say a group of people is asked how much a coffee mug is worth. They may respond with something like “around $2.” However, if they’re asked how much each member’s own coffee mug is worth, they will almost invariably respond with a higher value, like perhaps $8.  It’s a striking phenomenon, and it’s observable in primates as well as humans.  Simply put, there’s a strong tendency for us to overvalue things we already own. It could be something simple like a coffee mug, but it also applies to our real estate. Homeowners often think their homes are worth more than they actually are.  For a long time, I’d figured this was primarily because of a strong emotional attachment to the property.  After all, it’s only natural: most homeowners have created lots of memories over many years in these homes, and so of course they value the property more highly than “the next guy.”  Sociologists, however, explain that this works on a much deeper level than simple emotional attachment: fear, or specifically, fear of loss (and no, fear is not an emotion). That fear of loss drives us to overvalue things we own, and according to the Endowment Effect, this is the … Read More

The Honest Truth about Your Home’s List Price

sebfreyCommentary

Watch this Video First I want to be brutally honest with you about something that’s going to be very important to know, should you decide to put your home up for sale. It’s about the price that you choose to put your home on the market for. I want to give you the honest truth about your home’s list price. Ready? Here it is: in most cases, your home’s list price actually has little to do with what your home is going to sell for. In reality, your home’s list price is actually all about your marketing strategy. When deciding on a list price, one of the key questions you want to ask yourself is, “How long do I want my home to be on the market?” It is perhaps not surprising to hear that the higher the initial listing price (relative to competing properties for sale in your market), the longer you can expect it will take for your home to sell. Sales statistics show that the longer your home sits on the market, there is an increasing likelihood that your home will sell for less than list price, and that typically, the longer it sits, the greater the “discount” off list price. It’s a hard way to learn that you’ve overpriced your home. Funnily enough, sales statistics also show that the opposite is true: when homes sell quickly, they often sell at full asking price, and in our market, they commonly sell for a healthy premium over asking price. So when it comes to … Read More

How Much is a Granny Unit Worth?

sebfreyCommentary, Santa Cruz Real Estate

What's the Value of a Granny Unit?

I received an email the other day from a gentleman who was wondering how much is a granny unit worth in Santa Cruz? That’s an excellent question; many would-be home buyers specifically look for homes with granny units because they’re an excellent “mortgage helper.” Given their popularity, you might be surprised at my answer to the question: not as much as you might expect. Here is a screen shot from an appraisal for a sale I had about 18 months ago, which had a bona fide legal guest unit: You can see that the appraiser gave the guest unit only a $30,000 value. Granted, this particular guest unit (or “accessory dwelling unit” – ADU) was not in the greatest shape, but it was serviceable. Generally speaking though, I would say a guest unit adds $50-$75K in value versus a similar home without a guest unit. I am perpetually surprised that legal ADUs do not add more value than they do, considering the enormous amount of money they can potentially make. This is one reason why buying a home with an ADU makes so much sense – it can easily make twice as much money in rent as the additional mortgage would cost you. Another part of the gentleman’s question though was: how can you calculate how much value a granny unit adds to a property? Is there a methodology someone can use to figure out if one particular ADU adds, say, $50K, or more like $75K in value? There is no “official” formula that I have … Read More

The Anchoring Effect and Asking Price in Real Estate

sebfreyCommentary

Anchoring

There are a number of theories and philosophies when it comes to pricing real estate for sale. Most real estate agents will tell you that the best practice is to list a home for sale somewhere around what they feel is market value – or even just a bit under market value, to foment a bidding war. However, there’s a school of thought that suggests there’s a better way to get the highest price for your home, so in this article I will talk about the anchoring effect and asking price in real estate. Many home owners are uncomfortable with the idea of pricing their home competitively, that is to say, at or slightly below “market value.” There is real trepidation when it comes to trusting that the market is going to work its magic and deliver sufficient buyers to create a feeding frenzy that will be needed to boost the sale price of a home up over asking price. Additionally, some sellers fear that bidding wars turn off buyers and dissuade them from even making an offer in the first place. That is undoubtedly true, however the counter-argument to that is that the buyers who are put off by a bidding war are typically not the strongest, most-motivated buyers anyway. Instead of under-pricing or “fairly pricing” their homes, many sellers will choose to set a high price. Doing so, they believe, will give them “room to negotiate.” Beyond leaving “room to negotiate,” a high asking price also may work in the seller’s favor due to … Read More

Sales to List Price Ratio by Weeks on Market

sebfreyCharts and Statistics

Sales to List Price Ratio by Weeks on Market

Is it true that the longer it takes to sell your home, the less you are likely to receive for it? There’s a lot of evidence that indicates this is in fact true. Check out this chart, which illustrates the sales to list price ratio by weeks on market: Source: National Association of Realtors 2013 Profile of Home Buyers and Sellers As you can see, homes that sell within the first 1-2 weeks of being listed on the market get, on average, 100% of asking price. As time goes on, you can see that the sales to list price ratio begins to drop: by 3-4 weeks on market, the ratio drops to 98% of asking price, and by 5-16 weeks on market, sellers receive an average of 96% of asking price. But then look what happens for listings averaging 17+ weeks on market: sellers receive only 92% of asking price on their listings. Some of this is due to the fact that homes were initially overpriced, and it took a while for sellers to drop their price to a point at which it would sell. If you are in a situation where your house is vacant and you’re looking at paying to keep up that property (taxes, mortgage payments, maintenance, etc.), it can get very expensive to over-price your home. What isn’t shown on this chart, and which is hard to quantify, is what would have happened to these 17+ week sellers if they had priced their homes correctly? Would they have ultimately netted more money … Read More

Zillow Giveth, Zillow Taketh Away

Seb FreySilicon Valley Real Estate

Zillow Logo

While searching for a blog topic, two reports spanning the good/bad news spectrum caught my eye, because Zillow.com had a hand in both. To check out a Zillow-backed report showing the relative strength of the South Bay housing market, CLICK HERE. To check out a different Zillow-cited report showing how home values and negative equity are still headed in the wrong direction, CLICK HERE. Zillow is good for a few things, and not particularly good for others. They track housing statistics, and have some very detailed market reports that can be fairly telling. Their site also has all of the latest mortgage rates, and other helpful tools for buyers and sellers. Housing statistics simply report what has already happened, and there isn’t much room to screw that up. Yet where Zillow use can get dangerous is when people treat it like the Kelly Blue Book of housing, and believe what they find out. Users can plug their home’s address into Zillow and get a “Zestimate” of value. Apparently, this value is derived from some sort of algorithm involving tax record specifications of a home, and reported sales activity in the area. Sometimes, conditions are in place for Zillow to provide near-exact values. For homes that are located in complexes or communities of similar homes, sales data for the immediate area may be a strong indicator, especially if the area has high levels of sales activity. Yet for most other homes, things aren’t so simple. Often times, tax records don’t accurately report what’s on the ground, which … Read More