Looking to price an investment home? Put these tips and tricks into practice and learn the science (and art) of pricing a home to sell.
One of the more vexing parts of selling an investment home is pricing it correctly to sell fast. It’s a bit of a Goldilocks and the three bears situation. Price it too high and it may sit on the market and go “stale,” a term for a house that becomes undesirable. Price it too low and you might end up accepting a below market offer. So how do you get it just right?
Look at comparable homes (or comps)
One of the best indicators of how much your home will sell for is how much other nearby, similar homes sold for. These are comps. A real estate agent will use numbers from the Multiple Listing Service (MLS) to draw up a Comparative Market Analysis (CMA). You can hire an agent or appraiser, or do a version of this yourself.
Use recent numbers
Online listing sites like Zillow or Trulia publish home sales prices that you can use much like the MLS. Make sure you’re using recent numbers—ideally from the last three months. To get the right comp, compare homes with similar square footage, number of bedrooms and bathrooms, layout, and lot size. Research hot real estate markets and market trends too.
Accurately assess the home’s condition
As part of the comps process, you need to assess your home’s condition. Take a look at its bones. Did you update the electrical? Does the roof need replacing? Is this an old or new home? Consider how the home photographs and shows. Is the kitchen out of a design magazine or straight out of the 80s? Is the backyard an oasis or a mud pit? You’ll want to find homes that have sold in similar physical condition and with similar aesthetics for pricing clues.
That familiar real estate axiom, location, location, location is key to pricing a home. You not only need to consider a general location, like a city or neighborhood, but you also need to get downright micro about it. You can’t directly compare a home on a cul de sac with one on a busy street. You have to factor in the desirability of a well-manicured tree-lined street over one with unkempt lawns. Being near a coffee shop or a park could up your home’s value, while being near a train track or busy road might detract. Crime statistics, assigned public schools, and walkability all relate to a home’s location and figure in its value.
Run the numbers
Once you’ve assembled your list of comparison homes, you can do some quick math. What you want is to figure a price per square foot for your own home. To get this number:
- Add up the sale prices of your comps.
- Divide by the total number of comps.
- Add up the square footages of your comps.
- Divide by the total number of comps.
- Divide the answers to your two equations.
Common mistakes when figuring comps
- Comparing listing price instead of sales price. Listing prices can be helpful to get a handle on the market, but the sales price is what tells the real story.
- Looking at sales prices more than three months in the past. Real estate markets fluctuate, and numbers from 12 months ago may have little to do with your home’s current market value.
- Comparing homes that aren’t the same. A home a block over may sell for $100,000 more due to the school district. A cosmetically pleasing home that’s been professionally staged might sell for 10% or more than one that’s cluttered or empty.
- Assuming that how much you paid for the home affects the price. While you may very much care, the buyer does not.
- Assuming that how much time or money you put into the home upgrades affects the price. Your upgrades may affect the price but usually not dollar-for-dollar. Check out Remodeling Magazine’s Cost Vs. Value calculator to find out how much of a return on investment (ROI) you can expect on updates.
Research your local real estate market
Are you selling the home in a buyer’s market or a seller’s market? In a buyer’s market the number of homes for sale exceeds the number of buyers. A buyer’s market allows buyers to be choosey and make offers below asking due to lack of demand. In a seller’s market the number of buyers exceeds the number of homes. A seller’s market allows the seller to be the choosey ones, and it often drives up the price due to high demand. A good indicator of market type is how long homes sit on the market and whether they go for above or below the asking price.
Overpricing vs. underpricing
Overpricing is almost never recommended because you may miss the right buyers and attract the wrong ones. That means that potential buyers shopping in your home’s “true” price range won’t see your overpriced home when filtering by price. You’ll then attract the wrong segment of buyers—people who want more than your home has to offer. As a result, your listing can go stale. If you do get an offer for your overpriced asking price, you may run into problems if the appraisal comes in lower than the price and the buyer’s financing is denied.
Underpricing is safer than overpricing, but it may be detrimental in a buyer’s market. Underpricing in a buyer’s market can leave you with little room for negotiation if a single offer comes in. On the other hand, underpricing in a seller’s market is a strategy used to draw a number of offers and start a bidding war.
Erin Behan is a writer and editor covering real estate investor strategy for Sundae. She’s lived in L.A., New York, and Atlanta and currently resides in Portland, Oregon, where she writes and edits for a number of outlets, including WebMD, Farmers Insurance, and Vox Creative. She spends her free time hiking with her two boys, snuggling with her cat, and enjoying the best of the Pacific Northwest.