The Concept of Market Value
Most sellers have a unique way of establishing value – and that is quite simply by using their own Subjective Value. In other words, what the property is worth to them. In most circumstances, this is a great way to value property, as decision making can often be made based on the worth of options to the decision maker. You’ll hear “That’s not worth it to me”, or “It’s worth more to me than that”. The key here is what something is worth to THEM. While that’s great, when you’re looking to price a home, we’re looking for Market Value.
Market Value is quite simply ‘what a buyer is willing to pay for a home’. As much as beauty is in the eye of the beholder, Market Value is in the eye of the Buyer.
This is opposed to other means of determining value such as (but not limited to): Refinance Value (done by an Appraiser who has never walked through a property with a buyer, but rather a clip board, and who’s Appraisals state in the ‘Assumptions and Limiting Conditions’ section that Realtors have more experience pricing homes and they are the experts), Insurable Value (which is cost to rebuild), Purchase + Appreciation Value (Bought for 500K+100K renovations+5% per year appreciation over 8 years) or any other type of Subjective Value (Neighbour thinks/says, Dad thinks/says, Coworker thinks/says).
Again, while these are all valid ways to value a home, what we are interested in is the value that will allow us to SELL this property for the MOST amount of money, and that value is Market Value.
In order to determine Market Value, we use what is called the Direct Comparison Approach, and that is taking the best comparables to the subject property, identifying the differences between them, determining the value of those differences in today’s market, and then accounting for any time difference between the properties. Not only does one need access to information to get this done, but they also need recent and comprehensive experience with both Buyers and Sellers to assign the appropriate values to those differences and determine the proper ‘adjustments’ in pricing.
In order to determine what Buyers are exactly willing to pay for a home, we must not only consider value from their perspective, but we ALSO have to take into consideration their recent experiences of both buyers and sellers to anticipate the property movement of both the list and sale price – and that is where 3D pricing comes into play. In this book, we will not be going through exercises or examples of specific adjustments in value, but rather the concepts and theory behind it.
The Concept of 3D Pricing
3D pricing is a term that I recently coined, which essentially refers to the ‘three dimensions’ of pricing, or the three different considerations that have to be observed when selecting the right price to list a home. I’ve identified those dimensions as follows:
The First Dimension: Median Pricing
This is not a revolutionary concept; however, while many of the concepts I’ll explore are not revolutionary – they are much like common sense, and not too common 😊
Looking at the Median Price refers to looking at where the bulk of the data is as opposed to taking a straight average. For example, if we have 3 sales at 500K and one at 350K, the three homes at 500 should almost be considered exclusively, and the outlier at 350 would not get much consideration at all. Using the average here wouldn’t paint the proper picture of value.
The Second Dimension: Weighted Pricing
This refers to giving more consideration to the best comparables, which begs the question – what’s a good comparable?
A good comparable is one that is AS SIMILAR to the subject property and that has sold AS RECENTLY as possible. The reason for this is that the more differences between the comparables and the subject, the more adjustments in value have to be made, and the more room for error is possible. We’d like to keep things as straight forward as possible. In the same vein, the further back the comparable has sold, the more differences the market has experienced since then. Whether it be supply/demand, outside contributing factors or simply buyer preferences – there are many factors that can change over time and impact pricing. If a comparable sold last week – perfect. If it sold last year, now you have to consider everything that happened from then until now and price out those changes.
The Third Dimension: Pricing Climate
The best way to predict a buyers’ behaviour is to look at their past behaviour. It is very important to put yourself in the shoes of a buyer for your home, and ask yourself how many homes like this have been on the market, if they’ve had to compete for them or not, what the difference between list price and sale price has been and how many days they’ve been on the market. The reason this is important is because the brain works by identifying patters and relying on them for decision making (which is why you don’t study every door you walk up to and ask yourself if you’re going to open a portal to another universe or perhaps fall down into a bottomless pit on the other side, but rather you’ve gone through enough doors to know that it’s just another room on the other side of it, and it’s probably safe to go through it), and that pattern will reveal to us how to price a home to take advantage of a buyers expectations. For example, let’s say there have been 4 recent sales for homes like yours, and they’ve all been priced around 599 and sold for 750 in 5 days. If you tell yourself your house is worth about 750 and price it as such, buyers will know that houses like yours have been selling for 150K over asking, and you must want 900 for yours – which doesn’t make sense to them, and rightfully so.
The Science and Art of Pricing a Home
There are many situations in which pricing a home is more straightforward than not, but sometimes it is not so straightforward.
For example, pricing a townhome that has plenty of great comparables is a lot different than pricing out an “Age Unknown” farmhouse with 85 acres (50 of which are leased to a farmer), 4 outbuildings, a rubble foundation, half of the major systems updated and a geo thermal heating system. In a situation like this, relativity to other sales or homes that a buyer would also consider has to be considered, experience with these types of buyers and plenty of site visits (drive by’s or granted tours of homes). This is much more of an ART, and not a subject we will explore in depth.
When you look at all 3 dimensions of pricing as I’ve outlined it here, you’ll be able to see where the price range likely lies, but also where to price your home in order to end up in the higher part of that range.
In the following sections we’ll explore how to refine the home itself to ensure the absolute top of that range is where you end up.
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