Category Archives: Pricing a Home for Sale

Quickly Estimating the Value of Your Home

You want to know what your home is worth but you are not ready to sell. You may be considering whether to upgrade your kitchen or move. You may be completing a financial statement for the bank. Or, you may just be curious. But, you do not know a Realtor and do not want to go to a lot of trouble. Automated Valuation Models (AVMs) produce answers which may be useful to you.

AVMs use tax records which include information such as location, square feet, number of bedrooms and bathrooms, and property tax valuations. They also use sales prices where available.

Nationally, AVMs are most accurate where the creator of the model has the most information, where home prices are lower, and in newer subdivisions where few homes have been updated. They are less accurate where less information is available, more expensive or custom homes are involved, and in older neighborhoods where significant differences exist because of remodeling and updating.

Inspecting the Home

Inspecting the Home

Historically, AVMs were used by industry insiders such as mortgage companies. However, more recently some national home search sites provide these tools as part of their effort to supply useful information to consumers and leads to Realtors. The most famous sites are Zillow and Trulia. However, if you search on the internet, there are other sites that advertise their services. I found a product from Chase using an internet search. I have paid for a proprietary AVM for over a year. And, because I am a Realtor, I have access to another AVM provided by the National Association of Realtors.

Of primary importance with these products is accuracy. In my review, Zillow was most transparent about accuracy. See their comments here. The “Los Angeles Times” recently produced an article discussing the issues with accuracy at Zillow. The other AVMs use price ranges or disclaimers or both. Homes in Texas present a unique issue in that the sales price of a home is not public information. So, while Realtors have access to this information through the MLS, the public is generally not aware of sales prices. This also means the local taxing authorities do not have access to this information and may not have access to information on remodeling if the remodeling is not done in a taxing authority where building permits may not be required (e.g., outside a city limit.) So, for example, the taxing authorities may not be aware of a pool or a completely remodeled kitchen and bathrooms. Both taxing authorities and the AVMs may become aware of sales prices and updating if the owners or Realtors input or provide the information to the AVM (e.g., Zillow or the Harris County Appraisal District – HCAD.) However, most owners and Realtors do not provide this information. As a result, the accuracy of AVMs is compromised.  In the Zillow accuracy disclosure, Zillow indicates their accuracy for Houston is one star out of four stars.

However, even with those limitations, based on my testing for my own home and recent transactions, AVMs may provide useful information, especially if taken in combination with information from other AVMs and HCAD. And, it may be fun or interesting to search these sites and others for the values. I have not identified specific AVM sites with my results because they all can be close or nowhere near right depending on the properties. My home is more difficult to value for an AVM, even if it were not in Texas, because it is an older home in a 1950s neighborhood that has new houses, extensively remodeled homes and homes that have had no major work since the 1950s. My results were:

Price per HCAD is within 20% of my market value.

Site 1 produced a range that was 19% below to 9% above my market value.

Site 2 produced a price that was more than 40% below market.

Site 3 produced a price that was 5% below market.

Site 4 produced a range that was 30% below market to 6% below market.

Site 5 produced a range that was 14% below to 11% below market.

I also looked back at my most recent transactions representing buyers and sellers. Using one of the AVMs, the actual sales price differed from the value estimated by from 14.8% lower to 27.0% higher, averaging a 12.8% difference.

Of course, these sites should not be used if you plan to sell your home. The best answer if you plan to sell your home is to find a Realtor who can use information from the MLS about prior sales and insight into the current market to help you come to an accurate estimate of the value. I would be happy to provide valuation information for your home without any obligation.

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All Those Fees

There are many payments, costs and fees associated with buying and selling a home. Some are paid by the buyer and some are paid by the seller.

Costs and Fees Generally Paid by Buyer:

While there are a number of categories of costs and payments, the most significant buyer fees are related to financing.

Inspection fees – In the Houston area, these are generally mechanical, structural, foundation, termites and pool.

The warranty deed and deed of trust, if applicable, will be recorded with the County.

Escrow Fees are paid by both the buyer and seller to the title company for the services the title company is providing.

Survey cost is generally paid by the buyer. However, the seller may have an existing survey, which may be acceptable. Or, the seller could pay if that is negotiated.

Having Fun at Home

Having Fun at Home

Homeowners’ Association Dues and Fees are generally paid at the beginning of the year. As a result, the buyer will reimburse the seller for that remaining portion of the year for which the buyer will own the home.

Property taxes are paid at the end of the year. As a result, the seller will owe the buyer for that portion of the year for which the seller owned the house.

Optional Owner’s Title Policy additional coverage for discrepancies and shortages is negotiable but generally paid by the buyer, if purchased.

Homeowner’s Insurance and Flood Insurance may be paid directly to the insurance company if there is a cash transaction. If a loan is set up with an escrow account (meaning the bank pays these costs on behalf of the buyer), they are paid by the bank.

If financing is involved, there will be Lender Fees and Charges:

  • Lenders typically set up an escrow account to directly pay the buyers property taxes, homeowner’s insurance and flood insurance (if applicable). To set up the initial funding for that account, the bank will generally require a payment for three months’ insurance and at least a year of the estimated annual property tax amount.
  • Other lender fees and charges are loan origination, appraisal, document preparation, credit report, and mortgage insurance premium, if applicable. Mortgage insurance is paid if the down payment does not meet specific levels or on some government supported loans.
  • Interest for the period from closing to the date of the first payment.
  • Although not paid to the bank, the buyer will pay Title Insurance covering the bank for the amount of the initial loan.

Miscellaneous fees like courier fees are also charged.

Costs and Fees Generally Paid by Seller:

While there are a number of categories of costs and payments, other than debt payoff, most sellers’ payments, fees and costs are related to transaction commission to the broker, title insurance premium paid on behalf of the buyer, and property tax credit to the buyer.

Basic Title Policy for buyer – Although negotiable, this is almost always paid by seller.

Proration of Property Taxes – Property taxes are due at the end of the year. As a result, the sellers are charged for the portion of the year they owned the home. This amount is credited to the buyer who will be responsible for paying the tax at the end of the year (or their bank if there is an escrow account.)

Home Warranty –Typically, the seller pays an agreed amount for a substantial portion of a one year warranty on mechanical items in the home such as sprinkler systems, heaters and air conditioners.

Homeowners’ Association Dues and Fees are generally paid at the beginning of the year. As a result, the seller will be credited for the portion of the year related to the period of the year in which the buyer will own the home.

All commissions are the responsibility of the seller.

The payoff of all loans and liens will be charged to the seller.

Escrow Fees are paid by both the buyer and seller to the title company for the services the title company is providing.

Miscellaneous other fees and costs are related to recording the release of liens, document preparation fees, and homeowner’s transfer fees.

SELECTING A PRICE

The vast majority of homes sold in the Houston area go through the Houston Association of REALTORS’ MLS, which means a real estate agent was involved in the transaction. For each home listed, the REALTOR had proposed a price at which to list. When you list, how do you evaluate the REALTOR’s proposal?

You want to use Goldilocks pricing. Not too high because you will make the home sit longer, and possible buyers will start wondering what is wrong with the house. Not too low just to get a quick transaction. But, price it just right. Factors you may want to consider in evaluating the REALTOR’S proposed price are:

  1. The market sets the price. You and your REALTOR are not driving the process. The market is. So, what you paid for your house, how much you have spent on upgrades, or how much you need to net from the transaction have no impact on a possible selling price.
  2. Supply and demand will impact the price. A market equilibrium exists if there is a 6 or 7 months’ supply of homes on the market. The number is calculated using homes for sale divided by number of homes sold in the prior 12 months. If there are 50 homes on the market and 100 sold in the prior twelve months, there exists a 6 months’ supply. If there are fewer homes on the market, it is generally helpful to the seller in pricing the home. And, when there are more homes on the market, it is generally helpful to the buyer.
  3. Prices are very local. In calculating the months’ supply, one would want to use your neighborhood or subdivision. And, if there is a significant difference in size or pricing in the neighborhood, the calculation would need to be modified for relevant or comparable properties.
  4. Compare your home to the homes that are for sale. You can search homes for sale in your neighborhood and study how relevant the homes that are for sale are to your home. You can also visit open houses. The relevant homes you select are the competition, and your home will need to be priced in line with the competition. Relevancy can be determined by relative:
    • At Home

      At Home

      Size – For both the home and the lot. The larger the size, the larger the price.
    • Number of bathrooms –  The more bathrooms, the higher the price
    • Location – Are the homes on a corner (higher), busy street (lower), views (the better, the higher the price), near noise (freeway or a nearby entertainment area will reduce the price.)
    • Age – Many neighborhoods in Houston are mixed with older and newer homes. Your relevant homes should be from the same generation.
    • Condition – Well maintained homes will obviously improve the price comparison.
    • Flooding and foundation issues – In Houston, many homes have had water in the structure. A history of water will reduce the price. The status of the need to repair the foundation will impact the price.
    • Quality of remodeling – Poorly done remodeling or additions will reduce the asking price.
    • Uniqueness – A home that is different from others in the neighborhood (e.g., all bedrooms down and living area up, or a much larger home than others in the neighborhood) may make a home more difficult to sell, lengthen the selling process, or reduce the possible selling price.
  5. Staging can help. Having a professional stager or using a list of steps your REALTOR provides (e.g., plant fresh flowers and put mulch in the flower beds) can both speed the sale and improve pricing.
  6. Appraisals can be a limit on the price. Even in an excellent market for the seller, most homes will need to be financed. As a result, the appraisal for the bank may limit your ability to pursue a higher asking price.

When you select a price, there are three basic theories:

  1. Odd pricing – Pick a price like $236,475. It will make people curious and get a conversation started.
  2. Grocery or gasoline pricing – Price your home at $299,999 as it may sound less expensive than $300,000.
  3. Internet pricing – Many homebuyers or their agents use round prices to search for homes. If the round numbers are $290,000 to $320,000, they are going to miss your house priced at $289,900. With all the technology in use today, I prefer the round or internet pricing theory.

Although you can rely on your REALTOR to propose reasonable pricing, you will want to use these guidelines to evaluate their suggestion. Good luck.