By Robert Irwin
Pricing a house is always difficult, but it's even tougher when the market is advancing as it has been over the past few years.
In some areas such as Los Angeles, for example, we've seen incredible price increases of over 25 percent in one year! (Granted, that torrid pace has slowed down to around 10 percent recently.) Nevertheless, how is a "by owner" seller to come up with the correct price for his home in a volatile market?
THE PROBLEM WITH CMA
Most people have heard of the CMA, Comparative Market Analysis, where you look at comps (similar homes that have sold recently) and compare those homes and their prices to yours. That's supposed to lead you to the correct value for your home.
But does it really when prices are shooting up? Comps that are only 6 months old (usually considered recent and good examples) may already be far out of date. And sales prices for homes sold within the last few months are often unavailable, at least until escrows close.
So, how does one arrive at a fair price in a hot market?
One way is to track the trends. As noted above, last year in LA prices were advancing at roughly 25 percent or 2 percent per month. That can be very useful information.
Use the old CMA to find out what comps sold for months ago, then forward price your home. For example, if a comp sold for $500,000 in July and it's now October, what should be the correct price for your house today? If prices are moving up 2 percent a month, that means today's price should be 6 percent higher, or $530,000. Easy!
But, does it really work?
Sort of. The problem is knowing just where the market is. Newspapers always report on the price increases for the last 12 months. But, frequently those price increases themselves are suspect. As noted, in LA price increases have recently slowed. Adding 2 percent a month in today's market might overprice the home.
One way to judge prices is to constantly check the inventory (the number of unsold homes on the market). Any agent should be able to quickly give you these figures.
Increasing inventory suggests a slowing market. Decreasing inventory means the market is accelerating. For example, in LA while newspapers were still reporting a 25 percent price increase, agents were already reporting increasing inventories. By factoring in the inventory condition with reports of price increases, it's possible to get a more realistic approach. (Two months later the newspapers began reporting the sales slump.)
No, it's not a science. On the other hand, it's a way to at least "guesstimate" the true value of your home. And that's a lot better than simply asking an agent for the CMA and setting a price based only on its sometimes outdated averages.
By the way, forward pricing also works well in a market that's rapidly declining, something we haven't seen here for quite awhile. About the only time it isn't necessary is when the market is stable, few price increases or decreases.
Failure to abide by forward pricing is why in recent years there have been so many homes that sold for more than asking price. It wasn't always that buyers were bidding up prices crazily. It often was that sellers were behind the market and simply hadn't kept up with where the trends showed prices should be.
Robert Irwin is the most prolific real estate writer in America having produced over 100 published books in the field. His TIPS & TRAPS McGraw-Hill series has sold well over a million copies and his FOR SALE BY OWNER KIT and FIND IT, BUY IT, FIX IT and other books have been strong sellers for Dearborn. In addition Irwin writes a regular real estate column for The Wall Street Journal online and is introducing a new weekly column forOwners.com.
Irwin has sold his own property "by owner" and during over 30 years in the business has been a broker and consultant to lenders, agents, buyers and sellers.