Fair Market Value
Neither agents nor sellers determine a property’s market value: Fair market value is determined by that (highest) price a qualified, reasonably knowledgeable buyer is willing to pay at a specific point in time, to a seller not under duress, after the home has been properly exposed to the market.
An agent’s comparative market analysis (CMA) attempts to estimate today’s fair market value by an honest assessment of the following:
- General Area and Specific Location within Neighborhood
- Size, Appearance, Condition & Emotional Appeal
- Attributes & Amenities: Views, Parking, Yard, etc.
- Recent Comparable Sales
- Competitive Properties on the Market
- Properties that Did Not Sell
- Current & Projected Market Trends
- Likely Buyer Profile
Property Strengths & Weaknesses
The purpose of this analysis is to price the property appropriately to maximize market response and the final sales price.
Buyers – for any product, including homes – don’t find the issues of what a seller wants, needs or has invested germane to fair market value, so those issues shouldn’t play a role in a CMA or pricing the property.
Older appraisals or refinancing appraisals performed by appraisers not intimately acquainted with the property’s specific market area often do not accurately reflect current fair market value.
Pricing and Buyer Dynamics
The vast majority of buyers and agents will not make offers on homes they consider significantly overpriced. The vast majority of home sales in San Francisco do not sell more than 3% to 5% under the last asking price (including any price reductions): If the home is not priced within that narrow range, buyers simply move on to other listings.
If priced outside that range, the listing is generally ignored by the market and generates no offers, regardless of the quality and appeal of the property.
Well-priced homes create a sense of urgency in the buyer/broker communities to act quickly with strong, clean offers—and help produce the competitive bidding situations that generate the highest sales prices.
The Effects of Overpricing
Overpricing wastes the optimum period of buyer and broker attention: when a listing first comes on the market. This level of attention cannot be recaptured or recreated later.
Overpriced homes kill any sense of buyer urgency to act and spend much longer periods of time on market, on average 2 to 3 months longer, than well priced properties. This significantly reduces perceived value in buyers’ minds and makes competitive bidding unlikely.
This sample breakdown of San Francisco home sales below illustrates the large discount off original list price and the big increase in days on market, as well as the significant proportion of listings that don’t sell at all, when the listing is overpriced to begin with. The exact sales price percentages and days-on-market figures will change based upon market conditions, but the differences in results between properties priced correctly and incorrectly stay relatively the same over time.