CHAPT 13

  • Importance of Listing Price - Determining the correct listing price is a fundamental and critical task in real estate, as it directly influences the property's market exposure and potential sale outcomes. Properly priced homes tend to attract more buyers, generate greater interest, and ultimately lead to successful transactions. A real estate agent must analyze market data, understand local trends, and evaluate the characteristics of the property to establish a competitive listing price that aligns with both buyer expectations and seller goals.

Appraisal and Comparative Market Analysis

  • Methods for Valuation - The two common methods are:

    • Appraisal:

      • Seeks an opinion of value as of a specific date.

      • Performed by a licensed appraiser, commonly for a lender. Appraisals are often required for mortgage applications to ensure that banks and lenders do not finance more than the home’s worth. The appraisal process involves rigorous analysis, including comparing previous sales, assessing property condition, and ensuring compliance with relevant regulations.

    • Comparative Market Analysis (CMA):

      • Provides sales and listing price information about similar properties to help sellers choose a listing price. A CMA assists in setting a competitive price by analyzing similar, recently sold properties in the area.

      • Performed by the listing agent for the seller. This analysis considers various factors such as comparable sales, current listings, and market conditions, enabling sellers to make informed decisions.

      • Closely resembles the Sales Comparison Approach used by appraisers, though not an official appraisal. CMAs leverage data that may not be available during formal appraisals, thus providing a broader perspective on market value.

Appraisal Tasks

  • Responsibilities of an Appraiser - The appraiser's tasks include:

    • Preparing detailed reports that define methodology and estimate value, which provide essential insights to both lenders and clients regarding property valuation.

    • Computing the final estimate of value using established approaches such as the Sales Comparison Approach, Cost Approach, and Income Approach to ensure comprehensive evaluations.

    • Searching public records for necessary documentation, ensuring all relevant information regarding property ownership, taxes, and liens is collected to support the valuation process.

    • Inspecting and photographing properties to be valued to document the physical condition and unique features of the properties.

    • Evaluating neighborhoods, considering aspects such as school districts, crime rates, and local amenities, which could affect a property’s value.

    • Verifying legal descriptions and ensuring compliance with zoning and building codes.

    • Estimating replacement costs to determine how much it would cost to rebuild the structure from scratch, providing insight into the property’s value from a cost perspective.

Appraisal Assumptions

  • Foundational Assumptions - Appraisals of property for sale generally assume:

    • Cash transaction to simplify the analysis by eliminating financing complications.

    • Arm's length transaction (no undue pressure to conclude) to ensure that the sale reflects true market conditions.

    • Reasonable marketing time, as longer listings can indicate overpricing or issues with the property.

    • Well-informed buyer and seller, this helps establish a baseline for value based on typical market behavior.

    • These assumptions also help define "market value," providing a framework for interpretation and comparison.

The Three Approaches to Value

  • Methods of Estimating Property Value - Appraisers use three approaches to estimating value:

    • Sales Comparison (Market Data) Approach:

      • Based on the principle of substitution, meaning that a buyer will not pay more for a property than what is necessary to purchase a similar one.

      • Compares the property being appraised with recently sold comparable properties, factoring in differences in size, features, and location to arrive at a fair market value.

      • Considered the most reliable for single-family homes and the basis for CMAs since it reflects actual sales data.

    • Cost (Summation) Approach:

      • Estimates either the property's replacement cost or reproduction cost, providing a valuation perspective based on physical attributes rather than market dynamics.

      • Most reliable for recently built properties where actual costs are known, and can also be applied for special purpose buildings when income data is unavailable or there are no comparable sales.

    • Income (Capitalization) Approach:

      • Estimates the value of properties that produce income, generally from rent paid on leases.

      • Assumes that an investor bases their purchase decision on the future income stream the property will generate – referred to as the principle of anticipation.

      • Assumes that an investor would not pay more for a property with a certain income than for a similar property with a similar income – known as the principle of substitution, solidifying the relevance of cash flow in valuation.

The Sales Comparison Approach and the CMA

  • Characteristics of Sales Comparison Approach - Used for most properties and in CMAs.

    • Based on principles of substitution and contribution, considering amenities and current market conditions to determine a property's optimal listing price.

    • Limited by the difficulty of finding good comparables; less effective in inactive markets where fewer similar properties have sold recently, affecting the reliability of the price estimates.

Steps in the Sales Comparison Approach

  • Process Outline - Identify comparables.

    • Adjust comparables to account for differences with the subject property through established valuation techniques.

    • Weight or rank comparables based on their relevance and similarity to the subject property to arrive at a final value estimate that accurately reflects market conditions.

Differences in the CMA Process

  • Contrasts with Traditional Appraisal - CMA process is similar but:

    • Considers less information, focusing more on accessible data and less on exhaustive analysis compared to formal appraisals.

    • Defines comparables more loosely, not following the strict criteria often employed by professional appraisers.

    • Not as precise or extensive in making adjustments, which might result in broader price ranges.

    • Aims for a range of listing and selling prices rather than a specific market value, allowing flexibility in negotiations.

    • Not impartial and does not adhere to appraisal standards, being conducted primarily for the benefit of the seller to aid in pricing strategies.

The CMA Process

  • Four Steps - Step 1: Collect and Analyze Property Information

    • Information includes:

      • Property condition, as it heavily influences desirability and price;

      • Condition of surrounding properties to ascertain neighborhood standards;

      • Property conformity within the area to establish market expectations;

      • Size and style, affecting the appeal to different buyer demographics;

      • Amenities offered, which enhance property value;

      • Zoning, as it dictates potential property uses and restrictions;

      • Likelihood of finding comparables based on market activity and trends.

    • Step 2: Select Comparables

      • Selected from:

        • Sold properties, providing actual sale prices for context;

        • Pending sales, offering insight into current market dynamics;

        • Active listings, showcasing direct competition;

        • Expired listings, highlighting price pitfalls;

        • Typically, a minimum of three comparables is used to ensure a balanced view of the market.

    • Step 3: Compare and Adjust

      • Compare each comparable with the subject property critically.

      • Small adjustments are made for:

        • Location, to reflect desirability differences;

        • Physical characteristics, adjusting for square footage, age, and features;

        • Sale date, as older sales may not align with current conditions;

        • Financing terms, which could impact property attractiveness.

    • Step 4: Suggest Range and Price

      • Adjusted market values of comparables suggest a price range for the seller to choose from, empowering them to make informed pricing decisions that align with market realities.

Selecting Comparables

  • Criteria for Comparable Properties - A comparable:

    • Must have similar characteristics to the seller’s property to ensure relevance in valuation analyses.

    • Must resemble the subject in:

      • Size, with comparable square footage aiding in price assessments;

      • Shape, impacting layout and usability;

      • Design, ensuring aesthetic alignment;

      • Utility, affecting market appeal and functionality;

      • Location, as it influences demand and pricing.

    • Must have sold recently, typically within 6 months, ensuring data is reflective of current market conditions.

    • Transactions should be arm's length to eliminate any potential biases that might skew pricing.

    • Guidelines for comparables may be established by secondary market organizations like FNMA to maintain consistency.

    • CMAs can include pending sales as well as active and expired listings, in addition to recent sales, to provide a comprehensive market perspective.

Recently Sold Properties

  • Relevance - The more recent the sale, the more reliable the indication of comparable value.

    • Best predictor of the market value of the seller’s property and indicates original listing price and days on the market, serving as critical factors in determining competitive pricing strategies.

Pending Sales

  • Characteristics - Offer is accepted but the transaction is not yet closed; may remain pending for 30-60 days.

    • Less reliable than sold properties since the final sales price is unknown, only the listing price is available, which may not accurately represent market conditions upon sale completion.

Active Listings

  • Insights Provided - Show the level and intensity of competition in the market but do not provide actual price information, proving essential for sellers to gauge their pricing strategy compared to current active offerings.

Expired Listings

  • Significance - Show that asking price was too high; useful for establishing an upper limit of the price range.

    • An expired listing that was relisted and sold gives a good indication of the price for the seller’s property, thus providing useful feedback for pricing adjustments.

Distressed Properties

  • Considerations - Can be used if truly comparable but acknowledge limitations:

    • Transactions take longer than normal, reflecting underlining market conditions.

    • Many do not complete, potentially skewing market perceptions.

    • Post-transaction fix-up costs might not be reflected in the sales price, meaning buyers and sellers need to navigate these complexities when establishing valuations.

Adjusting Comparables

  • Adjustment Mechanisms - Since comparables are sold properties with known sales prices and the subject property price is unknown, only comparable prices can be adjusted.

    • Adjustments are either additions or subtractions based on the value contribution of features that the comparable property possesses or lacks compared to the subject property:

      • If the comparable has superior features, deductions are made to reflect those differences accurately.

      • If the comparable is inferior, additions are made to account for decreased value.

Factors for Adjustment

  • Adjustment Criteria - Adjustments are made for:

    • Time of sale, ensuring relevance to current market trends;

    • Location quality, helping buyers make informed evaluations;

    • Physical characteristics, ensuring price is balanced against property attributes;

    • Differences in transaction structure, accommodating variations in seller and buyer motivations.

Suggesting Range and Price

  • Methods of Finalizing Price - A comparable is considered more reliable if:

    • It requires fewer adjustments due to its similarity to the subject property.

    • It has smaller adjustments, reflecting minor variances that do not significantly impact valuation.

    • It incurs a smaller total adjustment, assuring a well-rounded value assessment.

    • The listing agent suggests a price range after weighting the comparables, allowing the seller to select a price that aligns with their selling strategy and market conditions.