The probable buyer’s value for a home is very similar to market value, as a home is only worth what a buyer will pay. If the seller wants more, it won’t sell.
Sometimes it can be tricky to estimate what a home might sell for. I usually talk with my seller clients about trying to find the probable buyer’s value. The seller may have a range of prices that he or she anticipates and would accept. So too with the buyer, whose range will likely be lower than the seller’s. The key is finding where the buyer and seller price ranges overlap. If it’s unlikely that their ranges overlap at all, we’ll have a listing that is difficult or impossible to sell.
Let’s take a hypothetical case of a home worth about a million dollars (see image above). The seller would love for the property to sell close to $1,040,000. The buyer would like to purchase it for $960,000. The agent’s competitive market analysis indicates that similar homes have sold or are selling at around a million dollars, give or take a percent or two. If the buyer and seller can come to a meeting of the minds, and there’s no undue pressure on either one of them, we have (hopefully) a sale and we have market value.
But as we know, sometimes homes sell for much more than they would seem to be worth, and other times much less.
What causes property values to go above or below what would seem to be the probable value? Undue pressure can certainly cause values to rise (desperate buyer who just has to get into a house, even if overpaying or desperate seller who has got to unload a property, even if selling too low).
We saw the high values happen in years where the market was terribly overheated, like in 2000, and buyers were exhausted (desperate) from losing time & time again in multiple offer situations. Sometimes the buyers got agitated and spiked the price. Here’s what I mean by that. We would see multiple offers on some homes, let’s say 10 offers, with 8 of them in a band of prices that were close to each other (true market value) and one a bit higher and another crazy high. The “crazy high bidder” got the home, the seller was ecstatic, but it was not typical of all homes and those drastically overbid homes were just creating a worse “bubble”. Those homes sold artificially high, but each time one closed, it raised the bar on what everyone thought was “market value”.
Additional causes of price fluctuations: If there is no extreme pressure, though, the rest of the odd pricing fluctuations usually come down to a couple of things:
- timing (if the home sells fast or not)
- the number of offers
- and the terms of the offer
Timing, number of offers and sales price
Homes that sell very quickly (in a week or so) may get so much attention that they also get multiple offers and they may sell with a great price and great terms for the seller. This can also happen after a dramatic price adjustment but the best chance of it happening is usually when it’s a brand new home on the market.
Right now, homes that are priced appropriately, in good shape, reasonably easy to see and have no issues are mostly selling within 3-4 weeks. If they do so, and sell with one offer, maybe a couple of offers, and a normal 20% to 25% downpayment, the property will likely sell close to list price.
Homes that stay on the market too long become “shopworn” and get passed over by most buyers (and their real estate agents). When they do sell, they will usually sell for much less than if they had snagged a buyer within the first month.
The terms of the offer and probable buyer’s value
The terms can make an enormous difference in whether a home sells for top dollar or for bottom dollar. In a nutshell, if the buyer’s terms are bad, the price will have to be good to compensate. Conversely, if the terms are great, the price may be much lower.
What kind of terms are good or bad? Most of the terms which impact sales price have to do with the financing, so the amount of cash down or other loan terms.
Great terms, extremely strong: all cash, large cash down payment, no issues with appraisal (either because of all cash, large cash down or no appraisal contingency). The buyer’s probable value may be lower if that buyer is bringing in an all cash offer with a 7 day close, no contingencies, and other sweet elements to the deal on a vacant house that the seller needs sold yesterday.
Bad terms, weakening the offer: small down payment, FHA financing, asking the seller to carry the loan
Other terms not related to financing can sweeten the deal for the buyer or make it worse in the seller’s eyes. The seller wants a “done deal”, so will likely take a lower price if the transaction looks more solid and sure (and less likely to fall apart).
Good terms: seller gets fast close of escrow (if desired) and a rent back which if needed (even stronger: seller gets free rent back).
Weak terms: buyer’s offer is subject to the sale of another home (worse yet: it’s not even on the market – better, it’s actually under contract and just needs to close escrow). The buyer’s probable value may be higher because of the increased time and risk to the seller. Sometimes a seller will take such an offer in order to maximize the sale price.
Strong terms can make the home purchase a “better deal”. Weak terms will need to be compensated with a higher price.
Let’s look at that hypothetical million dollar house in Silicon Valley once more and this time have a look at what can happen to the sales price with the terms, timing & number of offers in mind.
This is not comprehensive, of course, it’s just to give you an idea of how pricing can be influenced (and hopefully to dispel the idea that a house, condo or townhouse is worth exactly one precise amount). If the home’s impossible to see (requires too much notice, or has to be by appointment only but the agent’s cell phone rolls to voice mail and then the VM is full) has terrible odors or creepy occupants who don’t leave the house when the buyer is viewing it or it’s on the market for 2 years before selling – it will sell for less. To say nothing of what happens to the purchase price if it’s a short sale, bank owned or stigmatized property. Most of all, I want to give the sense that the price where the home will sell has a lot to do with how fast it sells, how many bidders there are and what the terms are like.
Awhile back I did a series of posts aimed at buyers who were facing multiple offer situations. If you would like more information on the contract or purchase agreement terms and how they impact positioning and pricing of offers, please have a read.
Finally, if you would like to get some data on the probable buyer’s value for your Santa Clara County home (San Jose, Los Gatos, Saratoga, Campbell & nearby communities) please fill out a request here: http://www.SiliconValleyHomeValue.com. Or better yet, email me your name, property address, and information on the house – remodeling, condition, etc. – as the more I know, the more accurate the estimate will be. (Offer good for home owners only and only for homes not on the market, pending, or sold within the last 6 months.)