How to Price a House

By Steve Gillman - 2006

We have covered lesson one of how to price a house: avoid aiming too high. Of course, putting too low of a price on a home is an obvious problem that you need to avoid. How then, do you decide what the price should be? It should be just a little more than what the market is likely to pay. In other words, close enough to the market value to avoid the over-pricing problems outlined previously, but with some room to drop the price a bit too.

In real estate, perhaps more than in any other area, people expect to negotiate. You keep buyers happy then, you have to give them some room to negotiate. Many people would be pleased to buy a home for $240,000 that was priced at $250,000. On the other hand, some of these same people might walk away from the exact same home if you asked $239,000 for it and wouldn't drop a dollar off the price. In other words, you have to let these weekend negotiators have their victories.

Start by asking a real estate agent what percentage of the asking prices houses are selling for in your area. If he has no idea, or doesn't run to find that information for you, don't use him to sell your home. Most experienced agents can give you a rough idea of how much of a discount from the asking prices the sales prices have been recently.

Suppose homes are selling for an average of 95% of the asking price at the moment. In that case add about 5% to the market value of our home and you have your price. If they are selling for roughly 2% less than the asking prices, then add 2% to what you have determined your home to be worth.

You get the idea. You want to have the buyer feel that he is "getting a good deal," when he buys your home less than you are asking. He doesn't necessarily have any idea what a good deal is, but he sees what other places are going for compared to their asking prices, and he at least wants the illusion that he did okay in his negotiations. If everyone else is buying homes for a few percent under asking prices, he wants to do that too. Make him happy and you'll make yourself happy.

We can refer to this difference between asking and sale's prices as ask/sale spread. It makes for a simple formula: Market value plus the average ask/sale spread. Of course that doesn't answer the question of how to price a house until we know how to determine the market value of your home. Read on...

The book continues here: Fair Market Value - It isn't what you think it's worth.

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