How to Sell Your Home FSBO
The process of selling your home is challenging, and your decision to sell your home without using a listing agent can make it even more complicated. From preparing your home for sale to handling the offers and contract negotiations, selling FSBO takes some hard work. However, to make matters easier, you may be selling in what is called a “seller’s market” — that is, pricing your home just right so that buyers start a bidding war where you have so much buyer interest that buyers will outbid one another to try to purchase your home.
Much like in a home auction, the right reserve price is not what you think your home is worth or the amount you hope to get, it’s the price at which you think other buyers will be encouraged to bid higher. This price, which is known as a reference point, is the price at which you list your home on the market. In this scenario, both buyers and bidders approach a home with more than just the perceived value of the home in mind: they are also considering the surrounding community as well.
So how do you price your home to start a bidding war between buyers? Setting the price too low carries the risk of undervaluing your home and potentially losing out on equity while setting the price too high means the bidding momentum could stop prematurely, or worse, your home could sit on the market too long. We will show you how to find the value of your home and how to set the right asking price.
How the Pros Determine Home Values
When home appraisers are valuing a house, they use a variety of tools, tactics, and models to arrive at an appropriate and accurate value. Home appraisers typically use Fannie Mae’s Uniform Residential Appraisal Report for properties that are primary residencies that will have loans purchased and guaranteed by Fannie Mae. (Although exceptions to this may vary market-to-market.)
In a typical Fannie Mae appraisal report, the appraiser will answer questions regarding the exterior and interior of the property, describe the neighborhood with an included street map showing comparable sales used in the home value calculation, a sketch of the exterior view, justification for the square footage calculation, exterior photographs of the property plus comparable properties, recent market sales data, public land records and public tax data.
The justification for a home’s value can be determined using two different types of valuation models: The cost approach and sales comparison.
The Cost Approach
The cost approach, also called a summation approach, is the most accurate when a property is new. Developers and home builders will use this appraisal model to make sure their new units are priced appropriately for the market. Insurance adjusters will use the cost approach appraisal model when assessing the replacement costs of a new home due to damage or total loss.
The Sales Comparison Approach
The sales comparison approach is the most common appraisal model used by real estate appraisers and is the preferred model for most residential mortgage lenders. The sales comparison approach accounts for individual exterior and interior features of the home in conjunction with recent sales of homes sharing similar traits. In a full walk-through, the appraiser evaluates the square footage with respect to the home’s unique exterior and interior characteristics.
The sales comparison approach compares the value of the home in question to similar properties in the area. In any given report, the buyer will be able to see a comparison of their property against others with similar features and their sales prices. The overall appraisal values generated in the sales comparison approach are usually averaged to produce a fair market value and are considered the most accurate.
Doing Your Own Research to Find a Price Range
Although home appraisers, who are hired by the buyer’s lender to ensure the loan is appropriate to the property’s true value, tend to use multiple appraisal models, listing agents, who represent the buyer, will usually take the sales comparison approach. Here is the stage where listing agents “pull comps” from the local MLS to set the initial asking price. “Comps” are shorthand for comparable recent home sales in your specific area and market.
If you don’t have access to your local MLS, which can be accessed through a local broker for a flat-fee, you can pull your own comps by using listing aggregators like Zillow and Redfin and sort by recently sold. Your local newspaper may also list recent sales in their real estate section of their Sunday editions.
Using recent sales of homes that are comparable in age, location and size is the best way to value your home. More importantly, comps reveal what buyers are looking for and how much they’re willing to pay for it. Here are the main criteria for you to use to set your asking price that a listing agent would also use:
Size. Next, you’ll want to compile sold homes that are similar in size to yours with a deviation of 10%. Pay attention to how the square footage is calculated and note if areas of the home like the garage or crawl spaces are factored in. The idea is to use comps which are as close to your own home as possible (e.g. if your home has a finished basement, try to find comps with finished basements as well).
Timing. Although real estate is cyclical, you’ll need to look at the last three-month date range to get the best idea of how homes are currently priced. You likely won’t be using these sales to influence the value of your home. Instead, you can see how your market has fluctuated and, if you have flexibility in your timing, use the information to decide whether this is the best time to sell. Generally, homes sell for more and faster in the spring and summer, when families have greater flexibility to relocate.
Location. Most appraisers will start by looking within a one-mile radius of the address, making sure not to cross school districts and natural neighborhood dividers like freeways and other major traffic arteries, so start by compiling at least three relevant sales comps in your radius. Note that if your home is part of a subdivision, your sales comps should come from the same subdivision, as homes will have been built around the same time and by the same developer using the same materials.
Updates & Features. Depending on your specific market, the types of updates and features can heavily influence buyer interest. Following the sales comparison approach, you’ll want to further refine your comps by looking at recent sales with exact or close-match upgrades. How many similar homes in your area sold with a new kitchen versus ones which sold their kitchen “as is”?
Some things that can mitigate the age of a home are major repairs, upgrades, and updates. If you’ve replaced the roof, plumbing, and addressed the foundation, then your home could be more desirable than a home that was built at the same time as yours but hasn’t been updated. (Keep in mind that most buyers will have their own personal tastes when it comes to larger or cosmetic upgrades like kitchens.)
Creating the Comp Chart
Now that you’ve gathered homes in your area with similar features, upgrades, sizes, and within a close age, it’s time to create a comparison chart. Using a spreadsheet, organize the following information into their own columns:
- Days on market
- Date of sale
- Asking price
- Closing price
- Square footage
- Year built
- Distance from your home
- Attributes of the neighborhood
- Types of upgrades or remodeling projects
- Similar features or attractions
With all your data collected and organized, choose three to five homes that are the most similar to yours. Now you can choose your asking price based on the spread between their asking and closing prices. If your choices aren’t exact matches, you can adjust your asking price by 5% per feature your home has that the comps don’t, or vice versa.
Are You in a Buyer’s or Seller’s Market?
The type of market you are trying to sell in will ultimately determine the final asking price. In a seller’s market, there is more demand than supply (more home buyers than homes for sale), and in a buyer’s market, there is a greater supply of homes or homes which are sitting on the market longer than expected.
In a seller’s market, homes are selling quickly (within 30 days or less of going on the MLS) and are closing at prices above asking. Selling in these market conditions is ideal as you can price your home competitively to attract multiple bids. In a buyer’s market, homes are sitting on the market longer than 30 days and are going for less than asking.
What causes buyer’s market conditions? There are multiple factors. Oftentimes there are simply more homes for sale than current demand. If it’s currently winter, it could be that a majority of potential home buyers won’t move until summer when their children finish school. In a buyer’s market like these, the few home buyers have greater negotiating power due to the lack of competition.
To determine the type of market, look at the comps you pulled earlier when determining your asking price. Check the listing dates against the sales dates as well as trends in new listings in the past three months. (You might also want to read Can I Time the Market to Sell My Home?)
Pricing Your Home to Start a Bidding War in a Buyer’s or Seller’s Market
Start a Bidding War in a Seller’s Market. If you want to start a bidding war in a seller’s market, you will want to price your home at market value. In a seller’s market, buyers may be frustrated at being beat by all-cash buyers. They’ll be pleasantly surprised by a home listed at market value and will be highly motivated to put in an offer quickly.
Start a Bidding War in a Buyer’s Market. If you’re in a buyer’s market, price your home between 5-15% below market value. Studies have shown that pricing your home this way will capture the interest of 90% of buyers and will indicate you’re motivated to sell.
In either market conditions, whatever you do, don’t underprice your property. If you’re in a seller’s market and your house is priced below market value, buyers and their agents will assume there’s something wrong with the property and discount it immediately. Or they will assume you’re so desperate to sell, they’ll send in a low-ball offer.
Remember, to start a bidding war, consider that price is not what you think your home is worth or the amount you hope to get, it’s the price at which you think other buyers will be encouraged to bid higher. Do your research and understand the market conditions. If a bidding war successfully starts on your home, you’ll receive higher quality offers, and more of them, helping you to sell your house quickly and effectively.