Home Pricing Analysis: An Example

[A telling story of home pricing, retold in this blog due to its continuing relevance]

I recently had the opportunity to analyze the pricing of a home in the Manhattan Beach Tree Section that had been offered for sale in the current buyer’s market for over 130 days without an offer. For that purpose, and as an example of the types of analytics we can create for you in the course of assisting you in pricing a home for sale (or evaluating what to offer for one), I present this analysis below. - David



The pricing of a home in a buyer’s market must be performed with a clear view toward the available substitutes on the market. Even strong advertising, frequent open houses, and special offers (e.g., financing and agent incentives) cannot overcome the stigma attached to an overpriced home in such a market. Moreover, in a buyer’s market involving financing resistance, buyers are generally reluctant to make what they fear might be perceived as a “lowball” offer for an overpriced home. So they make no offer at all.

Please see our analysis of this home below for our considered advice on this topic. Also please note that this summary analysis was supported by 40 page report also provided to the client.

PRICING ANALYSIS
A high quality property that has been on the market for more than a couple of months is quite likely overpriced for the market (supply, demand, local real estate economy, time of year). The biggest issue right now is that there are a number of brand new 5 bedroom homes still on the market from the summer and before, and new homes tend to sell before existing homes when the prices are similar (or less). In this case several are less.

SO, we've interviewed several brokers we respect and also created an updated CMA on this property evaluating 5BR Tree Section homes (1) currently on the market and (2) sold since 6/1/07.

Here's what this work reveals:

ACTIVE PROPERTIES

Average unadjusted price of the 19 5BR Tree Section homes* currently on the market is $2,299,000 (avg. days on market = 179).

Of those, average unadjusted price of the 14 NEW 5BR Tree Section homes* currently on the market is $2,315,000 (avg. DOM = 196). The scuttlebutt among builders is that they are about to start dropping these prices to get the homes sold and their prime-based construction loans, currently costing them an average of around $13,000/month, paid off.

Given the similarity in prices, the predilection of MB homebuyers, and the likely price cuts by developers, one would expect the new homes to sell first and (see sold property analysis below) ultimately for MORE than the existing homes.

SOLD PROPERTIES (using actual sales prices individually adjusted by us for comparability with this home in terms of size, age, yard, etc.)

Average adjusted price of the nine 5BR Tree Section homes* sold since 6/1/07 is $2,245,000 (avg. DOM = 95). These homes were priced more attractively than those that haven't sold, and therefore sold considerably faster than will those still on the market

Of those, average adjusted price of the four NEW 5BR Tree Section homes* sold since 6/1/07 is $2,351,000. This includes a $100,000 downward adjustment for the market's current preference for new vs. existing homes

And average adjusted price of the five EXISTING 5BR Tree Section homes* sold since 6/1/07 is $2,160,000, which is 8% ($191,000) less than for new homes sold, so perhaps we still haven’t adjusted the new home sales prices downward enough to reflect the market differential.

ADDITIONAL INFORMATION

Range of pricing suggested by brokers we spoke with last week and this week is $2,000,000-$2,299,000

2310 Palm, included in the "Active Properties" information above, opened escrow yesterday at a price $2,200,000. It is a new home that was on the market for 441 days (not a typo), and its list price was $2,399,000.

RECOMMENDATIONS

Based on our analysis and the information summarized above, we believe that the current pricing of this home, which was at the top of the market in summertime, is now completely out of the money.

Because we must look to the market for confirmation of asset values, we further believe that the proper pricing of this home to generate offers at this time and in this market is now $2,195,000-2,249,000.

As professional advisors, we recommend a price at this level. As an alternative, we could offer the property for lease (MLS, Craigslist, Westside Rentals) for 6 months, and then relist at what would be a better time of year and hopefully a better overall selling market. However we believe it unlikely that the inventory of new homes will have fully worked its way through the market by that time, so this approach, while covering current costs, would involve greater uncertainty.

*Below 4000 sq. ft. (generally meaning without media room & wine cellar) and off the ultra-premium "gaslight district" 600 and 700 blocks of 31st St.

What happened in this real world case study?  The homeowner declined to price the home in the recommended range and ended up selling it months later for less than $2 million  when a job change forced them to move.