There are many different bubbles of markets throughout the Greater Cambridge area, so I will focus primarily on the Cambridge market. Pricing is a hot topic both for buyers and sellers alike. Buyers are eager to get into a home after losing multiple bidding wars and sellers alike want the best value for their home knowing other properties in the area got a solid deal for their homes. So where do you start?
1. Buyer Behaviors
Pricing is something you have to continuously tweak as time goes by. Essentially you are analyzing buyer behaviors over time to see how other properties like your subject property measures up. On average buyers want similar characteristics: great curb appeal, a layout that flows well, and amenities in urban cities like laundry in-unit, parking where parking is so scarce and outdoor space. Buyers can also be split into segments. A buyer that is looking for a fixer-upper is not looking at new construction usually. Some buyers who are open to townhouses are really looking for single families and other buyers just want to get their foot in the door in the right location. So when it comes to pricing we actually care very much about buyer behaviors. We equally care about what buyers do not like. For instance, a corner unit on a very busy street may not be ideal and these properties no matter how grand might sit for the right buyer.
2. Quantify Buyer Behaviors
How do you quantify buyer behaviors? We do this by understanding subjectively the distinct market and adding value to property qualities valuable in that market. Take Cambridge, as my primary example, there is very limited space in Cambridge so having off-street parking for your car, having laundry not only on-site but in your unit and having a little bit of outdoor space you can call your own are highly desirable. These qualities in Wayland would not hold the same value as it is much more prevalent and there is more land to go around. Knowing your market is very important. But there are other characteristics that are equally important no matter where you go. Having good bones (no major structural issues), having nice curb appeal, having a private entrance way, being on a quiet street and maybe on a street with higher owner-occupancy rates. You will notice that properties that have a parking space tend to go for more money. Condos sold in the last 12 months in Cambridge on average sold for $788,101 and condos with 1 parking space sold for $811,464. That is approximately $20,000 more. You could add more criteria but best to keep it simple and make a parking space valued at $20,000 in your adjustments.
There is some obscure pricing to take into account as well such as property placement on a busy intersection or near a rail road or in an up and coming neighborhood. For these types of scenarios, you will find that these properties that sit near the rail road for instance may sell for 10% below the average and thus you will want to make a percentage adjustment.
Condition of a property is also important. You can research how much it would approximately cost to fix up a kitchen for example. Let’s say a 10 x 10 kitchen will cost $30,000 with mid-range upgrades. If your subject property has a dated kitchen then you would add the cost to upgrade plus account for the time and effort which you may value at $10,000. So having an outdated kitchen can cost around $40,000.
3. Research Comparable Properties
It is best to stick as close to the subject property and use comparable properties (comps) that have sold in as recent as possible. If you do not find comps in a 0.5 mile radius in the last 3 months then expand out slowly until you have about 3-6 comps. Be sure to also chose comps that are a similar size to your property within a 20% range and ideally with similar number of bedrooms and similar style. Then you adjust qualities side by side.
Take this very simplified example below. The subject property is blue and we have 2 comparable properties green and orange. The green house has 2 features that are better than the subject: 1 parking space and its on a quiet street so we must subtract value from this home to make it like the subject property. The orange house has one less amenity than the subject property so we add value to the property to bring it up to the value of the subject property. You notice when we do this we see that the new price for the green and orange house if they were just like the blue house would be $715,000. So although the green house seems similar and sold at $800,000 we know that the subject property is missing some key qualities to sell at the same price. Then we see the orange house which sold at $700,000 but did not have the desirable laundry area thus our blue subject property is more valuable. This is how we make adjustments to find an average price. This average price is a great reference point for pricing your home for sale and for purchasing a property. This does not however take into account a seller’s pricing strategy. We will save this topic for another blog.
4. When Pricing Goes out the Window
In the Cambridge market, we are seeing an influx of cash buyers. Pricing analysis is great in most markets and it should certainly be done regardless to give you an idea of what buyers have been willing to pay for a home. That said, if we go back to our Economics 101 class, we learned that pricing is actually what a seller is willing to sell and what a buyer is willing to pay. The point at which demand and supply intersect is how much a house is worth. Did I overpay? Did I get all the money I should have on my sale? These questions are very common, and the answer is not well accepted. A house is always worth what a buyer is willing to pay and a seller is willing to sell and sometimes it goes off the grid. Good luck on your next home sale or purchase!