505: Pricing your Property for Sale
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Episode Transcript
00:02
Welcome to Episode Five of Season Five of the Growing Empire Show. Today we're gonna talk about pricing your property for sale. So stay tuned.
00:10
Welcome to Growing Empires — hosted by real estate entrepreneur and trusted investment advisor Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments. For those who want to build and manage a more profitable real estate portfolio.
00:29
You're getting ready to sell your investment property, and now we need to think about pricing your property for sale. First thing we're going to talk about today is the difference between a CMA and an appraisal. A CMA stands for comparative market analysis, and that is typically done by a real estate agent or broker. And in theory, they use the same data that an appraiser would use — the main difference being that a real estate agent or broker is not typically licensed to do appraisals. And yes, it does require a separate licensing. A comparative market analysis is going to compare properties that are similar in kind and unit count to your investment property. And they are going to provide an analysis of what they believe the market will pay for your investment property. The difference between that and appraisal is an appraisal is actually an assessment of value. It's an independent opinion of value. Market analysis: what your property could likely sell for; appraisal: what your property is worth. Since you must be licensed to do appraisals, you can also assume that appraisers have to follow the same rule book, and that rulebook is going to tell them how far away they can find comparables, Typically in our market, they are going to use properties that are no more than one to two miles away. So it's going to be in the same zip code, the same area for sure; they are going to compare the size of the property, the amount of units in each property. So for example, if I'm selling a single family home, they're not going to compare my home to a two unit or a three unit apartment building. Just like if I'm selling a mixed use property where I've got commercial on one floor and maybe apartments above, they're not going to compare that to a strip center. So they have to find similar type properties to compare. We already talked about the distance from the subject property to the comparable, but we didn't also talk about the length of time. So typically, no more than six months, they're gonna find comparables. So whatever happened in the last six months are generally going to be the properties that are going to be used as comparables against your property. So no more than one to two miles away, no further out than their most recent six months of sales; they're going to compare the size as I said, the unit count. And depending on what type of appraisal they're doing, and I'll talk about that in a minute. will depend if they're also going to use some sort of valuation for the income on the property. Okay, so that's the difference between a market analysis done by a real estate agent or broker and an appraisal done by a licensed appraiser. Why you need to know the difference between the two is that when you seek out a broker to work with to help you list and sell the property, you've got to understand that they're only giving you their analysis of what they feel the property could be worth in the open market. And since they don't possess the licensing, to give you an actual valuation, that valuation could come in different after you're under contract. An appraiser is not hired until the buyer is through the mortgage application process; then they go into the underwriting process, and then the appraisal is ordered. So that appraisal is typically 30 days away from contract time, until you may have an actual valuation for your property. So keep that in mind when thinking about the value of your property because you would not want to be in a situation where you price it high, you get it under contract high, then an appraiser comes in and says oh no, the property's worth much less. That could essentially blow up a deal and cost you a lot of time and money for having your property on, you know, off market.
4:15
So let's talk about the three different types of analysis that an appraiser would use. There's the sales comparison approach, the income approach, and the cost approach. Those are the three main types of appraisals.
A sales comparison approach compares your property to other properties. So they're comparing building to building; they're going to look for things like I mentioned earlier — within a certain radius of the subject property with a certain size of properties, certain bedroom counts, recent sales, all of those things would be a factor in a sales comparison approach.
The next type is income approach. And that is exactly what it sounds like. An income approach is based strictly on numbers, and it's a way to value your property based on the return on that investment — the actual income that the property produces; and they're going to compare in this analysis, they're going to compare your income to another similar property, that income.
The last is the cost approach. And the cost approach is typically used to valuate new construction. The cost approach is the land plus the cost to build minus depreciation. That's how they factor what the cost approach number is.
Sales comparison approach is typically used one to four family income approach is typically used for five or more units or commercial properties. And the cost approach is typically used for new construction.
5:44
So next, let's talk about theory of negotiation. This is always quite a hot topic when it comes to selling investment properties. Theory of negotiation — I can't tell you the number of times I've heard a seller say, Well, I'm going to listen to this. But I'm not going to take less than this number. And I'm not going to do this. And I'm not going to do that. There's this misconception that negotiations have to be volatile. And they don't. Really what real estate is, it's a combination of bringing the buyer and the seller together for terms that are acceptable to both parties. Negotiations don't have to be volatile, they don't have to be mean, it doesn't have to have a hard stop. What we're trying to do is find a common ground where both the buyer and the seller can walk away feeling good about the deal that they made. So my point in all this is that when you're going to sell your property, the worst thing that you can do for yourself is to have this fictitious line in the sand drawn, where you say to yourself or fill your your head with, I'm not going to do this, no matter what or I'm not going to do this because of this. Because that hard and fast line that you're going to draw could be the difference between whether you're successful at selling or not selling. If you are not an expert in the market, the first thing that you need to do is you need to take your real estate agent’s or broker’s advice on what the property should sell for, what type of terms you should expect, and really what to expect as a whole out of the deal. But you want to avoid having this mindset that when you get into negotiations that they're going to be really volatile, because they really don't need to be. Another thing that I'm going to urge you to do to get the best out of your property is never split the difference. Ironically, there's actually a book written that's called Never Split the Difference. But you want to think about the deal as a whole. It's not always about price; there are terms that you need to think about that could make a difference for you. Maybe you need to sell quickly. If you need to sell quickly, the price of your property is going to be different. If your property has significant deferred maintenance, the price of your property needs to be adjusted. So when we're thinking about pricing the property we need to think about how the property compares to the other properties in the market based on condition, based on size, based on income, and based on other sales. And that'll help you to really price your property effectively for sale.
8:17
It's really important that you know your competition — you want to price competitively, but you also want to be strategic about it. So when you talk to your real estate broker about your market analysis, you want to look at the sales comparison option. And you want to compare your property to other properties in the market that have sold. But you also want to do yourself a favor and price your property — or evaluate your property, I should say — based on income. So when I go to sell an investment property, I actually look at both methods. Okay, I look at if this property didn't have income on it, right? as an example, what would this property price at what is it worth — just compared to other buildings in the same marketplace? Then I look at the income on the property. And I look at what the property's value is based on the income on the property, and how that compares to other income producing properties. And then I talk with the owner about how to price it competitively, but strategically, because you got to think about who is the most likely buyer; if you're selling a single family home, sometimes what you get for rent and the income on the property is not as much as what the property could be worth to an owner occupant. So you need to actually consider both and sometimes it's the opposite. Sometimes the income is so high that it's more valuable as an income property versus an owner occupant home. But there's some really key points here that I want to just make sure that are clear and understood is that: if you're selling anything from one to four family, you can get financing to owner-occupy the property even if you are an investor. So if you're selling a one to four family property, you really need to look at both you need to look at what the property is valued to an owner occupant and what the property is worth to an investor who would not live there. And then you need to figure out who's your most likely buyer. And that is how you're going to determine what the price of your property should be. You also want to look at what is on the market currently, and what just recently went under contract and how quickly it went under contract. Because again, that will tell you the history, and what the buyers are, what the market is dictating, at that current time. What's on the market is active listings — that's your direct competition. So you want to make sure that part of pricing competitively and strategically, is you want to make sure that you're placed in the mix of that — you never really want to be the highest priced property, because you likely won't get looked at, but you never want to be the lowest priced property, because you're likely not getting enough money for your property. So you want to look at what is on the actual open market right now — that is your competition. But you also want to look at what the market is dictating today, and that is you're under contract listings. So going back to what I was talking about before with a comparative market analysis, and an appraisal, those are based strictly on sold properties. But your pricing comparison needs to also look at what is on market, that's your competition. And what is something that recently went under contract, because that tells you what the buyers are demanding right now. You also want to look at the time on market, if you see something. So we're in a market that's really hot, right? You've heard me say that before; things go on market and under contract in literally days. Sometimes there's offers presented on properties before the properties are even seen. So if you're in a market that is that hot, if you see a property on the market for more than 30 days, it wasn't priced right or there's something really wrong with the property — I can assure you of that. So you want to look at kind of what the history is and how quickly those things have sold. Because what you want to do is you want to make sure that your property gets on and off the market in an average amount of time for what that marketplace is doing currently. If your property sits on the market longer than that, people are going to start to assume that there's something wrong with your property, and then your offers are going to be less favorable. So, one of the main tricks to pricing competitively is knowing your timeline, as well. How can you accomplish what you're setting out to do, which is getting the most amount of money for your property with the best terms in a timeframe that is reasonable for the marketplace that you're in. And if you take all of what I've told you so far, and you compare all of that together, it'll really help you price competitively as strategically because you know your competition, you know, what buyers are looking for, you know what the banks would likely appraise your property for, and then you can use that data to get your property on the market and put the best foot forward.
12:50
The episode will continue in just a moment. To make the most out of your investment property sale, you will need a team that understands the market fluctuations and how to capitalize on that demand. Knowing the market trends and forecasting economic changes is critical to your success. Having an expert by your side to help you buy low and sell high is the only way to create true wealth. When you need help analyzing your portfolio to maximize your return on investment, there's only one person you need to call — and that's me. I will help you analyze your portfolio and increase your profitability year over year. And that's my guarantee. Schedule a call with me today at growingempires.com. That's g-r-o-w-i-n-g-e-m-p-i-r-e-s.com. And I'll help you create the life that you desire with passive real estate investing.
13:37
Here's what you need to not do when pricing your property. Never, ever, ever price your property anticipating negotiation. What I mean by that: don't say to your real estate broker, I want to list my home at $500,000 because I want to leave room for negotiations. But I know my property is only worth $425,000. Never do that under any circumstances. That may have worked back in the day, but that does not work in a hot real estate market where things go on and off the market really quickly. And here's why: if you overprice your property, you're doing two things: one is you're killing the opportunity to have multiple bids on your property. And that is not a place that you want to be as a seller, the most powerful position that you could ever be in is multiple bidders at the same time. Because then they're not negotiating with you, they're negotiating against each other, and you as the seller are in a very win win situation. Number two, if you price your property anticipating negotiation, you're putting the cart before the horse, you may never get to negotiate because people will bypass your property because your property is overpriced. So maybe years ago that worked in a different market, in a different time. But today I will tell you at least in our local market, that does not work and you are literally shooting yourself in the foot if you are going to price your property anticipating that somebody is going to negotiate lower. Now with that being said, you will always get somebody; even if your property is priced under market value, you're still going to get somebody who is uneducated or not well advised that is going to likely give you an offer on your property that is well below acceptable. Don't worry about it, don't stress about it, certainly don't get bad, don't react — just kind of chalk it up to the fact that they are ill advised and move on to the next buyer. You have no reason to react or have any feelings about a low offer. You just reject it and move on or counter it if you feel like it's within the acceptable range, but don't react. Don't get upset, know that there's no shortage of people out there that are ill advised. And you likely will experience at least one person giving you some kind of crazy lowball offer, ignore them and move on. That's the best thing to do. But never ever, ever, as I said before, price your property anticipating a lower valuation or a lower offer. Price your property competitively and strategically in the market, so that you can obtain multiple bidders and put yourself in the most powerful position.
16:22
So when it comes time to receive offers, and you magically get offers on the first day, do not automatically think that your property is underpriced. I assure you, if you're doing this, right, you've accomplished your number one goal. And that's to get multiple bidders. And to do that, you have to price your property at market rates, you have to price it where somebody is going to want it. And what I mean about being in the most powerful position is and why you want to get offers on the first day or within the first week, I should say, they don't always happen on the first day and you shouldn't panic if they don't, usually within the first week, definitely by week two, if you don't get multiple offers in that time period, then you know, you probably price it a little too high. But that's okay. That doesn't mean you won't get offers, you might not just get multiple offers. But why we want to go to the point of multiple offers is that this is where it's no longer just about the price, it's about all the terms, right. So, that buyer who really has the ability to buy cash, but would prefer to finance likely will change their offer from a financed offer to a cash offer. And by doing that, they might actually even cut out the appraisal. So now you don't have an independent third parties opinion of your property to really fuss with, you just have a cash deal. Cash deals closed much quicker, they have a lot less hurdles. So when buyers are forced to negotiate against each other, not only are they going to want to give you the best price that they're willing to offer you, but they're also going to want to give you the best terms. So it would not be uncommon to get an all cash offer quick close, no inspections, no contingencies. And that is literally gold from the perspective of a seller selling any type of investment property. I want to just touch really quickly on the difference between a residential and an investment valuation because I find that people sometimes get stuck in this category. And what bank is going to be financing the buyer is really important to the seller. And here's why. If the property is one to four units, the bank that's going to finance that is likely going to use a sales comparison approach, which means they're comparing a building to building; they're not comparing it based on income. And you need to know that because if your property's highest value going back to what we were talking about before with valuing your property based on the sales of other properties, like kind properties in the area versus the income on your property, if you find that the income of your property is far superior to evaluation to the sales comparison approach, but you're selling a one to four family, you should be cautioned a little bit because depending on the type of bank that is going to fund the buyer, if you are basing your property when you price it and you're pricing it based on the investment valuation or the income approach because that's where the most value is and you feel that the most logical buyer is an investor, when it comes time for the bank to come out and do an appraisal, if it's a one to four family, they likely are going to automatically use a sales comparison approach which is not going to give you the same valuation that you price your property with to put it on the market. And that's because they're comparing it building to building. The only type of banks that do the income approach are typically commercial banks. So if your investor is buying in an LLC, you probably have nothing to worry about. LLC purchases have to be in a commercial product done by a commercial bank. But residential lenders can lend up to four units, and they almost always use the sales comparison approach. So just keep this in mind and make sure that you talk to your real estate broker about the bank that is going to fund the buyer when it comes time to receive offers. And let's just make sure that if you price your property based on an investment valuation or an income approach, and they're using a bank that is likely going to use a sales comparison approach, just know that you might have some challenges if your building is under four units. If your building is five units or more, you have nothing to worry about. We're specifically talking only about one to four family homes.
20:29
Let's just quickly recap for today. We talked about the differences between the appraisals — three main types of appraisals; the sales comparison approach, which compares property to property; the income approach typically used for commercial financing, or five or more units based and that basis, the evaluation on income alone; and then the cost approach, which is your land plus your cost minus depreciation typically used for new construction homes. We talked a little bit about the theory of negotiation and what to do what not to do, and pricing your property anticipating negotiation. We talked a little bit about pricing your property competitively and strategically, all at the same time, the differences between a market analysis and an appraisal and what you need to know when pricing your property. And we talked a lot about first day offers the negotiation to expect and how to put yourself in the most favorable position when you're going to sell your investment property. I hope you got a lot out of today's episode, and I hope when it comes time that you're pricing your property and anticipating multiple offers. Until next time, take care.
21:38
For more information about how Jennifer can help you plan, develop, and manage a strong real estate investment portfolio, visit growingempires.com