Dear Monty: One of real estate’s biggest myths

By Richard Montgomery

Reader Question: The relo counselor is telling me I will lose the relocation benefits if I list my home for more than ten percent above the average of two appraisals. This seems like one of real estate's biggest myths. Their argument is this rule will ultimately help the home sell at a higher price, which means more equity for me. I think I should have a chance to maximize my value. Do you have an opinion about the ten percent over appraisal ceiling?

Monty’s Answer: The qualified answer to your question is that the guidelines likely are based on unfounded logic, and is not allowing you the chance to benefit. One relocation company did research that suggests the approach your employer is taking with you is not as practical as promised. They developed a chart that explains the research results and adds clarity to your question.

Impact of Pricing Guidelines (see chart)

The percentage difference between the actual sales price of homes and the average of two appraisals is summarized. Pricing guidelines are intended to reduce the loss on sale that would reduce the number of transactions reported in columns one and two on the chart. In column one and column two, 34% of all homes investigated sold for between 5 and 10% lower and 10% or lower than the average of two appraisals.

The Difference Between Actual Sales Price and Appraised Value

The company’s team analyzed the actual transactions reported in the "5 to 10% lower,' and  “10% or lower,” and found the following:

1. 76% of the transaction’s original list price was within the typical 105% pricing guideline.
2. The average original list price as a percentage of the contract of sale was 103.5%

Conclusions

1. The original list price was not the cause of the higher loss on sale results.
2. The actual causes of the higher loss on the sale result were issues such as:
3. Unique homes or properties that were difficult to appraise.
4. Deteriorating real estate markets in the applicable location.
5. Homes with unique issues that are difficult to determine the impact on value.

In my opinion, this limited research provides credence and perspective to your objection.

Determining the fair market value of a house is both an art and a process.

The Art

1. Many real estate agents realize that determining value is a very imprecise art.
2. Some tools have been created to help with this process. Examples include various appraisal documents, software packages, Internet sites, training programs, etc. However, no tool or expert will guarantee their prediction of the value of a home.
3. Ultimately an agreement between the seller and the buyer determine the value of any given home. The unpredictability of sellers and buyers is one of the primary reasons that determining value is such an art.

The Process

1. Relocation professionals use various tools to start the process by determining an initial list price to place a home on the market.
2. Feedback from the marketplace is then used to adjust the price or condition of some factor to more accurately reflect market reality.
3. This process of adjusting marketing to reflect the reality of the marketplace continues until the seller and buyer agreed on value and a sale.
4. The determination of the value process is now complete.

The Important Lessons

1. Do not ignore the process that is a critical element in effectively determining the value of a home.
2. Do not to overemphasize or value any one tool that can be used to determine the value of a home.
3. Do not Institute unreasonably restrictions, i.e., overly restrictive pricing guidelines, which will not effectively allow the process to determine, fair market value of a home.
4. Recognize that the justifiable range of value for many properties can vary by more than 10%.
5. Valuation tools are often not able to effectively value common issues such as busy streets, great views, in ground pools, unusual floor plans, and more.

In Summary

Understand the research above involved real estate appraisers as opposed to real estate agents to establish the price the company will pay for the employee’s home. The real estate agents often start the process of marketing a home independent of the price negotiation between the company and the employee. Unlike the appraiser, the listing agent is working on a “ success only” fee. There is a tendency in this environment for many agents to overlook or minimize the importance of the process.

Richard Montgomery is the author of "House Money - An Insider’s Secrets to Saving Thousands When You Buy or Sell a Home." He is a real estate industry veteran who advocates industry reform and offers readers unbiased real estate advice. Ask him questions at DearMonty.com.