The housing market is finally getting back to normal. This year, sales of existing homes are likely to match or top long-term historical averages for the first time since the early 2000s. But real estate economist Stan Humphries says that some of the conventional wisdom about buying and selling a home has changed drastically. That’s partly because people have become much more wary about the future of real estate prices in the wake of the 2007–2009 housing-price meltdown…and partly because of the growing role of technology, especially the Internet, in real estate shopping. Humphries has analyzed millions of home listings, as well as data gathered from millions of monthly visitors to the Zillow real estate website. He has developed insights that can earn you thousands of dollars more on the sale of your home.
Conventional wisdom says that as a seller, you should overprice your home by 5% to 10% to leave yourself some wiggle room in negotiations…renovate your kitchen to add the most value to your house…and list early in the year to catch the spring and early-summer home-buying rush.
But here’s what national and local housing data say are the rules that work better now…
Rule 1: Price a home as close as possible to fair market value. About half of all sellers still price their homes too high and have to make cuts to attract potential buyers. Zillow studied more than a million homes listed for sale and tracked price changes until they sold. Homes that required a 10% price cut spent an average of 220 days on the market and sold for 2% less than their estimated value. That’s because buyers bargain more aggressively when a listing sits on the market a long time. Homes that were correctly priced to begin with needed no price cut to sell, spent an average of 107 days on the market and, best of all, sold for 2% more than their estimated value.
Best way to determine fair market value: Have a real estate agent prepare a market analysis of the recent selling prices of comparable homes in your area to help establish fair market value.
Rule 2: Make sure the last non-zero digit in your original asking price is a nine. This is the same kind of psychological pricing that works in retail stores, and it leads to faster, more lucrative sales for homes at every price level.
For example, the average US home that was listed initially for $449,000 wound up selling for about $4,000 more than a home listed at $450,000. What’s more, comparable homes priced $1,000 lower than their counterparts sold four days faster on average.
Why it works: Consumers are conditioned to see prices ending in nine as signifying an attractive discount. That kind of pricing attracts more attention to your home’s listing, which often translates into higher offers.
Rule 3: Make modest upgrades to your home that restore the basic functioning of the house. Modest upgrades have a much bigger relative impact on your home’s value than renovations that add fashionable but frivolous luxuries. For example, upgrading a bathroom from poor to decent shape completely changes the livability of the property and appeals to just about everyone. But taking a fully functional bathroom and adding high-end elements, such as fancy jet-massage showerheads or dramatic tiling, actually may turn off many prospective buyers. Based on Zillow’s analysis, a $3,000, mid-range bathroom remodel—with such steps as replacing the toilet…updating lighting fixtures…adding a double sink…and painting or putting up wallpaper—resulted in a $1.71 increase in home value for every $1 spent on renovation. But plunking down $12,000 for a complete bathroom overhaul, including replacing the floor and moving plumbing, resulted in only an 87-cent increase in value per dollar spent.
Note: In contrast to conventional wisdom, kitchen renovations have a lower return than many other home-improvement investments, with a cost recovery of just 50 cents per $1 spent regardless of the scope of the remodeling. Reason: Prospective buyers are very particular about what constitutes a dream kitchen. They won’t be excited about a kitchen renovation if it doesn’t happen to match their needs and tastes.
Rule 4: List your home for sale in late March or later. Many home sellers choose to list early in the year, starting in late January or in February. They do this in order to have plenty of time to catch the spring and early-summer home-buying rush. But Zillow’s data indicates that listing very early in the year has become so popular that you’re better off waiting until after the first few weeks of March or even the second week in April in some markets, such as Boston. The average US home put on the market in late March, for example, sold for over 2% more than the average home listed earlier in the year. Reason: Your house doesn’t get lost in a sea of new listings. That leads to more attention and potentially more offers.
Rule 5: Write long, carefully worded listings. Although the Internet allows home sellers to upload videos and lots of photographs of their homes, the data shows that homes with written descriptions longer than the median length of 50-to-70 words routinely sell for more than their asking prices, while homes with shorter written descriptions don’t. Prospective buyers want details, and those extra words give them additional information that makes a home worth seeing in person. Note: After a listing reaches 250 words, additional length did not seem to help the sale price.
What to write: Avoid words in your listing that connote “small,” “nothing special” or “needs work.” These words include cute…charming…potential…quaint…needs TLC…and unique. Such words turn off buyers and can reduce the selling price by as much as 2% to 7% of the asking price.
On the positive side, lower-priced homes described in listings as luxurious beat their original asking prices by 8%, on average…and using impeccable beat their original asking prices by 6%. In more expensive homes, listings with the word captivating boosted the sale price by 6.5%, on average, and the word gentle (typically referring to the property description such as gentle rolling hills) was worth an additional 2.3%, on average. Words such as remodeled pushed up the selling prices of homes in every price range by an average of 1.7% to 2.9% and landscaped by 1.5% to 4.2%.
People choose to buy particular homes for a variety of reasons that have little to do with money. But if one of your primary goals in choosing a home is price appreciation, the data is clear—look at properties in up-and-coming neighborhoods.
If you can get to one of these neighborhoods within the first five years of it becoming hot, you have a chance of snatching a property at a much lower price point than in areas that are already well-regarded.
How to spot these soon-to-be hot neighborhoods…
Use the Halo Effect. Look for less developed areas adjacent to premier neighborhoods that already have taken off and have ample restaurants, cafés, parks and nightlife.
Look for a Starbucks. Believe it or not, having a location of the popular coffee shop within a quarter mile of a house has proved to be one of the strongest, most reliable indicators of neighborhood gentrification and rapidly appreciating home prices. Between 1997 and 2014, US homes appreciated 65%, on average. But properties near a Starbucks appreciated 96%, on average, and they recovered much more quickly from the housing bust. Reason: Starbucks has an army of analysts and geographic information specialists dedicated to finding the next hot neighborhood, assessing everything from traffic patterns to the kinds of new businesses opening in the area. In addition, the iconic coffee shop is seen as a proxy for gentrification by other potential upscale businesses.