Understanding Real Estate Prices
Did you know there are four prices throughout a real estate transaction? And did you know the price can change throughout the escrow process? Let us walk you through these stages and discuss which price is ultimately the most important.
1. LIST PRICE
The list price is what the seller sets to offer their home based on a listing agent’s recommendation. As the market is shifting in the summer of 2022, some sellers believe their house is extra valuable or worth the same price as homes that sold months ago. In some markets, list price can be dictated by recent sales, but there are other factors that a knowledgeable listing agent will discuss with a seller to price a home correctly. Other sellers choose to be more realistic, and in line with the current market conditions, so you will notice there can be a range of list prices for similar homes.
2. OFFER PRICE
This is the price that will be presented to the seller when a buyer writes an offer. Based on many conditions, it could be the final contract price. Depending on who has the negotiating power in the current market, buyers/sellers can negotiate the terms or price of the home throughout the escrow process.
3. APPRAISAL PRICE
The third price is the house appraisal price which the bank determines is the value of the home. This appraisal price could change the offer price depending on the contract terms, such as whether there is an appraisal contingency.
4. FINAL CONTRACT PRICE
After the appraisal, any repair negotiations or other details, the final contract price is ultimately the sales price that the buyer pays. This price is what you will see on the MLS or county records when the home sale closes escrow.
HOW ARE THE FOUR REAL ESTATE PRICES RELATED?
The four prices defined above are all related to each other, and depending on the market condition, they may fluctuate throughout the escrow process. Let’s discuss several market condition scenarios to help illustrate the relationship between these four prices.
FIRST SCENARIO: PANDEMIC CRAZY
Let’s go over an actual scenario of a home I sold back in January 2022 when the supply was low and buyer demand very high – an extreme sellers’ market. The seller listed the property for $1.8M. So many buyers were interested in the home that the seller received 20+ offers. The top few offers were over $2.3M! So the gap between the list price and the offer price was $500,000!
The bank appraised the property much lower than the offer price, but since there were no contingencies in the offer contract, the buyer had to come up with extra money above the bank’s value to close the sale.
The offer price was $186,000 over the bank assessment; since the buyer removed the appraisal contingency to be competitive, they could no longer negotiate with the seller!
The final contract price remained the offer price because the buyer had no contingencies and, therefore, no ability to re-negotiate based on appraisal, inspections, or investigation.
SECOND SCENARIO: SLIGHT SELLER’S MARKET
This second scenario is set in a mild seller’s market such as we have today in September 2022. In this scenario, we will set the list price at $1.5M (about the average home price in San Jose).
Let’s assume the offer price comes in at $1.475M with some contingencies. Today appraisals are coming in at the offer price (or even slightly above), so let’s use $1.475M as the appraisal price. Since the appraisal matches (or is higher than) the offer price, the buyer will be happy with their loan, and likely the final contract price will match the offer price.
THIRD SCENARIO: BUYER’S MARKET
When the market changed in 2009, there was a lot of inventory and fewer qualified buyers willing to buy. In this buyer’s market scenario, let’s keep the numbers consistent for illustration and put the list price at $1.5M again. In a buyers’ market, it is more likely a buyer will come in with a low offer, $1.4M.
Let’s say the bank appraises the property even lower at $1.35M. In a buyers’ market, the buyer likely has an appraisal contingency, so the buyer can return to the seller and renegotiate the price. The options are to negotiate with the seller to match the appraisal price or negotiate somewhere between the offer price and appraisal price. An experienced agent can educate you on which scenario today’s market is and how to negotiate through the steps. Contact us to work with a knowledgeable agent on your side!
WHICH PRICE IS MOST IMPORTANT?
Based on the discussed scenarios, which of the above prices do you think is most important?
The final contract price is most important since the buyer pays this price, and the seller receives their net profit based on that number.
We hope this discussion clarifies the relationship between the four real estate prices and how each can change through the process and with different markets. Do you see why a knowledgeable and experienced agent is valuable on whichever side of the sale you are? A real estate agent who does a lot of business knows precisely what’s happening in the local market and can advise you on your list price or offer price and help you negotiate a final great contract price.
Are you wondering… Is it a seller’s market right now? Is this a buyer’s market? Who has the negotiation power in the local Bay Area real estate market? Where do you find data and facts for the local San Jose Real estate market trends?
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