Making an Offer on a Home for Buyers

The 5 Real Estate Contingencies You Need to Understand

Contingent Real Estate-The 5 Big Real Estate Contingencies

Whether you’re buying or selling, you need to understand contingent real estate – what it is and how it works. Contingencies affect every real estate transaction and must be directly addressed before the deal can be finalized.

I’ll provide a quick overview of real estate contingencies in general, then discuss the details of the five real estate contingencies you’re most likely to come across in your future property deals.

What are Real Estate Contingencies?

Simply put, contingencies are conditions of a real estate transaction which must be met in order for the deal to close. Think of them as milestones to be passed on the way to finalizing the transaction. Each contingency will be assigned a deadline in the Contract to Buy and Sell. Contingencies may be accepted by formal acknowledgment, but acceptance is also assumed when no objection to a given contingency is noted prior to its deadline. Don’t worry if that sounds confusing; we’ll go over several specific examples together in this article.

Just remember: the contingencies listed in your Contract to Buy and Sell are conditions which must be met. If a contingency is not met, your deal cannot close! That’s why it’s so important to understand common types of real estate contingencies and the requirements of each.

5 Types of Real Estate Contingencies

Any number of contingencies can be written into a real estate contract (as every transaction is unique). But there are five types of common contingencies which apply to most real estate deals:

  1. Title
  2. HOA
  3. Inspection
  4. Finance
  5. Final Walk

1. Title Contingency

The main purpose of the title contingency is to confirm that the buyer will get “clear title” to the property upon close of escrow. Clear title just means that there are no other liens or claims against the ownership of the property. Buyers want to be assured when they purchase a home that no one else can approach them after the deal closes, claiming to own a share (or all!) of the property.

A title company will be hired to research the property’s title (the ownership rights). A good title company will confirm that the seller actually has the right to sell the property. So the title company is looking for any “clouds on title” (any items which could prevent the seller from having complete rights to sell the property).

They also research any issues which could prevent the buyer from “quiet enjoyment” of the property (legalese for living in peace on the property without interruption by claimants).

What’s Included in a Title Search?

A title search and report by your title company typically includes the following:

  • Any pending litigation. Bankruptcy filing, divorce proceedings, and lawsuits could all affect the seller’s ability to legally sell the property
  • Any liens on the property. Liens are debts against the property which must be paid prior to the sale. Tax liens for unpaid taxes and mechanic’s liens for unpaid home repairs and improvements are the most common.
  • Any easements and/or encroachments. Easements are authorized rights of others to access a portion of your land for a specific purpose. For example, you might have a utility easement for government employees to access electrical meters on your property. Encroachments are unauthorized use of any piece of your land by another. This could be a neighbor’s overgrown tree extending into your yard or their fence crossing the property line into your property.
  • Any Improvement Location Certificate (ILC) requirements: ILC’s are informal geographic reports to confirm that the structure and any other improvements on the property (like sheds, fences, etc.) are located within the boundaries of the property lines. ILC’s also show easements and any encroachments. In many cases, they are accepted in lieu of a formal geographic survey.
  • The status of property taxes. Buyers need to know if sellers are delinquent on their property tax bill.

The buyer needs to understand the status of the property’s title and agree to the covenants in the title report. If the buyer objects to any covenant, or if the title company discovers a cloud on title, the seller has the right to cure. Clouds on title are fairly common and often easily cured by the title company and the seller.

If the title issue can be cured, the contract is still enforceable, and the deal can proceed as planned.

In the unlikely event that the seller cannot cure the title issue, the property becomes “uninsurable” for the title company. This means a lender will not finance the purchase, and the property will be extremely difficult to resell. For this reason, the buyer of a home with an incurable cloud on title has the option to terminate the contract. In this case, the buyer would be entitled to a full return of their earnest money.

2. Homeowners’ Association (HOA) Contingency

The purpose of a Homeowners’ Association (HOA) Contingency is to make sure buyers are aware of any HOA the property belongs to. HOA’s are private organizations which manage planned real estate developments. If your home is located in an HOA area, membership is mandatory; you cannot opt-out of an HOA, so you need to understand your HOA and its operations.

HOA Dues

The HOA collects dues from all homeowners with property in the development to pay for maintenance of the development. This includes common areas like private streets and landscaping, as well as community amenities like pools, clubhouses, and security services. Some HOA fees may even include some utilities like sewer and trash.

Buyers must be aware of the amount of the HOA dues, which can range widely. Suburban developments without amenities may only charge $25 per month to fund private road maintenance. Urban condominium communities with full amenities like sauna, concierge, and fitness centers may charge over $1,000 each month! Many Colorado Springs area homes do not belong to HOA’s, but those that do typically pay between $200 and $300 per month in HOA dues.

HOA Bylaws, Conditions, Covenants, and Restrictions

HOA’s also require homeowners’ compliance with HOA bylaws. Buyers need to understand the conditions, covenants, and restrictions (CC&R’s) of the HOA. Some common CC&R’s include:

  • Noise restrictions
  • Parking restrictions
  • Exterior property upgrade restrictions (for example, many HOA’s have similar-looking homes and won’t allow homeowners to change the home’s aesthetic)

It’s important to understand the CC&R’s for your potential HOA because failure to comply could ultimately result in the HOA placing a lien against your home, which as discussed previously, could affect your ability to sell the home in the future.

Finally, buyers should research any special assessments levied by the HOA. Special assessments are a way to raise money for unexpected expenses. Well-managed HOA’s will reserve a portion of the dues for large projects, like a new roof or new road, in a reserve fund. However, the reserve may not cover the complete expense, and the HOA can levy a special assessment to collect the remainder from the homeowners.

Special assessments are also common in emergency situations like floods, fires, or tornados, where the insurance cannot cover the full cost of restoring the community.

Buyers have the opportunity to review all HOA documents, bylaws, and CC&R’s during escrow. If the buyer chooses to object to any terms of the HOA, they must do so before the HOA contingency deadline.

3. Inspection Contingency

The purpose of the home inspection contingency is to allow buyers to inspect the property during escrow. And to make sure buyers are satisfied with the condition of the property prior to closing.

We recommend that every buyer take advantage of this opportunity by hiring a professional home inspector to physically inspect the property and report on its condition and any visible issues with the structure and systems.

You can research local home inspectors online to find an inspector, or you can ask your Realtor for a referral to a professional, certified inspector. If you are choosing an inspector on your own, make sure he or she is certified by ASHI (American Society of Home Inspectors) to ensure a quality home inspection.

What’s included in a standard home inspection?

It’s important to note that home inspectors can only inspect what is visible. They will not open walls or ceilings or dig below ground to search for additional potential issues.

A typical home inspection includes a physical evaluation of the following:

  • General integrity of the structure (any sagging or bowing of the frame)
  • Exterior
  • Roof
  • Electrical system
  • Heating and cooling systems
  • Interior plumbing (this does not extend to the piping leading away from the home)
  • Appliances
  • Attic, basement, and garage areas
  • Grounds (driveway, patio, etc.)
  • Any potential safety issues

We recommend that buyers attend the inspection. This gives them a chance to get to know the property and to learn about the home directly from the home inspector. It’s also a great opportunity to ask questions of the inspector regarding the condition of the home.

Warning to buyers: your home inspection will report every little issue (or even potential issue!) uncovered by your inspector. Don’t panic! Many of these items are documented simply for the buyer’s information. They are the things we all live with like cracked sidewalks, staircases without handrails, or windows that stick when you open them. Take a deep breath before reviewing your inspection report, and know that not every item needs to be addressed. The inspector just wants to make sure you understand what you’re buying.

Some items may be serious and may require a remedy before the buyer is willing to release the inspection contingency and close the deal.

Some items may require an additional inspection. For example, if the home inspector notices electrical outages in the garage, they may recommend that a licensed electrician thoroughly inspect the electrical system.

Many items will simply be noted to bring them to the attention of the buyers and won’t require any action.

Your Realtor can help you navigate through the inspection, having seen dozens or even hundreds of them! Your Realtor can help you decide which items are serious, which items may need additional inspection, and which are just noted for your information.

What’s not included in a standard home inspection?

Standard home inspections do not include:

  • Mold
  • Radon
  • Methamphetamine
  • Lead paint
  • Asbestos
  • Pests
  • Sewer lines

But if you’re concerned about any of these potential issues, you have the option to hire specialists to assess and report on these specific items.

Inspection Objection

Once the inspection report has been reviewed by the buyer, their Realtor can draft the Inspection Objection. The Inspection Objection lists any items from the inspection that the buyer wants to be corrected before the deal closes. It’s also common for buyers to request a reduction to the agreed-upon purchase price so they can afford to correct the issue(s) themselves after closing, instead of asking the sellers to correct the issue.

Inspection Objections often start a whole new round of negotiations. Buyers typically expect the seller to cure some of the issues brought to light in the inspection report. And sellers counter the buyers’ request with an offer to cure some, but not all, of the issues noted in the original Inspection Objection. As with most negotiations, it’s best to enter the discussion with an attitude of compromise.

When the buyer and seller agree on the terms of the Inspection Objection, the inspection contingency can be released and the deal can proceed.

Inspection Objection Deadline

One quick note about the Inspection Objection Deadline: Time is of the essence with inspections and submitting Inspection Objections. To ensure a timely close of escrow, it’s in both parties’ best interest to leave time to negotiate the correction of any serious inspection-related issues. So there are deadlines listed in the Contract to Buy and Sell to keep the deal moving forward.

The Inspection Objection Deadline is especially important for buyers because failure to submit the Inspection Objection by the deadline could result in forfeiture of your earnest money, or even termination of your Contract to Buy and Sell.

4. Finance Contingency

Unless the buyer is making a full-cash purchase, they will need to secure financing to buy the home. And of course, the deal cannot close until the buyer is approved for the loan. The purpose of the finance contingency is to confirm that a lender has formally approved the buyer for the loan required to purchase the home.

“Pre-qualification” for a loan is not enough to release the finance contingency. Instead, the buyer must be “pre-approved”.

Pre-Qualification vs. Pre-Approval

What’s the difference? Pre-qualification is a preliminary step to guide the buyer in their home search. Pre-qualification determines the types of loans, and potential loan amount, the buyer may be eligible for. This helps the buyer narrow their search to a more specific price-range based on what they can afford.

Pre-approval, on the other hand, requires the buyer to complete a full loan application so the lender can review the buyer’s complete credit history and financial situation, and commit to covering the loan. Learn more about prequalification vs. preapproval.

This loan commitment confirms that the buyer will be able to secure financing to complete the purchase as expected. If the buyer is unable to obtain a loan commitment from a lender, the deal cannot close, and the Contract to Buy and Sell is terminated.

Assuming the buyer is pre-approved for the loan, there’s still one last thing to consider before the finance contingency can be released: the Appraisal.

The Appraisal

The appraisal is important to the lender because the property secures the loan. Consider the lender’s point of view: if the buyer fails to make their mortgage payments, the lender will foreclose on the property, and effectively become the new owner. So the lender needs to make sure the property is worth the price the buyer is paying.

And that’s what the appraisal does. It values the property during escrow to make sure the agreed-upon purchase price isn’t higher than the value of the property.

Once the loan has been approved and the appraisal accepted by the lender, the finance contingency can be removed and the deal can proceed.

5. Final Walk-Thru Contingency

The final walk-thru contingency is the last contingency to be released prior to closing. Immediately before closing, the buyer should physically walk through the property one last time.

During this visit, buyers should confirm that:

  • The keys (including keys to any community amenities) and garage door openers work
  • All agreed-upon inspection items have been remedied and copies of any receipts for work done are provided to the buyer
  • All inclusions are still in the house
  • The property condition is as expected and acceptable
  • The property is acceptably clean
  • There are no unknown damages
  • The seller has removed all personal possessions from the property

If each of these items is acceptable, buyers can release the final walk-thru contingency.

And your real estate transaction can successfully close!

Additional Resources

 

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How to Use the El Paso County Assessor Website

Colorado Springs is the second largest city in Colorado, located within El Paso County. I’ve recently had more opportunity to explore the user-friendly El Paso County Assessor’s website. As a Realtor in Colorado Springs, I have used this site quite a bit for real estate purposes, but there are some functions that are useful to any resident of El Paso County. Here are some of the ways that I have used the El Paso County Assessor Colorado Springs’ website recently.

Tax bills

If you have a mortgage on your home, it is likely that 99% + of the El Paso County population has an escrow account established with their lender. The lender collects 1/12th of your taxes in your escrow account with your monthly payment.  You will receive a bill at the residence (or your address if it is an investment property). The taxes are due in one payment April 30 or in two installments at the end of February and June 15. Your lender will pay this. Some ask that you send it in with your payment following receipt of the bill, just to make sure your lender received it. If you don’t carry a mortgage or have enough equity, you don’t have to carry an escrow account (determined by lender) then you need to be prepared to pay these taxes per the deadlines indicated. The Assessor’s website is handy to check the Colorado Springs Tax Assessor’s information:

  • Amount of your tax bill
  • Changes in the last few years to your tax bill
  • Verify the tax amount of a property that you are considering purchasing

Property Search

I have a past client looking to make a change. They are enjoying their beautiful new home, but looking into the future. She described to me a property that had some stigmatizing factors (condemned house, mercury spill). She was willing to invest in the land, clean up the spill, build an updated home. So she described the location to me, “it’s down at the end of the road that my house backs up to.”

  • I went to the El Paso County Assessor page and looked up her address.
  • Make sure the appropriate property is selected, verifiable by address or owner name.
  • I clicked the upper left “Parcel Map” link.
  • I clicked around the plats/parcels in the area and showed her my search until we figured out the parcel she was looking for.
  • I went to the MLS and found the property. She thought it had gone off the market, but it actually sold. It would have been a great investment, but we continue her search.

Tax Information

I had a client moving out here from their former post in Oklahoma. The house they were interested in seemed to have very low taxes indicated. We needed to find out why.

  • I placed the property address in search bar
  • Click County Treasurer Tax Information
  • The seller had occupied the house for nearly 30 years. Due to that and their age, they qualified for the state/county homestead exemption, so the tax rate they paid was half what a new home-owner would pay.

Square Footage of a Property

  • Put property address in search bar
  • At the very bottom of the property page, there is a “Residential Information” section. If you click on the square footage indicated there, it will take you to a verification page. (** Caution, the number indicated here, is normally only above grade, so do click the link to see square footage broken down by living levels.)
  • I’ve had 2 instances in the past 3 years where this information was conflicting.

1) Builder filed a building plan with PPRBD.org for a partial basement/partial crawl space, then ended up finishing the home with a full basement. We were able to reach the original owner, who is a local Realtor as well. He even almost wanted to buy his old house back! So we had to indicate the square footage discrepancy in our square footages disclosure and why the assessor page had incorrect information.

2) Builder filed a building plan with a full basement and ended up doing a partial basement/partial crawl space finish. We discovered from the previous MLS and tax records that there was a discrepancy. We input the MLS with a partial finish, and the owner had the assessor come out and update the square footage, so any future owners/Realtors would have accurate information. It took a couple weeks, but they verified and updated the website for accuracy.

Plat Maps

We are about to host an open house for neighbors to view the progress on a newly reconstructed beautiful home in Broadmoor Heights. I needed to find a way to map the area, so we could hand deliver invites to these neighbors.

  • I put the address we are listing in the search field on the El Paso County Assessor site front page.
  • I again clicked “Parcel Map” at the upper left.
  • I printed the approximate area to which I knew we wanted to deliver.
  • I clicked house by house to make sure I had all the addresses on my printed map.

Past Home Sales

While we have access to the MLS, sometimes the information isn’t 100% accurate depending who completed the data input. Also, there are foreclosures and For Sale By Owner transactions that don’t always hit the MLS, but would be recorded sales with the county.

Property’s Legal Description

We all know our home by the address, but in the real estate world that is a “commonly known as” address, and every legally recorded document is filed against the legal description… usually Lot ___ Block___ in *Subdivision* and Filing ___ Colo Spgs. You want to verify that your documents and closing are recorded against the correct legal description. This is a huge reason why we have title companies to verify and ensure such things.

So, you can see the El Paso County Assessor’s Website is not only easy and user-friendly, but you can get so much information about a property. If you need to visit the El Paso county Assessor’s Office in person, here are the contact details and hours as well:

El Paso County Assessor’s Office Location

1675 W. Garden of the Gods Rd, Suite 2300, Colorado Springs, CO 80907

Telephone: (719) 520-6600 — Fax Number: (719) 520-6635

Hours:
8:00 AM – 5:00 PM Monday – Friday
Offices closed: Saturday – Sunday

El Paso County Assessor's Site, Colorado Springs CO Assessor, El Paso County Assessor Colorado Springs

Real Estate Contract Dates & Deadlines

Real Estate Contract Dates & Deadlines

In residential real estate, the Contract to Buy & Sell can be a bit confusing for first-timers, especially because it’s 19 pages long. The dates & deadlines of the real estate contract are covered even before the sales price. If you understand what those dates mean, you will understand 75% of the contract. There are 36 possible deadlines, but you usually don’t use all of them.  You can find an example of the current deadline chart at the end of this blog.

Item No. 1 – Alternative Earnest Money Deadline

This is the date that your Earnest Money deposit must be turned in to either the Brokerage or Title Company. The next 7 dates are on the Title Policy.

Item No. 2 – Record Title Deadline

This is the deadline in which the Title Company must provide the Buyer, a current commitment for an owner’s title insurance policy. This will consist of copies of any plats, declarations, covenants, conditions & restrictions burdening the property. And copies of any other documents listed in the Schedule of Exceptions in the Title Commitment that was furnished to the Buyer.

Item No. 3 – Record Title Objection

The Buyer can object to the Record Title Deadline here. This can be based on any unsatisfactory title condition, in the Buyers sole discretion.

Item No. 4 – Off-Record Title Deadline

The Buyer must receive, on or before this deadline, true copies of all existing surveys in the Seller’s possession pertaining to the Property and must disclose to Buyer all easements, liens or other title matters not shown by public records, of which the Seller has actual knowledge.

Item No. 5 – Off-Record Title Objection

This is similar to the Record Title Objection. The Buyer can object & terminate if unsatisfied with documents provided in item No.4.

Item No. 6 – Title Resolution Deadline

This is the date on which all title objections must be resolved.

Item No. 7 – Right of First Refusal

This date applies to situations, where an outside entity, like an HOA, has to approve a Buyer’s contract. If the entity who holds this right, disapproves the contract, the contract terminates.

Item No. 8 – Association Documents Deadline

The Listing Agent typically handles this for the Seller. This is the deadline for which the Buyer must receive all current HOA documents. This is VERY important for Buyers to review, especially in Townhome or Condo Communities. This is where buyers can find pet, design, parking, and many other rules and restrictions.

Item No. 9 – Association Documents Objection Deadline

The Buyer has the right to terminate on or before this deadline, based on any unsatisfactory provisions in the HOA docs.

Item No. 10 – Sellers Property Disclosure Deadline

Sellers typically complete this document before listing their home for sale. This is the Sellers disclosure on any issues or improvements that they have any knowledge of pertaining to the home. There is no objection for this because it’s simply a disclosure. The Buyer will have their own inspections to get the current facts on the property.

Item No 11 – Loan Application  Deadline

This is pretty self-explanatory. Buyers have usually gone through this process before submitting an offer. It’s the deadline in which the Buyer must submit a full loan application to the lender.

Item No. 12 – Loan Objection Deadline

This contract is conditional upon the Buyer determining, in Buyers sole discretion, whether the new loan is satisfactory. This includes payments, interest rate, terms, conditions, and cost. This deadline is for the sole benefit of the Buyer.

Item No. 13 – Buyers Credit Information Deadline

In the case of owner carry financing, this deadline applies to the Buyer supplying the Seller with financials, a credit report, etc…

Item No. 14 – Disapproval of Buyer’s Credit Information Deadline

This is the Seller’s opportunity to decline the Buyer based on the information provided.

Item No. 15 – Existing Loan Documents Deadline

This is only applicable for assumptions; by this deadline, the Seller must provide all current loan documents to the Buyer for review.

Item No. 16 – Existing Loan Documents Deadline

Once the Buyer receives the Seller’s current loan information, they have the right to review the terms and object or decline.

Item No. 17 – Loan Transfer Approval Deadline

This only applies to assumptions; this final deadline applies to the lender approving the assumption.

Item No. 18 – Seller of Private Financing Deadline

This deadline applies if any portion of the financing of the transaction is by private or seller financing. The Buyer must decide by this date if the financing being offered is acceptable.

Item No. 19 – Appraisal Deadline

This is the date in which the Buyer must receive an appraisal of the property. It’s probably best for the Buyer Agent to communicate with the lender as the deadline approaches because appraisers tend to be behind during the busy season. This does not apply to VA loans.

Item No. 20 – Appraisal Objection Deadline

Either the appraisal matches the price or it doesn’t. By this deadline, the Buyer must submit in writing that the valuation is less than the purchase price. At this point, a couple of things can occur: a) the Seller can come down in price to match the valuation; b) the Buyer can bring the difference in cash or c) the Contract can terminate.

Item No. 21 – Appraisal Resolution Deadline

If there is an appraisal objection, the issue must be resolved by this date or the contract terminates.

Item No. 22 – New ILC or New Survey Deadline

An Improvement Location Certificate or Survey is usually only ordered if the lender requires it, or if the Buyer has questions as to where the exact property lines are. The Buyer must receive either document by the deadline.

Item No. 23 – New ILC or New Survey Objection Deadline

The date when the Seller must receive a written description of any matter that is unsatisfactory and the Buyer requires the Seller to correct.

Item No 24 – New ILC or New Survey Resolution Deadline

If there is an ILC or Survey objection, the issue must be resolved by this date or the contract terminates.

Item No. 25 – Inspection Objection

The Buyer must have all home inspections completed by this date. Seller must receive a written description of any unsatisfactory physical condition that the Buyer requires the Seller to correct.

Item No. 26 – Inspection Resolution Deadline

If an objection is received by the Buyer, the Seller has until this date to respond in writing, addressing the Buyers repair requests. The Buyer has to agree to the terms or the contract terminates.

Item No. 27 – Property Insurance Objection Deadline

Prior to this date, the Buyer must obtain as many bids as they’d like for home owner’s insurance. If the insurance does not meet their satisfaction, they must terminate in writing by this deadline.

Item No. 28 – Due Diligence Documents Delivery Deadline

If the box is checked, the Seller agrees to deliver copies of the requested documents pertaining to the property. This can include any leases, completed contract work, warranties, permits, etc.

Item No. 29 – Due Diligence Documents Objection Deadline

If the Due Diligence Documents are not supplied to the Buyer or are unsatisfactory, the Buyer can terminate or Object. If the Buyer Objects, they must deliver a written description of unsatisfactory documents that they require the Seller to correct.

Item No. 30 – Due Diligence Documents Resolution Deadline

If there is a Due Diligence Document Objection, the issues must be resolved by this date.

Item No. 31 – Conditional Sale Deadline

If the Buyer has a property to sell before they can complete the purchase, list that property here. If it is not sold and closed by this date the Buyer may terminate.

Item No. 32 – Closing Date

This is when the Seller delivers the deed to the Buyer. The Closing date is specified here or by mutual agreement. The hour and place will usually be designated by all parties.

Item No. 33 and No. 34 – Possession Date and Time

This is when the Buyer gets keys and the Seller is no longer allowed to enter the property at their own discretion. This usually occurs at closing.

Item No. 35 and No. 36 – Acceptance Deadline Date and Time

This is the day and time in which the Buyer requires the Seller to respond to their offer. If the Seller is countering, a new deadline is established on the Counterproposal.

These dates and deadlines might seem so overwhelming when reviewing the contract, but they all serve an important purpose. Read more about steps to buying a house, or steps to selling a house, or simply give me a call with your questions about buying and selling houses.

Real Estate Contract Dates & Deadlines Summary Chart

deadlines

How Do You Determine Market Value

How Do You Determine Market Value?

As a Realtor people often ask me how market value is determined. Sellers want to know their market value so they can decide on a fair asking price. Buyers want to know the market value of their home so they can see that the price of the home is justified. Here is the advice that I usually I give them.

Factors that Influence Market Value

Back in school, they taught us that market value is “what a willing buyer will pay and a willing seller will accept”. That’s definitely true. Here are some factors that influence market value.

1. Inventory – In a competitive market like we’re in now, there aren’t as many homes for sale. Supply is low and demand is high, creating bidding wars. A willing buyer will pay more for a property now than they would have a few years ago. Many people are desperate to secure the sale and they are willing to pay a higher price to beat out the competition. Market value is redefined each time buyers write an offer.

2. Home Sales – Recent home sales in the area also influence market value. You may have heard the term “comparable properties”. The definition of comparable properties is homes nearby which are similar in size, age and condition to the subject property. These comparable homes will definitely be used to establish a home’s market value. Buyers will look to see what homes have been selling for lately and will often base their offers on such. And appraisers will use these comparable sales to justify the current contract price.

Factors that Do NOT Influence Market Value

1. What a seller originally paid for the property does not determine it’s current market value. It doesn’t matter if they got a screaming deal on it just two years ago. It doesn’t matter if they paid a crazy low price when they bought the home. They could have paid five dollars for the property. You are not going to benefit from the great deal they once got.

2. What your relatives in another state think the price “should be” doesn’t determine market value. If your parents live in Texas, chances are they paid less for their 4,000 square foot, all brick rancher on 2 acres of land than you’re going to pay for that 1,700 square foot 2-story home in Colorado Springs. Conversely, your sister in California paid more for her $925,000 townhome in Santa Barbara than you will pay for a spacious single family home in Colorado. An accurate estimate of market value needs to compare apples to apples, and we all know that home prices can really vary across different regions.

3. The public assessor’s site property valuation is not actual market value. I don’t know why, but the assessor’s estimate is always under market value. And really, that’s a good thing. Our property taxes are calculated on this, and if the county assessor thinks a home is worth less, then our property taxes are lower. Hooray!

4. Public internet sites are not always accurate with their valuations. For example, Zillow posts home values on their site and call these valuations “Zestimates”. I constantly tell buyers and sellers not to believe the Zillow Zestimate they have seen. They are always low. To prove my point, NBC News recently reported a class action lawsuit was filed against Zillow for undervaluing properties. It turns out they are obtaining these valuations from the county assessors site. Interesting!

Realtors, the Best Resource for Market Value

Anyone can give you an idea of what they think your home will sell for, but they won’t always be right, and it won’t always be supported by data and facts. The only way to get an accurate determination of the market value of your home is to call a professional. Realtors live and breathe the housing market, and giving homeowners a market value on their home is a regular part of our job. When I meet with a homeowner to do a market value analysis, I will not only give you a value based on data and my many years of experience, but I will tell you how I arrived at the market value and all of the factors that were considered.

Real Estate Pricing

What’s My Home Worth? How Realtors Determine a Realistic Price

Pricing real estate is difficult for a few reasons:

  1. Real estate markets are in constant fluctuation. Real estate values can dramatically rise or fall over just a few months. So you need the most up-to-date information to properly price a house, and that price will only be accurate for a short period of time.
  2. There are many outside factors affecting values. School districts, local construction, even distance to a Starbucks…these all impact the price of local real estate.
  3. Every piece of real estate is perfectly unique. Even in a planned community with neat rows of identical structures, every piece of property is distinctive simply because of its location. There is no other property in the world with the same longitude and latitude coordinates as the property you’re pricing. And that location affects the view, the sunlight, the noise-level, the breeze…every property is one-of-a-kind.

But despite these challenges, real estate professionals price houses every day. And this post will show you how the pros do it and how you can find out what your home is worth.

One important note before we really dive in: there is no substitute for an appraisal. Appraisals are formal real estate valuations conducted by Certified Appraisers. The appraisal is the authority on the true value of the real estate in question.

With that, let’s start our discussion on how to price real estate like the pros.

CMAs are Your Best Friend in Determining What Your Home is Worth

CMAs (which stands for Competitive Market Analysis or sometimes Comparative Market Analysis) are the industry insider method for simplified real estate pricing.

A CMA is essentially a spreadsheet that uses formulas and market-specific data to establish the realistic price of a specific property. This specific property being priced is commonly called the “subject property”.

The key to a CMA is finding “comparable sales” (which are often referred to as “comps”). Comparable sales are exactly what they sound like: sales of properties that are similar enough to the subject property that they can be used as a guide to help establish the price of the subject property.

What Makes a Good Comparable Sale?

There are many factors to consider when selecting comparable sales. Let’s look at the five most important considerations for finding the best comps.

1. Similarity of the Comp to the Subject Property

Is the comparable home roughly the same size, style, and quality as the subject home? Was it built around the same time? Does it have a similarly-sized lot?

What about the bed-and-bath count? The comps don’t necessarily have to match the subject property’s bed-and-bath count exactly, but they should be close.

Of course, the more similar the comparable property is to the subject property, the better.

2. Location

Location is an important component of comparable sales because of those outside factors affecting home values that I mentioned earlier. For example, if you are pricing a home in Southwest Colorado Springs, you would not want to consider comps in Southeast Colorado Springs. A similar home in Southeast Colorado Springs would be less expensive than Southwest Colorado Springs because of outside factors.

Population density determines how far you can look for comps. In an urban area, you may have hundreds of condos on a single block, but in a rural area, you might only have a few dozen properties in a square mile. The general rule-of-thumb is to focus on comps within the following ranges:

  • Urban neighborhoods: ½ mile
  • Suburban neighborhoods: 1 mile
  • Rural areas: 5 miles

3. Special Features

Does your subject property have a special feature? Maybe it has a pool, a barn, or a spectacular mountain view. Consider these special features when selecting your comparable sales.

4. Timing of the Sale

The timing of the sale is critical because real estate prices are constantly fluctuating. You really want to find sales that closed within the last six months. The more recent the sale, the better.

5. Arm’s-Length Transactions

It’s also important to confirm that the comparable sale you’re considering was an “arm’s-length transaction”. This basically means that both parties to the sale were acting in their own best interest and neither party was under severe pressure to buy or sell. Be wary of short sales, foreclosures, or transactions between family members.

Like I mentioned earlier, every property is different, as is every sale. So simply looking at the average sales prices of your comps isn’t enough to determine a reasonable price for your subject property. I’ll cover the ins-and-outs of using these comps to properly value your subject property in a bit. But first, let’s talk about how you can use the CMA to make sound real estate decisions.

CMAs for Sellers

For sellers, the main purpose of a CMA is to establish an appropriate asking price for their property

One of the biggest mistakes sellers make is overpricing their listing. They look at the number on the CMA and want to increase it by 5-10%. Sellers typically overprice for two reasons:

  1. They want to leave negotiating room in case they get a low offer.
  2. They figure they can always lower the price later.

This sounds reasonable until you look more closely at actual buyer behavior. That’s when you’ll find several problems with overpricing.

Overpriced Homes Have a Smaller Pool of Potential Buyers

Pricing a home too high could take it off the radar of some potential buyers. If a CMA indicates that a house should be priced at $245,000, and a seller decides to list about 5% higher at $257,000, the seller has just eliminated buyers looking to spend up to $250,000. The subject property won’t show up on buyer’s under-$250,000 search results.

Overpricing to create room for negotiations is another mistake sellers make. Bill Gassett discusses this and other pricing myths in this great article.

Buyers are Being Advised by Their Agents to Ignore Overpriced Listings

Buyer’s Agents can spot an overpriced listing from a mile away. And they don’t want to waste their clients’ time. So they will usually advise their clients to ignore the overpriced listing. Or they may make an excessively low offer to test the waters. Either way, they won’t take the seller seriously until the asking price is reasonable.

Overpriced Listings Go Stale

The problem with listing high, then having to implement a home price reduction strategy, is that the listing goes stale. There’s a fresh excitement around new listings that sellers should take advantage of. Every buyer wants to take a look at the new listing to see if it could work for them, and every Agent wants to look at the new listing to see if it could be the right fit for any of their clients. Interest usually declines after that first frenzy. And if the price is reduced, buyers start to wonder why. What could be wrong with that house to make the sellers drop the price?

Overpriced Homes May Fail to Appraise

“Failure to appraise” means that the formal appraisal value is lower than the agreed upon purchase price. This can be a real estate deal disaster because it means the buyers may not be able to get a loan for the purchase. Lenders will not allow borrowers to pay more for a house than the house is worth.

Realtors very carefully consider the available comparables and use the CMA to determine the right asking price for a property. Ultimately, the pricing decision is up to the seller, not the Realtor. So if you’re looking to sell, take advantage of the expertise and market knowledge your Realtor packs into his or her CMA to price your home right!

Then once you receive an offer, you can refer back to the CMA to decide if the offer is acceptable or if you would like to respond with a counter offer.

CMAs for Buyers

The main purpose of a CMA for buyers is to determine how much to offer for a property. Does the CMA match the listing price? That’s a strong indication that a full price offer is warranted.

Does the CMA show that the listing price is slightly too high? Perhaps a lower offer is in order.

If the CMA shows that the listing price is much too high, buyers may not even want to make an offer. A too-high listing price implies that the seller isn’t being realistic about the value of the property, and they may be difficult, if not impossible, to work with. General real estate wisdom is to ignore overpriced listings. Don’t waste your valuable time!

Does the CMA show that the listing price is too low? This could be because the seller intends to start a bidding war and actually expects the offers to be higher than the asking price. Buyers should consider offering more than the asking price in this case, offering an amount more in line with the CMA.

CMA’s are also helpful for buyers in anticipating the appraisal value. Before you close escrow on your new home, you’ll have a formal appraisal done on the property. If the appraised value is less than the agreed-upon purchase price, you have a problem. If you’re getting a mortgage, the lender won’t grant the loan knowing that you’re paying more for the home than it’s worth. And even if you’re an all-cash buyer, you just plain don’t want to overpay for a home, right?

Speaking of the appraised value, let’s briefly take a closer look at the appraisal.

The Appraisal

The process the Certified Appraiser will use to conduct your appraisal is very similar to the CMA process.

The most notable difference is that the Appraiser is certified, so the results of the appraisal are more official than the results of a CMA. The Appraiser will also look more closely at the details. For instance, they may pull permits to confirm that improvements to the property are properly permitted.

The comparable sales used by the Appraiser may or may not be the exact comps used in the CMA. The Appraiser will most likely choose a few of the same comps, but if there are many recent sales comps to choose from, comp selection can be semi-subjective, so the Appraiser may have a different comp or two.

The Appraiser’s comps could also be different based on the timing of the listing and the appraisal. While preparing to list the house, the CMA would consider sales within the last six months. At the time of the appraisal, the Appraiser is considering sales within six months of that date. So some of the CMA comps may have aged off the Appraiser’s comparable sales list.

CMA Details: How to Price Your Real Estate Just Right

We’ve discussed the purposes of CMA’s and how they relate to appraisals. So now we can jump into the nuts and bolts of the CMA. What makes it work?

We know that no two properties are identical. And without identical properties, we’re kind of comparing apples to oranges. So how can we use these similar-but-not-identical properties to arrive at a reasonable price for our unique subject property? The answer lies in comp debits and credits.

Debits and credits are used to adjust the sales prices of your comparable properties in every aspect in which the comparable properties substantially differ from the subject. Adjusting the sales prices of the comps for each material difference from the subject allows you to see what would happen to those sales prices if the comps were identical to the subject property.

Examples of Debits and Credits

In Colorado Springs, additional garage bays are worth between $5,000 and $7,500. Homes that back to open spaces are worth $5,000 to $10,000 more than those that don’t. And a good view could be worth anywhere between $5,000 and $25,000!

So let’s see how we can apply this data to a CMA. Here’s an example to clarify this important concept

Comp A sold for $300,000. It has two garage bays, but your subject property only has one garage bay. You need to adjust the sales price of Comp A to pretend that it only has one garage bay, just like your subject property. So you would subtract $5,000-$7,500 from Comp A’s $300,000 sales price. If this is the only difference between Comp A and your subject, the adjusted price for Comp A (the value you would actually use in establishing the price for the subject property) is between $292,500 and $295,000.

Make sense? Let’s do one more example:

Comp B sold for $260,000. It has no view; the house just looks out onto the neighboring homes. But your subject property has a stellar mountain and lake view. You need to adjust Comp B to pretend it has that same stellar view as your subject. So you would add $25,000 to Comp B’s $260,000 sales price. If this is the only difference between Comp B and your subject, the adjusted sales price for Comp B is $285,000.

Notes on Applying the Debits and Credits

Important: debits and credits are always applied to the comps, never to the subject property. This is because 1) you want to change your comps to match the subject, not the other way around, and 2) you won’t have a price for the subject property until all your adjustments have been made to the comps anyway.

You apply these debits and credits to account for any and all material differences between your comp and your subject property. Lucky for you, your Realtor already knows how much to adjust your comparable sales for each material difference because they know what each item is worth in your local market. This is where your Realtor’s knowledge and expertise is invaluable!

And the material differences aren’t just limited to the few listed above. There may also be adjustments for unequal numbers of beds and baths, square footage, finished basements, patios, and general upgrades.

Once your adjustments are complete, you’re effectively looking at sales prices for properties that theoretically match your subject property in every way that matters to determining the price of a property. You’re finally comparing apples to apples!

How Many Comparables Do You Need?

Three good comparable sales for a CMA is pretty standard across the residential real estate industry. “Good” is loosely defined as arm’s-length transactions of properties fairly similar to the subject, located within the rule-of-thumb proximities discussed previously, and sold within the previous six months.

It’s not always possible to find three comparable sales to meet the “good” criteria, particularly for unusual, custom-built homes or in rural areas with very low population density. In this case, it’s wise to find up to six acceptable comps in place of three good comps.

Appraisers will typically use three to six of the best available comparable sales for the appraisal.

Can You Use Active Listings as Comparables?

CMA’s can use active listings (properties currently for sale) as comparables. This can be a helpful exercise in tracking value trends as the local real estate market ebbs and flows.

But you should be careful using active listings as comps because the asking price and sale price of the home could be very different. Remember, sellers can list the property for any amount they’d like, but that price isn’t validated until a buyer is willing to pay that amount.

Summary

Pricing real estate is tricky but doable. A Competitive Market Analysis is a great tool to help you use recent comparable sales to determine the value of the subject property. CMAs help sellers decide on an asking price for their listing and help buyers decide how much to offer. But CMAs shouldn’t be confused with appraisals, which must be conducted by a certified Appraiser.

CMAs work by taking comparable sales and adjusting their sales prices to account for the material differences between the comps and the subject property. This allows you to calculate the value of the comps as if the comp properties were exactly like the subject property. And that’s how you can calculate a reasonable price for the unique subject property and have a good feeling for what your home is worth.

Now that you understand how Realtors determine the asking price for a home, you can run your own numbers to properly price real estate on your own. Just keep in mind: Your Realtor knows your market, knows your comps, and knows the adjustment values of those material differences. Take advantage of their knowledge and expertise for the most accurate real estate pricing!

Additional Pricing Resources:

http://www.rochesterrealestateblog.com/how-to-determine-the-market-value-of-a-home/ via: Kyle Hiscock

http://merrimackvalleymarealestate.com/determine-homes-value/ Kevin Vitali

http://imagineyourhouse.com/blog/come-price-home-like-price-right-game-show-really/ Lynn Pineda

http://sellingwarnerrobins.com/overpricing-home-bad-idea/ Anita Clark

http://www.cincinkyrealestate.com/blog/price-my-luxury-home-for-sale/ Paul Sian

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