Bob (fictional person) wants to sell his house and needs to determine how much it’s worth.
First, let’s consider Bob’s car. Bob has found a car he really likes and wants to buy; its price is $15,000. His car’s book value in its current condition is $10,000. He has no extra cash and needs an extra $5,000, so he’s decided to sell his car for $15,000 to make up the difference. Would you like to buy Bob’s car? New tires, horn still works, not burning oil, gets good mileage.
Just as Bob has put himself at a disadvantage to sell his car, the same thing will happen if he uses unwise ways to determine the price of his house—if he sincerely wants to sell it.
Maybe Bob says, “I have to sell it for more than I paid for it, or I’m not selling.” If he paid too much originally, or if the local economy has been hit with things to hurt the housing market, he’s probably not going to sell it. I’ve personally sold homes for profit, but also for a loss, because at the time, I believed it was going to be more profitable in the long term; and there are other factors that may affect our decisions and our lives in addition to things financial.
Or perhaps Bob points to all the maintenance and improvements he has made, and says, “I want to add all these to the price I paid for my house and won’t take anything less.” It’s possible that his price might be lower than what the house is worth, especially if he has lived in it for a number of years; so he could be underpricing it. Also Bob must realize that others may not like improvements he liked, and he may not get its full value; and maintenance, such as a new roof, are things that a house has to have anyway. Receipts for maintenance and improvements added to an original sale price do not necessarily give a reasonable estimate of a house’s value.
There are other ways Bob may consider: maybe he looks at how much he owes on his mortgage, or how much extra profit he will need to get the house he wants to buy. Whoops! We’re sort of back to the same thinking as the car example, aren’t we?
So what’s Bob to do?
Well, since he’s going to use a good Realtor® who has been referred to him, he is going to learn that it is something usually called “the market” that sets the price. Like the book value of his car, there are ways that a price or price range can be determined by evaluating houses similar to his, that have sold recently. Probably the most reliable way is for Bob to get an appraisal—maybe even two if he wants a second opinion—before he arrives at a price. Another option is for his Realtor® to do a market analysis for him; and again, he may want to get a couple of more realtors to give an analysis as well. The material he receives should give him a detailed understanding of what has recently sold in his area, of properties similar to his, with allowances made for significant improvements, special features and other factors. Arriving at a sale price in these ways will help him have a more satisfying experience in the sale of his home.
(By the way, Bob waited to sell his car, got a part-time job until he saved enough to make up the difference and sold his house the next year, moving to Silicon Valley, where he became a millionaire.)