In a racing residential real estate market, brokers looking for the best price on their listings are being outpaced. Past sale prices used to form the basis for pricing similar properties what brokers call comparables but in a market characterized by quick acceleration from the previous month, many brokers have switched to using active listings to set selling prices.
From the front seat of the rocket ride that is the New York real estate market, brokers say pricing a property is less about formulae and more about foresight.
“Pricing is not a mathematical science, the way it is with bank appraisals,” said Jim Gricar, executive vice president at Brown Harris Stevens. “Any broker will tell you it’s not exact like that unless the buyer is a bank appraiser.”
All joking aside, appropriate pricing is the lynchpin of an agent’s business. An overpriced property can languish, and can require a dreaded price reduction that disappoints a seller and erodes a broker’s credibility. An underpriced property can spawn a bidding war that creates animosity and extra work for the brokers involved, with minimal gain for those who do profit.
A rapidly inflating market upsets the delicate art of pricing, brokers say.
“It’s really tough when you’re trying to play catch-up with the market,” said Sabrina Kleier Morgenstern, vice president at Gumley Haft Kleier.
For instance, when setting a price on a condominium eventually listed in September for $2.7 million, Kleier Morgenstern’s firm used prices of similar units sold in the neighborhood in the prior three months.
It wasn’t fast enough.
“We found out from the owner when we called with the price that an apartment, the same space and type, just came on the market for $3.2 million,” Kleier Morgenstern said. “So we can’t put it on the market for $2.7 million it just doesn’t make sense.”
In an up market, sold and closed listings are stale the day they’re announced, brokers say. Over a year ago, JC DeNiro & Associates changed its pricing formula from a blend of sold and closed properties and active listings. Now, it uses only properties on the market half of them active listings and half of them contracts signed, said Christopher Mathieson, managing partner of the firm.
“And beyond that, you really need to know the particulars around any sale,” he said. “It’s even more important because this market is changing so quickly.”
Gricar said one of the reasons brokers are using alternative means of valuing properties is that banks are more willing to loan money to prospective buyers. Several years ago, non-contingent deals, meaning offers made that were not reliant upon obtaining financing, accounted for only 20 to 25 percent of the market, Gricar said. Now it’s closer to half, he said.
“Banks have been so eager to lend, and rates have been so low, that it has encouraged more people to do non-contingent deals,” he said. “In a deal that’s not contingent upon financing, the appraisal becomes less important.”
That can be a hardship for buyers who have sealed a deal on a property only to find out their bank will only provide financing at a lesser value one that’s based on the values of properties sold and closed.
“Mortgage appraisals are coming in lower than what the current market rate is,” Kleier Morgenstern said.
For that reason, and to avoid overpricing, brokers still need to refer to the hard data of sold and closed properties when discerning prices, said Diane Ramirez, president of Halstead Property.
“Currently, availables should only be one factor in determining your asking price,” she said. “You might have two or three apartments in an area or building, and one is priced against the other, but the reality is they’re all overpriced. Three overpriced properties don’t make a market.”
Halstead, which has an economist compile its data, uses a combination of information from city property deeds, bank appraisals, firm sales data (which includes data from sister firm Brown Harris Stevens) and industry buzz to assess pricing.
Working with other brokerages is important, Ramirez said.
“There’s a professional courtesy,” she said. “We do call other brokers for information. So, when they need your comparable for their analysis or their buyer to place a bid, you’re going to repay the favor.”
There are obvious variables that comparables revolve around: an apartment’s location; whether it’s a condo or co-op; prewar or postwar; new construction or conversion; the number of rooms; its condition; square footage, though that can be deceptive; and the building’s services and amenities, such as a doorman. Apart from gathering as much information as possible, pricing properties can also be as much about experience, instinct and finesse, brokers said.
While brokers tend to look for comparables in the same building or, if those aren’t available, the same neighborhood pricing a unique property is the challenge, Gricar said.
“When you’re pricing a truly unusual property, say one with outdoor space, it can get dicey,” he said. “Then, oftentimes, you have to move out of the neighborhood to find a comparable property.”
Various pricing strategies have played out in the current heated market, including underpricing to create a bidding war or overpricing to steal a potential listing from competitors. Some have paid off like slot machines for a few brokers who have hit records. But a reliable strategy for many agents has been pricing a bit in advance of the market.
“My pricing strategy is always to anticipate the market by about two months,” Mathieson said. “I don’t want to overprice it, but I want to get my sellers as much money as possible.”
Kleier Morgenstern said brokers have started pricing properties 10 to 20 percent over the last deal in the building.
“I think that’s a bit crazy,” she said. “I think brokers are becoming a bit overambitious in their pricing.”
Kleier Morgenstern said she might come up 10 percent from the last closing price on a comparable, but a preferred strategy is erring on the side of underpricing.
“I don’t believe in intentionally underpricing, because it can backfire,” she said. “But it’s always safer to be at market or slightly under, and assume the market will raise the price because you’re going to get so much interest.”