How to Price a Home in Chicago’s Depreciating Market

January 23, 2009

Residential

Depreciating Markets Make Pricing Difficult

Depreciating Markets Make Pricing Difficult

I am both a real estate broker and a certified appraiser. You might not think this poses a problem in the real estate game, but it often does. But it often helps as well.  I recently had to talk to a seller I represent about a price reduction, and the way I did it might benefit you as well.

Appraisers & Agents: Two Different Points of View

Appraising and selling deal with the same house from completely different points of view. Wearing both hats at the same time is virtually impossible. Appraisers are 100% data driven. If it’s not quantifiable or verifiable, it doesn’t have a place in an appraisal. Agents, like appraisers, must consider data to help their clients, but agents must also be concerned with the less tangible side of real estate: the impact the light has on the mood of the study, if the closets need to be purged, making sure the soap scum is off the glass shower, and the many, many facets of human nature.  Real estate agents really have to love helping people without offending them.

How to Have the Price-Reduction Conversation

Because I’m licensed and certified in both appraising and selling, I often find myself mixing the two. Recently, I had to have a tough discussion with the owners of one of my listings. If you’re an agent, you too have had to fret and stew over having to make the price reduction phone call. If you’re a seller in today’s market, you’ve likely been on the receiving end of that call. It’s happening more and more frequently these days; all the analysis, data, and news is crystal clear: we are in a depreciating market.

So, how do you, Ms/Mr Agent, know how much to recommend lowering the price? How do you, Ms/Mr Seller, know if the reduction is warranted? How do you know it’s the right amount of reduction? Do you guess? Do you feel your way along? Instinct is important to an agent, but the appraiser side of me also forces me to present clear and strong data to my clients to justify why I’m asking for a price reduction in their best interest.

How to Calculate Depreciation (or Appreciation)

This isn’t difficult?it’s similar to what agents do every time they find comps to give a client.

  1. Neighborhood ? First, you need to define your subject neighborhood. You need to make sure that the comparable homes you select are as close to your home as possible. If they are too far away, the comparisons won’t work. You also need to be sure you’re comparing apples to apples.
  2. Closed Transactions ? Search for similar (comparing apples to apples) homes with CLOSED status inside your defined neighborhood. The search needs to be conducted in the same time period from 2007-2008 and then again 2008-2009.  For example, one search would be for Jan. 21, 2007 to January 20, 2008 and the second search would be from January 21, 2008 to January 20, 2009.
  3. Median Price ? You can figure out how many parcels exchanged hands and what the median price point was. You do not calculate the average; you find the median. The median is the middle price. If you have seven prices, you sort them and the middle price is the median. For example, the median of {3, 5, 7, 8, 9, 10, 14} is 8, because there are three numbers below the 8 and three numbers above it. If you have an even number of prices, the median is the average of the two middle prices. For example, if you have {4, 6, 7, 10, 11, 12}, the median is the average of 7 and 10, which is 8.5.
  4. Annual Depreciation ? You can then compare the median prices for the 2007-2008 year with the median of the 2008-2009 year and calculate the percentage of appreciation or, more than likely, depreciation. For example, if the median price in 2007-2008 for similar properties was $295,000 and in 2008-2009 it was $279,000, the amount of depreciation is (295,000-279,000) / 295,000 = 5.4%.
  5. Monthly Deprecation ? You divide that number by 12 (5.4% / 12 = 0.45%) to get an idea of how much prices are depreciating every month. This will give you a good idea of what needs to happen to the price based on how long the home has been on the market.

This isn’t fool proof?it’s only as good as the comparables you select. The more similar the comparables are to your home, the more accurate it will be. If you select comparables well, it will give you an idea of what you need to be doing with the pricing of your listing or your home. This should give both Ms/Mr Agent and Ms/Mr Seller some numbers on which to base the decision of reducing the price.

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About Katie Anderson

Katie Anderson is a respected and successful broker at Sudler Sotheby's Realty as well as a certified appraiser. She specializes in representing clients who purchase and sell condominiums, town homes, single-family homes and income property in the Chicago land area. In her small amount time in the real estate game (she became an agent in 2003) she has assisted in excess of 400 deals and over $200 million in sales and continues to use her skills as a certified appraiser. Katie resides in Chicago's Bucktown neighborhood with her loving husband and 4-year-old-daughter, where she spends much of her spare time with her family and friends. You can contact her at katie@thechicago77.com or at andersonbraack.com

View all posts by Katie Anderson

10 Responses to “How to Price a Home in Chicago’s Depreciating Market”

  1. Rod Holmes Says:

    Thanks for sharing from your little bag of tricks!

  2. Catherine Brennan Says:

    Thank you Katie for the calculations – this will help my clients better understand accurate pricing from their vantage point (as a buyer or a seller)

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