State of the Market: Substitution and Real Estate Appreciation

Pricing Your Home to Sell

You bought your home in Pompano Beach, Sailboat Bend, Tarpon River, or Victoria Park 10, 15, maybe 20 years ago. During that time, your home and the neighborhood have appreciated handsomely in value. It’s to the point that now, so many years later, you’re ready to sell and move. Your gut tells you that you should be able to get double what you spent. That’s in line with what other homes are listing for. It might be what they’re closing for.

But is it a realistic price for your home? Maybe, but only if you define what “realistic” really means and how it applies to your home and the life you spent there. In today’s market, in any market, the goal is to price your home to sell and never overprice your home.

This is the third of three stories on the state of the Fort Lauderdale real estate market. We’ve been dissecting the factors and forces that have a hand in real estate realities. In the first story, we explored how commonly occurring market fluctuations create highs and lows in home values. These can tip the scales from buyer’s market to a seller’s market – and back again. We explored how savvy buyers and sellers respond.

Hitting the Strike Zone

In the second story, we examined the importance of real estate inventory data. Pricing your home to sell is an artful task. We know real estate inventory 2019 is edging up. Excess inventory can drive prices down. Used wisely, it can help to establish your listing price “strike zone” that places a home seller’s asking price in striking distance for a prospective buyer. By performing a list price to sale price ratio analysis, we can shorten a home’s time on the market and complete the transaction sooner. This can be especially important for buyers seeking workforce housing that seemingly may be priced out of given markets.

This time, we’re exploring pricing your home for sale. By coming up with a price for an easy sale, one which takes into consideration the years of equity and life spent there, you can hit the “strike zone to sell” with proper pricing.

At The Gary Lanham Group at Coldwell Banker Fort Lauderdale Beach Office, we know how economic fluctuations affect market conditions. We gather and read the data. We then compare listing and closing price figures to arrive at asking prices that are most likely to result in an expeditious transaction.

But we also know that both sellers and buyers can be a fickle lot. Whether you’re selling or buying in Coral Ridge, Imperial Point, Lake Ridge, Las Olas, or any other greater Fort Lauderdale market, we take seriously our responsibility to educate sellers and buyers alike on those market realities.

Show, Don’t Tell

We often turn to a principle used by storytellers: “Show, don’t tell.”

Imagine you believe your home is worth $500,000. You’ve read the listing information online. Comparable homes in the neighborhood recently have listed or sold for about that. So you’re convinced that $500,000 is the right asking price for your home.

Rather than say, “Yes, you’re right,” or “No, you’re a bit off,” we sharpen our pencils to show where your home stacks up to area properties. Actually, with each property we are engaged to list, we first run comps, or collect data on comparable homes, in the neighborhood. That’s standard operating procedure for every Realtor representing a seller or a buyer.

Then, we break out a charting application to show where your property lies on a neighborhood pricing continuum of active listings and pending sales. It creates a line graph that allows our clients in a simple visual to see precisely where they align among all homes in the relative price range.

Using that $500,000 example from above, we’ll show all homes – listing, pending sales, or those having closed – all in the $500,000 range.

The chart also shows details about the homes – year built, square footage, bedroom/bathroom configuration, whether they’re on water, etc. This creates a strong, visual representation of where the home likely belongs on the continuum.

An Educated Client Avoids Substitution

As a Realtor, I have an idea of what that price should be based on a list price / sales price ratio. But I need to educate my sellers so they understand clearly how to place that property on this grid. This way, they know where they stand price-wise. More importantly, they understand why.

They know what the comps and competition is on the available market. When you educate your buyer, and especially your seller, they will come up with the answer themselves when presented with facts they can easily comprehend.

In real estate, we’re trying to mitigate a concept called “substitution.” Much of real estate buying is about substitution. Given the opportunity, buyers will first seek out or “substitute” a less expensive property in a neighborhood to possibly buy. They then may substitute various amenities as the go up in price.

This makes sense. Except in ultra-exclusive developments or communities, it's rare for a buyer to purchase the most expensive home in a neighborhood.

Price your home reasonably, based on comps and amenities, and they buyers are more likely to see yours as the substitution for another that’s priced higher than their “strike zone.”

Think Realistically – Like an Investor

Another issue many sellers face is a case of nearsightedness. In medical terms, nearsightedness, or myopia, is the inability to see things far away. In real estate, is the inability to see value further away than what may be obvious in the moment.

Remember how we discussed a homeowner who has lived in their home a decade or two? They’ve watched as it’s appreciated in price; in South Florida, it could easily have doubled. What’s that rise in value – hopefully equity – worth at resale?

Let’s put things in perspective. If you rented for 15 years, you would have amassed no property value or equity to speak of. Yet, as a homeowner, even paying mortgage interest, your South Florida property will have appreciated quite handsomely (assuming you’ve maintained it and the neighborhood has held its value or appreciated as well).

A prospective buyer already is thinking like an investor. Whether they’re a first-time buyer, or moving up or down in their property ownership situation, they’re likely making a business decision. Sure, they may love the design or layout, the amenities, or its location or neighborhood. But at its core, they’re buying with the expectation that the home will appreciate in value over time. At the very least, they’ll be avoiding rent. They may be paying taxes, insurance, and mortgage interest that they wouldn’t be if they rented. But if you’ve seen rates for “luxury” rentals around Fort Lauderdale lately, which can easily top $2,000 for less than 1,000 square feet, it might as well be a mortgage payment.

Thinking Like an Investor

So, sellers must think like an investor. You made a wise purchase 15 years ago. The property appreciated in value. And how it’s time to be realistic about what the home actually will yield. Smart sellers might want to get $500,000. But they realize that the 15 years of their lives spent in that home has brought both tangible and emotional value to them.

The benefit of that “peaceful environment” cannot be marginalized. Nothing is free, and that “value” is vital to this equation.

If we educate our clients well, they will gladly, even intuitively, factor in both the appreciated value and equity, as well as the peaceful environment, into the asking price and the price they’re willing to accept at contract and closing. And, they are pricing the home to sell to a satisfied buyer.

View our slide with regard to to active listings for price increases and particularly price decreases. It's a compelling visualization to help sellers understand how real estate works in this market. Pay special attention to the closed sales and pending sales (those in the strike zone). In the aggregate, we have a greater than 3-1 ratio of available inventory and inventory that's selling. These are important points to keep in mind.

If you want to learn more about price valuations, substitution avoidance, and putting a tangible value on the “peaceful environment” your home has provided you and your family, contact me. I’d like to show you.

Gary Lanham Group at Coldwell Banker Fort Lauderdale Beach Office is a boutique real estate organization offering sales, leasing, and brokerage services to the Greater Fort Lauderdale area. A listings agent matches home sellers with buyers and tenants with landlords. While Broward County is our universe, we focus on  real estate in Fort Lauderdale, Coral Ridge, Imperial Point, Coral Ridge Isles, Oakland Park, and Pompano Beach. Call us today at (954) 695-6518 or visit www.GaryLanhamGroup.com.

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