Welcome to this edition of the Greg Fly Podcast, my excuse for talking with people I find interesting about the subjects that I'm curious about. I'm Greg Fleischaker, your host, and today I'm joined by Jon Mand from Lenihan Sotheby's International Realty, where we are both licensed real estate agents.

Home Valuation Podcast Transcript:

Greg:     Jon, good to see you. How are you today?

Jon:    I'm doing great, Greg. Thanks for having me.

Greg:    I wanted to talk about pricing houses and how most agents go around getting to that number, which probably is one of the more important things an agent does. Is that something we can talk about today?

Jon:    Absolutely, yeah. Happy to.

Greg:    Do you have a system in place or do you figure it out house by house? Well, let's start with most agents in general. What is the quickest, easiest way to come up with a value for a home that someone might be interested in putting on the market?

Jon:    Well, I'll probably have to use my stock answer here, Greg. It depends, right? It depends...

Greg:    I'm just going to cut that sound, loop it, and just bring it back every time I talk to you.

Jon:    Exactly. No, I would say that in terms of determining the value, there is going to be an enormously wide range of methodologies and tools that agents across the market are going to employ going through that process. As a result, the numbers that they're going to arrive at are going to be significantly different. For any seller that's considering putting their home on the market, you really want to find an agent who understands the valuation process and can really determine with a high level of precision where the home should be listed and the expectation for the sale price because your mileage may vary depending on which agent you select.

Greg:    I'm sure a lot of people listening are probably rolling their eyes. I think a lot of people who are interested, and this is a little off topic, but putting their house on the market without an agent or going FSBO think that there's really not much to pricing. You look at your neighbor down the street and you're like, "They sold for 505, so my house is better, I'm going to go 510." Yeah, go ahead... There are probably some traps you can fall into...

Jon:    Well I was going to say, you'd be surprised though, I've seen agents, experienced Realtors, going through their valuation process, and in determining the value, one of the primary functions they use to start selecting their comparable sales is the price. They start by filtering with price to find their comparables and then average those prices to determine the price of the home you're selling. Well, as you can imagine from a mathematical perspective, if you're starting with the numbers at the beginning, well you're going to end up with numbers that look like that at the end, you know?

Greg:    That's research to justify the answer, right?

Jon:    Exactly. Exactly. I've been shocked being in the business and watching other people, how they sometimes perform these things, that there's not a standardized answer in terms of the valuation process for agents. Obviously appraisers have pretty rigorous metrics they go through. That's really the metric that an experienced agent is going to use. They're going to try to approach it from a similar perspective as an appraiser.

Greg:    Can you walk us through some of those steps? For anyone who thinks it is simple as hopping up on the MLS and pulling up a couple listing in five minutes with some of those automated valuation machines, it's not that.

Jon:    No, it's not a Zestimate.

Greg:    That's a whole 'nother podcast, isn't it?

Jon:    Yes, absolutely. We could spend an hour talking about that. Although, you know, Zestimates may be better than some of these that I've seen. I think the most important part of any appraisal or valuation process is starting with good comparable sales. That's what going to ultimately determine the value, and then obviously how you select those comparables is an important part of it as well.

Do You Need To See The House First To Determine Value?

Greg:    Can I back up a little bit? You said that the first step is getting the comparables. I might disagree a little bit in the sense, not counterintuitive, it sounds silly to have to say, I'd say the first step is actually going through the property. I've seen agents-

Jon:    Oh absolutely. Yeah.

Greg:    ... come up with values for a property they've never been inside of.

Jon:    Absolutely. I have sellers that are shocked all the time when I come for the initial listing appointment and they say, "Well, what's the price?"

Greg:    Exactly.

Jon:    I say, "Well, this is the first time I've ever stepped foot in your home. It would be wildly inappropriate for me to come in here with a valuation in hand on that first appointment without knowing what kind of condition it's in, what kind of floor plan it has, what kind of upgrades or finishes the property has."

There's a lot of things that go into these. Back to your point about these automated valuation models and Zestimates, that's exactly how a lot of agents treat it, and they'll come in on that first appointment and say, "Here's exactly what the house should be listed for and here's what it should sell for," despite the fact they have no idea what's inside that home prior to that appointment.  Is the property in good shape?  Does it need lots of repairs, is it dirty and really needs to be professionally cleaned?

Greg:    Right, so even though I shouldn't have had to say it, I said it. Number one, go through the property. All right, so back to your to-do list.

Jon:    Going through the property is important. We take very detailed notes on that initial walkthrough to make sure we're giving credit for every single finish and upgrade and the condition and all of those things that I just touched on. Then we go back to the office and spend quite a bit of time pulling in comparable sales, making sure that the comps are appropriate for the property.

Obviously similar to appraisers, we're trying to find home of the similar square footage above-grade is a primary metric. We want to stay within, well as close as we can, but certainly within 10-20% of the above-grade square footage. Geographical distance is important. Staying within the neighborhood is obviously better than picking comparables that are in a neighborhood across the street or down the street. Then just kind of working through that process of making adjustments for the differences in square footage above-grade and below-grade, acreage...

Greg:    When you're talking about adjustments, I've talked to enough sellers and I'm pretty sure most of them don't really get the concept or fully understand it. If you're having trouble finding homes that are really similar, so maybe they're similar square footage, but they have a different number of bedrooms. Or they're similar square footage, but they have a different number of bathrooms. Or the number of bedrooms and bathrooms are the same, but the square footage is off. If you can't find really dead on comps, that's where it gets tricky and where the skill of a seasoned, knowledgeable Realtor really comes into play.

Finding Values For High End And Luxury Listings

Jon:    Absolutely, yeah. That particularly happens at the high end of the market. We deal with an inordinate amount of very unique properties, just by virtue of our position as the number one luxury brokerage in Louisville. Where there's not a comparable sale, when you're in a two and a half million dollar home on some acreage with a pool and a pool house, and guest cottages, and all of these things, well we're not going to be able to find three other sales of similar homes within 10% of the square footage within a half mile in the last six months like an appraiser would like.

There's certainly an art to it where we have to make subjective decisions in selecting good comparables and making those adjustments. What's a home in Glenview versus the comps that might be in Prospect or in Anchorage? How do we value that differences in acreage? Is the floor plan functional? Conditions, finishes, slate roof versus asphalt shingle, all of these things. We really spend quite a bit of time and base all of our judgments on just the experience of having been the number one brokerage for these sales in these homes for the past five years. We're very well dialed in on what these properties sell for and what buyers are looking for, so we use that to help inform our valuation process.

Greg:    I hadn't meant for this to be a sales session for Lenihan Sotheby's, but we might as well.

Jon:    I'm a salesman.

Greg:    That's right. One of the benefits of working in this brokerage is that when you can't find a "comparable" on the MLS, you can walk down the hallway and pop into the office or sit down with someone who has sold a comparable. There's so much knowledge just walking through the hallways that ... We're not appraisers, but there's a lot of working knowledge on high-end homes. When you can't find something online, you can probably find it in the hallway.

Jon:    Oh, absolutely yeah. There's a tremendous amount of that kind of cross-pollenization within the office. One of the things that, just a quick segue, the valuation process and looking at these historical sales is an extremely important part of what we do. One of the things that we really pride ourselves on as well is, or as an appraiser will look at the historical data, we also focus, put some emphasis on, the current active competition. Regardless of what price point you're in, we want to know what did the last three or four or six similar properties sell for to help inform our valuation.

We also want to know at the point a buyer comes into this property, when it's on the market, and leaves to go to their next showing, what are they shopping us against? What's the competitive landscape look like in that neighborhood, in that price point, for those amenities, and make sure that we're positioned well. Then that's something we monitor throughout the marketing process. We're constantly watching new listings come on the market and making sure that we're positioned competitively with those homes so that our sellers are able to meet their goal of moving the home.

Greg:    When you look at closed sales and you look at active listings, do you ever pull out some of the information about someone who tried to sell their home and then the listing expired? Is that worthwhile information for a seller to know this is beyond reach, that buyer's aren't going for this?

Jon:    Typically we don't have to get into the expired listings or cancelled listings. We'll have enough data with active inventory, pending sales, and closed sales. When we do run into issues where we're struggling to find enough comparable properties to base a statistically valid report on, we'll dig into the tax records and start looking for those private sales. Obviously our office does a lot of those, so we have a lot of data internally on these transfers. That's more what we would supplement with before we would get into something that would had not transferred.

Cross Town Differences In Property Valuation

Greg:    Gotcha. One more question I'm curious about. Some parts of town, it would seem, are much easier to calculate a solid listing price. A subdivision that is all set by itself seems like it would be a little bit easier, but then you have parts of town, like the Highlands or maybe St. Matthews, where your neighbor's house could be wildly different from yours. Have you found that certain parts of town are a little bit, I don't know how you want to say it, more interesting or more challenging to really nail down a good, solid price on?

Jon:    Yeah, I mean I think you touched on it. The highest level of precision that we're typically going to have is on a larger scale neighborhood where the homes are going to be within range of square footage. They're all going to be similar in size, similar age of construction, similar levels of finish. If you're talking about Lake Forest or Sutherland or Hillcrest or Hunting Creek, any of these large-scale developments, we're going to have a whole lot of data on those valuation reports. We'll base it off of the most comparable three or four properties, but we'll have a tremendous amount of supporting data behind it.

When you get into the Highlands, when you get into Glenview or Anchorage or some of these places where you can really get into some very cool, unique properties, that's where it really pays to have somebody familiar and well versed in that price range to make sure that you're getting credit for all the finishes and the condition of the property in making all of those adjustments with the comparable sales.

Greg:    You talked about the finishes, so at some point, in different price ranges, you expect certain finishes in some price points and that's sort of a given. If you don't have it, it's a negative. In lower price points, you actually get to add ... I think you talk about crown molding is one of those where ... Yeah, go ahead...

Jon:    Well, yeah, absolutely. I mean it depends on the price point and neighborhood, but there are different expectations of levels of finish that buyers are going to have depending on the size of the check that they're writing for the house. It's not necessarily a benefit. You mentioned crown molding. If you have very nice crown molding and extensive millwork throughout the house, well it depends on the price point of the home as to whether or not that's an extra of if that's just an expected feature. If you're talking about a $700,000 house, well people are going to expect that. If it's a $350,000 house, well that's going to be a nice upgrade having some nice millwork and crown molding.

It depends on the price point and that's where, as we've come in and look at those condition and finishes, we're obviously very well versed in these different price ranges and what buyers are looking for so we can make those adjustments and know, "Well, that's a credit we should add on," or "Wait a second." I was in a house this weekend that was just under $600,000 with no moldings to speak of. That's a tough thing for a buyer. They had pre-finished hardwood floors that needed some serious cleaning. As a buyer comes in a looks at that and compares it against the competition, well the competing inventory was very nicely finished. That's a big negative to look at that and realize we got to redo flooring, we've got millwork issues, we've got some other things that need to be adjusted for in that price.

Greg:    As you said in the beginning, it's not all based on square footage. That's not the best way to figure out the true value of a home.

Jon:    Sure, yeah. Absolutely. That's not, and there's a lot that goes into this.

Greg:    Well, Jon, thanks once again for coming and I look forward to talking to you on one of the future podcasts.

Jon:    Not a problem. Thanks, Greg.