Seller Misconceptions

“Sunk Cost”:  retrospective (past) cost that has already been incurred and cannot be recovered.


What Sellers paid for their home ” and how much they subsequently put into it (for improvements, updates, etc.)  ” are important psychologically.*

And, depending on how much the would-be Seller currently owes on their home, the sum of their cost + improvements certainly matters financially (if the mortgage balance plus any home equity loan exceeds the current value, the owner is what’s called “underwater” ” and may not be able to sell).

However, it’s seldom the case that the owner’s cost + improvements = current fair market value.

Historical Cost

There’s a succinct, one-word explanation for why that’s so: “historical” (called “book value” in accounting-speak).

While home valuations are hardly as perishable as a dozen eggs or a gallon of milk, prices are deemed obsolete within six months (if not sooner).

That’s because markets, interest rates, inventory, etc. continually change.

While the Twin Cities housing market is less volatile than Miami’s or Las Vegas’, annual changes of plus or minus 10% aren’t unheard of.

String together a couple of years of market changes ” let alone a few decades! ” and it’s easy to see how the owner’s outlays quickly recede in significance.  See, “Why the Neighbor’s Home Usually Isn’t a Comp.”

Three Good Comp’s (and Maybe a Fast “Pending” Sale)

What is relevant pricing a home?

For all but the most unique homes, just this: how much the three most similar, nearby homes sold for (called Comp’s, or “Comparable Sold Properties”) within the last six months (ideally less) ” and to a much less extent, how much competing homes are asking (can be unreliable because of overpricing).

In fact, the Comp’s establish likely fair market value not just for the listing agent (representing the Seller), but also for Buyers’ agents, and ” eventually ” for the Appraiser working for the Buyer’s lender.

It may be counter-intuitive to Sellers, but all the other data is just housing market noise . .

*While the owner’s costs aren’t so relevant, the condition of their home is very relevant.

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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