Buying a house is a complex, complicated affair that involves a lot of people and moving parts. One of the hardest things to know is whether the sale price is reasonable. To find out it’s helpful to know a few key terms. For example, the sale-price-to-list-price ratio can tell you if an agent regularly lists homes for more than the final sale price. A good ratio is at or near 100%, because that means the agent knows how to price homes in a particular market. “Median days on market” indicates how long the home has been for sale, and the bigger the number the easier it should be to negotiate a lower price. For more on this continue reading the following article from TheStreet.
Navigating the world of real estate can be a quagmire in and of itself without getting crippled by confusing terms. While most buyers and sellers can grasp the significance of a home's list price and the size of house, other terms might leave them scratching their heads.
Whether you're a first-time homebuyer or a seasoned investor, below are five real estate terms you should know.
1. Sale-price-to-list-price ratio
In many ways real estate is a numbers game, and the better a person understands the numbers the more likely they will make a smart decision. The sale-to-list-price ratio is a way for people to gauge how well their agent understands a local market.
What is the sale-to-list ratio? For the mathematically inclined, it is the final sale price (what a homebuyer actually pays for a home) divided by the list price and expressed as a percentage.
If the figure is above 100%, the house sold for more than the list price. Conversely, if the figure is below 100%, the home sold for less than the list price.
We know this can be difficult to understand, so here is an example: If a home was listed for $100,000 and sold for $80,000, the sale-to-list ratio would be 80% ($80,000/$100,000).
The value of the sale-to-list ratio comes when you look at an agent's sale-to-list ratio. An agent's sale-to-list ratio should be near 100%. If the percentage is low, it means the agent routinely lists homes for more than they sell for. If the number is high, the agent might have a track record of negotiating for a higher price tag.
A problem, however, is that it can be difficult to find this ratio, even in the information age. One valuable resource is neighborcity.com. In addition, your agent should be willing to provide you with information.
Tip: A good agent will have a high sale-to-list ratio, meaning that they understand the local real estate market.
2. Median days on market
Speed is sacred in real estate. The faster a piece of property sells, the better it is for everyone involved. The buyer gets to move into their home, the seller collects funds and both real estate agents are paid.
Because of this, real estate professionals place a heavy emphasis on the number of days a home is on the market. The median days on market refers to the time it takes for a home in an area to sell. The median days on market is the midpoint of home sales, meaning half the homes in an area sold faster and half the homes sold slower.
This statistic can be used to calculate a market's relative strength. The basic ideas is that the faster homes sell, the more demand there is in a market.
Typically, homes with a high number days on market are perceived to be less desirable or overpriced compared with homes that were recently listed. For example, buyers might make the assumption that the longer a home is on the market, the more eager the seller is to unload their property, and try to negotiate a lower price.
At the same time, this number might not be as accurate as many people think. A common practice is for agents to take homes off the market after a set number of days and relist the home.
Tip: You should consider homes that are already on the market as opposed to flocking toward new listings. Knowing that a home has been on the market for a long time can provide you with a starting point to argue for a lower price.
3. Median list price per square foot over time
When homebuyers begin their search, they will want to know the strength of the market. This will clue them into whether it is a buyers' or sellers' market, and ultimately save them money. One way to gain insight is to look at the median list price per square foot over time.
If this number is down or flat it might be a good time to buy a home. If the figure has increased it can indicate demand is up and it is a good time to sell. In addition, the current median list price per square foot allows buyers to compare the relative cost of two homes in two different areas. You can see an example of this on our market statistics page for San Diego.
Agents use the median list price help formulate a negotiation strategy. When an agent is deciding a home's list price, they will look at the median list price per square foot of nearby homes. The agent will then factor in each home's unique qualities to find an accurate listing price.
Tip: Some might be tempted to look at the average price of homes in a city to learn how the real estate market is doing. It's true that this information can help decipher real estate trends, but a better measurement is to use the median list price per square foot of a real estate market.
4. Pending status
When homebuyers begin searching for a home, they will come across a number of designations that explain a home's condition on the real estate market. These are referred to as the home's listing status.
The majority of homes buyers will look at will be listed as "active," meaning the sellers are accepting offers. There are, however, many different status listings that can mean slightly different things. Because each Multiple Listing Service is unique, how listing statuses are defined will be different.
One of the most common listing statuses is "pending." This means the seller has approved an offer and is not accepting more others. In other words, the home is ready to close and all contingencies have been waived.
Tip: Sometimes the seller will accept a backup offer in case the first offer falls through. So if you're absolutely in love with a house, go ahead and bet on a long shot. It's not uncommon that your backup offer might turn into the real thing.
5. Percent of distressed properties
What are distressed properties? There are a lot of answers to this question, but it boils down to homes that are on the market because the homeowner has defaulted on their mortgage or tax payments.
After a property becomes distressed, a variety of organizations such as a debt collector, government or bank try to sell the home to recuperate back mortgage payments or taxes.
Homebuyers on the hunt for affordable homes should consider viewing distressed properties because they are typically sold at a much lower price than similar homes on the market.
As the name suggests, the percentage of distressed properties, which can be viewed on any major internet brokerage, tells homebuyers what percent of a real estate market is made up of distressed properties.
Tip: If you're a frugal shopper, you will be more likely to find cheaper homes for sale by looking at distressed properties. The smaller the figure, however, the harder it will be to find home deals.
This article was republished with permission from TheStreet.