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Spring House Hunt: A guide to real estate pricing terms

Ask the Expert Buying
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What is my home worth? It sounds like a simple question, but the answer can vary greatly, depending on why and whom you are asking. Are you selling your home and wondering what your listing price should be, or are you referring to the assessed or appraised values of your home?

Words like “assessment’’ and “appraisal’’ are often tossed around interchangeably and frequently misused. Additionally, the listing price is not necessarily the price a seller should expect to receive when his or her home is sold, as many would think. If you are wondering what your home is worth, you should understand what all of these terms mean, as well as how they are actually determined.

Listing price

The listing price is the price the sellers chose to list their homes for when they put them on the market. Determining the right listing price involves homework and strategy. That’s where your agent comes in. Agents begin by preparing a Comparative Market Analysis (CMA) for their clients. We do this by researching and comparing recently sold, similar properties found on the Multiple Listing Service and adjusting for features and benefits. Once we arrive at a range that we believe a home will probably sell for, we discuss our findings with the sellers, who ultimately decide the actual listing price for their home. This price may be adjusted while a home is on the market if it’s not getting enough activity.

A seller may ultimately choose a listing price below the expected sale price of the home. This is where pricing strategy comes in. For example, if we suggest a range between $499,000 and $529,000, the seller may decide to price on the low end to generate more interest and bring in more potential buyers with the intention of having the price bid up above the range. This happens quite frequently in a seller’s market, with low inventory and high demand. Sellers need to understand this process, because if they set the price too high, their home will linger on the market, possibly even selling below the lowest suggested price.

Appraisal

Appraisals are also used to determine market value, but unlike CMAs, they are performed by a licensed appraiser and are part of the buyer’s mortgage process. When buyers apply for a mortgage, their lender will require an appraisal. Appraisals are designed to protect banks so they don’t lend too much money on a property. Appraisers are unbiased parties to the transaction. They generate a report for the bank that is much more detailed than a CMA. The appraised value must be equal to or more than the purchase price a buyer has agreed to pay for the home. If the property does not appraise at the purchase price, one of two things will probably occur; either the buyer will have to put down more money for the loan, or the seller and buyer will have to renegotiate the price.

In a high demand market, this can happen fairly often — limited inventory can drive a proposed sale price above the appraised value of the home. This is something that savvy agents will consider when reviewing offers with their sellers. If an agent can get a buyer to drop the appraisal contingency (but make sure that they have enough money to cover any gap) that is always a huge plus for the seller.

Assessment

An assessment is quite different from an appraisal and a CMA, because it has nothing to do with the actual market value of the home. Municipalities do assessments to determine property taxes. It always starts as a valuation on a group of homes before becoming a value assigned to a particular property. Your annual property tax is based on your home’s assessed value, something a buyer will want to consider to determine annual expenses on a new home.

All of these terms are important in understanding the home sales process. Buyers and sellers should always make it a point to learn what real estate terms mean —and as I always advocate, retain a professional real estate agent to help you with the process. Happy house hunting.

Marjorie Youngren is a broker at Century 21 Commonwealth in Lynnfield. Send your real estate questions to marjorie.youngren@commonmoves.com. Follow her on Twitter @MarjorieTeamC21. Subscribe to our free real estate newsletter at pages.email.bostonglobe.com/AddressSignUp