Setting the right price is crucial when selling real estate. Price too low and you leave money on the table. Price too high and you’ll scare away potential buyers. So how do you strike that delicate balance? Appraised value is the key.

Appraised value is a professional assessment of what a property is truly worth in current market conditions. When you use it to guide pricing, you maximize sale proceeds while keeping profit margins reasonable.

In this post, we’ll explore how to leverage appraisals to optimally price and profit from real estate—whether you’re selling your home, investing, or working as an agent. Read on for insider tips that’ll help you priceproperties accurately to drive sales.

What is Appraised Value?

First, a quick primer on appraised value for those unfamiliar with the term.

Appraised value is a licensed appraiser’s estimate of what a property would sell for in the current market. The appraiser analyzes recent sales of comparable homes in the area to come up with a number.

Key factors considered include:

– Location

– Size of land and improvements

– Number of bedrooms and bathrooms

– Layout and condition

– Upgrades and additions

– Age of property

The goal of an appraisal is to get as accurate a market value as possible. Appraised values are important because they provide an independent, unbiased estimate of what a property is truly worth. This can help buyers feel confident about purchase prices and help sellers set realistic asking prices.

Banks and lenders also use appraised values to determine loan amounts for mortgages. The appraised value sets a limit on the amount of money a lender will loan for a property. Obtaining an appraisal is crucial for both buyers and sellers when real estate transactions involve financing.

Why Appraised Value is Important for Pricing

There are a few key reasons why appraised value should be an important factor when setting real estate prices:

1. Appraisals help price accurately according to true market value.

Relying solely on a seller’s wishful thinking can result in overpricing that turns buyers away. At the same time, an emotional seller may underprice and lose out on proceeds. The appraised value provides an impartial market perspective to set prices within an acceptable range.

2. Appraised value helps manage seller expectations.

Home sellers often have an inflated idea of what their property is worth. A recent appraisal helps real estate agents gently convey accurate estimates and manage expectations about likely sales prices. This keeps sellers grounded when pricing and negotiating.

3. Appraisals establish a proper price anchor. 

The appraised value creates a reference point to guide pricing decisions. Sellers can adjust up or down from this anchor price based on market conditions and other factors, rather than picking a price out of thin air.

4. Appraised values reflect the upper limit for mortgage lending.

Since banks won’t loan more than the appraised amount, it’s important not to set prices too far above this limit. Price too high, and buyers won’t be able to secure financing, killing deals.

5. Appraisals help assess market changes over time.

Regularly updating appraisals helps sellers track market fluctuations in value. They can then modify pricing accordingly to stay competitive.

Now that we’ve covered the definition and importance of appraised value for real estate pricing, let’s look at how to put it into practice…

How to Use Appraised Value to Set Prices 

The following steps outline a methodology for using appraised value to set optimal asking prices, list prices, purchase offers, and sale prices:

1. Determine the appraised value.

– For selling a home, order an appraisal through a lender or hire an independent appraiser.

– When buying, require the seller to provide an appraisal or other acceptable valuation. 

– For real estate investing, regularly appraise properties to assess market changes.

2. Factor in your desired profit margin.

– Research typical profit margins in your area – often 5-10% above appraised value.

– Set your target margin based on market conditions and your timeline.

– Add this margin percentage to the appraised value when pricing.

3. Compare to competitive pricing.

– Analyze similar active listings and recently sold comparables.

– Make sure your price with margin aligns with competition.

– Adjust up or down if needed to stay competitive.

4. Adjust for market conditions.

– In a hot market, consider pricing slightly above comparables. 

– In a slower market, aim closer to (but still above) appraised value.

– Minor adjustments can maximize sales potential for market dynamics.

Following this methodology ensures your pricing ties back to objective valuation while also staying competitive and responsive to market trends.

Let’s look at a quick example:

– Appraised Value: $500,000

– Add 10% margin: $550,000 

– Compare to competition at $565,000 

– Hot market, so add 2%: $567,000 asking price

The precise adjustments will depend on your situation, but the approach stays the same. Appraised value sets the baseline, profit margin covers your business needs, and market comparables keep you competitive.

Managing Profit Margins Over Time

One appraisal represents a property’s value at a given point in time. Markets fluctuate constantly, so appraised values can change over weeks or months. As an investor or agent, it’s important to manage pricing and margins appropriately as values rise and fall.

Here are some tips for adjusting profit margins over time as market values change:

1. Track changes in appraised value.

– Monitor neighborhood sales to estimate value shifts.

– Re-appraise your own properties every 6-12 months. 

– Drive-by appraisals can offer cheaper value updates.

2. Re-evaluate pricing regularly.

– Adjust prices up or down with changes in appraised value.

– Maintain your target margin percentage as values fluctuate.

3. Consider temporarily lowering margins.

– Aiming for 5-10% margins maximizes sale potential.

– If needed, reduce margin to as little as 3% to drive sales.

– Price drops can be better than letting a property sit.

4. Know when to increase margins again.

– Raise margins back to target levels once demand rebounds.

– Increasing appraised values also support pushing margins up.

The key is staying nimble with pricing as the market shifts instead of sticking to a rigid profit margin. Appraised values guide these incremental adjustments up or down over time.

Other Pricing Factors to Consider

While appraised value sets a baseline for pricing, several other factors come into play for real estate:

– Demand and desirability 

Trendy areas or luxury builds command higher sale prices unrelated to appraisals. Capitalize on high demand for certain properties that drives buyers to overpay.

– Uniqueness of property

One-of-a-kind homes with rare features or acreage justify pricing well above valuation. Special properties attract premiums.

– Upgrades and improvements

Major remodels and additions boost property value and support increased pricing. Appraisals may lag in reflecting these enhancements.

– Marketing and visibility

More eyeballs on a listing can drive up perceived value. Higher prices may be possible with ideal photos, video tours, and aggressive promotion.

The condition, aesthetics, location, and marketing for a home all impact perceived value in addition to appraisals. Factor these “x-factors” into pricing strategies as well.

Setting Prices for Different Situations

Pricing also depends on the specific real estate situation, whether setting an asking price, evaluating offers, auction bidding, or creating rental/lease rates. Here are tips for pricing for different scenarios:

Setting an Asking Price

– Asking prices allow room for negotiation below your target price

– Price 5-10% above appraised value and comparables 

– Consider boosting above appraisal more in hot markets 

– Can factor in planned price reductions to attract activity

Evaluating Offers and Negotiating 

– Most buyers expect 10-15% below asking is a reasonable offer 

– Negotiate up from buyers’ initial offer prices 

– Stay within 5% of appraisal value as your floor to protect margins

Pricing for Auctions or Bids

– Set a high opening bid to anchor perspectives 

– Watch for bid momentum and market signals from buyers

– Be prepared to settle for sale price below your goal

Pricing Rentals or Leases

– Check rental rates for comparable properties in the area

– Establish monthly or annual rental rates factoring in expenses

– Increase rates each renewal to keep pace with market changes

The pricing methodology adapts per situation, but appraised value remains the constant benchmark to ground your numbers.

Common Pricing Mistakes to Avoid

While appraised value is a solid anchor for pricing, there are still some common missteps to sidestep:

– Setting prices too far above recent comparables in the same market. Appraisals can lag, but don’t ignore fresh sale prices around you.

– Refusing to negotiate much below asking price. Most buyers expect some negotiation, so leave yourself room to barter.

– Overpricing because you feel emotionally attached. Detach yourself and use objective valuation data, not emotions.

– Not updating pricing with market changes. Regularly revisit value indicators so your pricing stays current. 

– Trying to recoup renovation costs that don’t increase appraised value. Cosmetic updates rarely boost value, so don’t factor their cost into pricing.

The market ultimately determines the true value of a property. While appraisals provide an informed estimate, sellers should avoid deviating too far from what nearby sales activity supports.

Conclusion

Setting the optimal real estate pricing strategy requires blending objective valuation from appraisals with the art of negotiating and adapting to shifting markets. It’s a balancing act, but appraised value provides an essential baseline that guides pricing decisions. 

By keeping margins flexible, anchoring to appraisals, and incorporating market signals into price-setting, real estate sellers can maximize proceeds while maintaining competitive pricing. Appraised value alone shouldn’t determine pricing, but no pricing decisions should be made without carefully considering it either.

Regularly updating appraisals and staying on top of market trends is key to pricing profitably. Buyers and agents can also leverage appraisal data to negotiate better deals. For all parties, appraisals reduce risk by establishing an impartial estimate of true current value. Relying on this objective third-party valuation minimizes mispricing that costs time and money.

So for real estate professionals and investors, be sure to appraise properties often and factor these valuations heavily into pricing strategies. For buyers, push for up-to-date appraisals on prospective purchases. These valuations provide confidence that both buyers and sellers are getting a fair deal at a reasonable market price. With the right appraisal knowledge, all real estate transactions can be win-win based on real market value.