Two very similar properties recently sold in a central Toronto neighborhood. One sold for $1,700,000 and the other sold for $1,295,000. Does that make sense to you? It doesn’t make sense to me, but I understand how it can happen. You should understand how it can happen, too, so you can determine the best list price for your home if you’re selling and a fair offering price for any home you’re thinking of buying.

First off, understand that most people estimate the fair market value of a home by examining the sale prices of comparable homes. So if most homes that are similar to Home A have been selling for $1,000,000, chances are that the fair market value of Home A is approximately $1,000,000, too.

What complicates the analysis of fair market value is the fact that some homes  may have sold for prices that were much higher or lower than $1,000,000. For example, let’s assume that Homes B-I were all comparable to Home A. One of the buyers who bid on Home B lost out in 4 previous bidding wars and paid $1,200,000 for it out of desperation. Another buyer from New York paid $1,175,000 for Home C because she found it to be a reasonable price relative to New York prices. Home D was bought for $1,225,000 by a buyer who had already sold his own place and was desperate to find a place to live so he didn’t have to move in with his parents. And a couple expecting twins in 3 months paid $1,190,000 for Home E because they wanted to get settled before the big day.

There were also homes that sold for less than $1,000,000.  There was only 1 offer on Home F, from a buyer who was moving here from Winnipeg (my wife’s old hometown), and she was only willing to pay $800,000 because prices in Toronto are very high relative to those in Winnipeg. The sellers accepted this price because they needed to sell immediately. Homes G, H and I all sold for lower prices than expected because they came on the market at the same time so interest in them was split. After all, there are only so many buyers to go around and price is determined by supply and demand.

You get the picture. The fair market value of Home A is based on the sale prices of most comparable homes, but there are numerous additional factors that may result in the ultimate sale price being much higher or lower than fair market value. When you’re trying to determine the fair market value of the home you want to buy, it’s best to ignore outlying prices, both high and low. Once you’ve determined fair market value, you can decide if you want the home badly enough to pay a premium for it. It’s also important to focus on fair market value when you’re selling. Everyone wants to hit that home run or win the lottery (or both), but if you price your home too high, you may not get any offers at all and if you price it too low, you may leave money on the table.  Choosing the right list price is the key.

Unfortunately, there’s no formula to calculate the perfect price. Determining the right  price is an art that requires many years of experience.  It’s not quite rocket science, but it’s close. Great agents put a lot of thought and intuition into selecting the price that will best help their clients achieve their goals. It’s not just a matter of picking a number and seeing what happens. Luckily for you, you already know where to find a pricing artiste.