The listing/offer price is always decided by the client. The real estate agent's duty is to provide the seller/buyer with all the information, explanations, and a recommendation for listing/offer price.
There are three ways of finding the fair market value of real estate:
1. Comparison Approach: This is used for owner-occupied residential properties. Compare the 3-5 most similar homes that have sold recently.
2. Income Approach: This is used for investment properties. How much money will the property gross, minus expenses, divided by investment. Compare the return on investment to other investment opportunities.
3. Cost (Replacement) Approach: This is used for insurance. How much would the property cost to replace today?
For residential real estate, the comparison approach is the standard way to determine price. The best Realtors will provide a "Comparative Market Analysis" (CMA) to demonstrate fair market value for the property. This is not an appraisal since appraisals can only be performed by licensed appraisers; it is the next best thing.
Finding Comparable Properties (Comps):
This is an important step because using the wrong comps will end with an inaccurate value. The comps must be a similar type (i.e. single family home vs. condo). Ideally the property would be sold within the past six months or, at most, up to 1 year. The property would be in the same neighborhood, then within .5 miles, then within 1 mile. Then selection should be based on the most similar age, sqft, bed/bath, acreage, and style.
Example: Sales/Pending in past 1 year; .5 mile radius; Single Family Home
Price Adjustments to Comps:
Once the 3-5 comps are selected, your Realtor must compare each property to the subject property categories: location, view, design, appeal, age, condition, full bathrooms, half bathrooms, bedrooms, sqft, finished basement, garage(s), patio/decks, fireplaces, flooring, updates to kitchen/baths, pool, age of roof/hvac/windows, septic/well, and appreciation since sold.
Example: Best 3 Comps with Adjustments (one shown)
Once the price adjustments are made to the comps, there will be a clear pattern that develops. Homes that sold for more, but are superior, will be price adjusted lower. Homes that sold lower, but are inferior, will be adjusted higher. The average of the adjusted price is the comparable price. The fair market value range of 95%-105% of the comparable price is what will most likely be the sold price of the property.
From my personal experience performing CMAs before a property is sold and then comparing it to the sold price, the fair market value range that I calculate based on a CMA has an 83% confidence interval.
CMA Results:
Fair Market Value: $440k-$475k
Most Likely Sales Price: $465k
As part of our service, we provide a FREE CMA for those considering selling their home.