Listing your home at the right price is critical. Pricing too high or too low can keep your home on the market a lot longer than you’d like, and can even leave thousands of dollars on the table.

Comparing what other similar homes in the neighborhood recently sold for is the more popular way of coming up with an accurate listing price in residential real estate; however, there are other ways to measure value.

One way that some sellers and their agents price homes for the market is by using a price-per-square-foot analysis of a subject property to compare to. While this shouldn’t be the sole method of pricing a listing, it can help somewhat. While many in the industry discard this method, it can still help narrow down an accurate listing price. In fact, professional appraisers and commercial brokers still continue to use these calculations, so there’s still got to be some merit to it.

The key to using a price-per-square-foot analysis is to follow specific guidelines.

How the Price Per Square Foot is Calculated

A home’s price per square foot is determined by dividing the subject property’s price by its square footage. For instance, a 1,500 square-foot-home that’s priced at $300,000 would have a price-per-square-foot calculation of $200 ($300,000 ÷ 1,500 s.f.). Calculating the price of a home can be done by multiplying the price per square foot by the home’s square footage.

Of course, this calculation on its own is very simplistic. Many issues can be raised by this simple calculation alone, as these numbers are subject to error. For instance, how accurate is the actual square footage of the home? How was this actually calculated? Was it even measured to ANSI standards, or was it done using old-school measuring tape?

No matter what method was used to calculate the subject home’s square footage, it needs to be very accurate. Not only that, it needs to be consistent with the method used to measure other comparable homes in the area. If not, one of the variables in the price-per-square-foot calculation could very well be highly inaccurate. Only after very precise numbers are obtained can the price-per-square-foot analysis work.

Follow the 10% Rule

A price-per-square-foot comparison method needs to stick to the 10% rule in order to be accurate. Basically, this rule involves ensuring that the improvements to the subject home along with the square footage of the land it sits on are within a 10% range of those of the subject property that is being evaluated. For instance, for a 1,500-square-foot home on a 5,000-square-foot lot, comparable sales should be based on homes within the 1,350 to 1,650-square-foot range (1,500 +/- 10%), and lot sizes must be within the 4,500 to 5,500-square-foot range range (5,000 +/- 10%).

Lot size considerations are especially important in California where a home’s value is heavily tied to the land compared to the depth of improvements. In this case, not considering usable lot size can result in inaccurate calculations.

Tread Lightly With Improvements

A home that’s been renovated from top to bottom in high-end materials is often assumed to be worth a lot more per square foot than a home that is in dire need of some TLC. While this is true to some degree, improvements might not necessarily have as much of an effect on the price-per-square-foot, depending on the buyer.

For instance, a home with brand new porcelain tiles might not be worth much to a buyer who has intentions of ripping it all out and replacing it with wide-plank oak hardwood flooring. In many circumstances, improvements do – and should – play a role in establishing an accurate price based on a price-per-square-foot analysis, but exceptions to the rule should be accounted for.

Any upgrades that have added useable square footage to a home will typically increase the value of the home. For instance, if a 2-bedroom, 1-bathroom house is converted into a 3-bedroom, 2-bathroom home, such improvements will usually increase the property’s value.

The Bottom Line

The price-per-square-foot analysis can certainly be helpful in coming up with a listing price for your home, but it should definitely not be the only method used. The key to accurate pricing is to use a comparative analysis of similar properties in the area that have sold no further back than two or three months. Actual sale prices are factual, and already involve all of the variables that need to be considered when coming up with an accurate listing price, including size, location, finishes, condition, and so forth.

There’s also something to be said about an in-depth knowledge of the local market, knowing what buyers in the area are looking for, and understanding buyer and seller motivation. The price-per-square-foot analysis only works with a solid understanding of the housing market of the area in question. Experienced real estate agents will be able to pair their knowledge of the market with comparables and a price-per-square-foot analysis to come up with the right price that will garner the most attention from interested buyers.

If your home has a specific problem that could affect the enjoyment of the new homeowner or even lower the property’s value, you’ll need to disclose it. If you fail to do this and a major problem arises as a result of that particular issue after the buyer purchases and moves into the home, you could find yourself in legal hot water.

Disclosure statements are important because they allow buyers to better evaluate whether or not to purchase a specific property, or what kind of price they should offer and what type of work will need to be done on a home if they do decide to go through with the transaction.

In the majority of states across the country – including California – you would be breaking the law if you knowingly hide major problems with your home before selling it. In California, sellers need to fill out a disclosure form that specifies every known defect in the home.

In general, all residential sellers with properties containing one to four units in the state of California are required to fill out and submit written disclosures to buyers.

Not only do disclosure statements help provide pertinent information to buyers, they also protect sellers from potential legal action. This statement gives the seller a chance to come clean about any known problems in the home that could have a negative impact on the value or enjoyment of the property.

Types of Disclosures That Must Be Made to Buyers

A number of issues will have to be disclosed to buyers before a real estate transaction closes, including any one of the following:

• Leaky roof
• Any ill-functioning appliances
• Room additions
• Work done without a permit
• Damage to any part of the home
• Presence of mold
• Termite problems
• Major construction projects nearby
• Neighborhood noise issues
• Whether any deaths occurred in the home in the last three years
• Information about the location of registered sex offenders that can be obtained from local law enforcement agencies

This list is by no means exhaustive. Your real estate agent can help you identify any particular issues with your home that should be communicated to the buyer.

The state of California provides a standard form, called the “Transfer Disclosure Statement,” which sellers need to use to communicate their disclosures, and can be obtained from a real estate agent. A “Natural Hazard Disclosure Statement” will also have to be filled out, which requires sellers to disclose possible future hazards from fires, floods, earthquakes, and so forth.

Special Form For the Disclosure of Lead

If the home you’re selling was built before 1978, you’ll need to comply with “Title X,” which is officially known as the Residential Lead-Based Paint Hazard Reduction Act of 1992.  In order to be in compliance with this law, you will need to disclose all known information about any lead paint in the home, provide the buyers with a pamphlet called “Protect Your Family from Lead in Your Home” from the EPA, allow the buyers to test the home for lead, and warn the buyer in the contract about the potential presence of lead.

When Do Sellers Need to Provide Disclosure Statements?

While there isn’t a specific deadline of when these disclosures need to be provided to buyers, as long as they are submitted in a timely manner. Some sellers will provide the disclosures before an offer is on the table, while others provide it after an offer is made.

If the disclosures aren’t given to the buyer by the time the purchase agreement is signed by both parties, the buyer can back out of the deal. If the disclosure form is given to the buyer in person, the buyer has three days to cancel the deal. If the form is delivered by mail, the deadline to back out of the deal is five days. At the end of the day, the sooner the disclosure is given, the better.

Consider Getting a Home Inspection Before Selling

The buyer will probably request to have their own home inspection done as part of the contract’s contingencies, so any issues will likely be discovered then. If you strongly suspect that your home has some defects, you might want to consider having your own inspection done on the home before you even list it.

It’s not legally required, but doing so will help you find out if anything in the home will need to be repaired or replaced, as well as help you figure out what needs to be included in the disclosure statement. By making any necessary updates, you might even be able to boost the value of the property and increase the listing price. However, you’re not necessarily obligated to make these improvements. Many times the disclosed issue can be something to be negotiated between you and the buyer.

The Bottom Line

Before you list your home for sale, find out exactly what types of disclosures you’re responsible for. Luckily, your experienced real estate agent will have that information readily available for you so you can cover your tracks when listing and selling your home. Just make sure that the buyer acknowledges having received the disclosure statement by ensuring that they sign and date the form. Full disclosure is the only way to approach your real estate transaction in order to protect yourself, and conduct yourself fairly with the buyer.

There are plenty of sizzling hot real estate markets in California. Some are so hot that homeowners could make an absolute killing should they ever choose to sell any time soon.

Take San Francisco, for starters. The median price of detached homes in this bustling city spiked 23% in 2015, while the median condominium price jumped 21%. Homeowners who bought years ago before the market really started to sky-rocket now likely have quite a bit of equity in their properties, predominantly from a rise in market values. Even if homeowners in this area never really had any intentions of selling any time soon, numbers like these could spark some serious contemplation about whether or not to jump in while the market is still red hot.

If you’re mulling over the idea of selling your home during a hot seller’s market – even if your intentions were to stay put – there is plenty to think about before you make that move.

As always, make sure to get advice from a seasoned and experienced real estate agent prior to making this huge decision.

How Much Higher With the Numbers Rise?

You might be thinking that the numbers couldn’t possibly get any higher, which is why you would even consider selling and capitalizing on a huge gain in the first place. However, the best time to jump out is when the housing market in your area is at its peak.

Homeowners may be tempted to act on a hot seller’s market right away before interest starts to fizzle and the demand isn’t as strong. But it’s best to spend some time taking certain things into consideration, such as determining exactly where the market is continued to head. It’s highly possible that the hot streak could continue, but just how long and how far are the million dollar questions.

Where Will You Buy?

Once you sell, you’ve got to buy somewhere else. Unless you plan on moving to a completely different area where the housing market isn’t as strong, you will likely end up on the opposite end of the transaction, paying huge numbers to stay in the market. Make sure you’re willing and ready to be on the other side of the coin before you jump ship from the home you’re in right now.

The Numbers Aren’t the Only Things to Consider

The idea of selling your home for a lot more than what you paid for it may sound enticing, but lining your pockets shouldn’t be the only thing to consider. A hot seller’s market can cloud homeowners’ judgments, and cause them to forget about the big picture.

Consider where you see yourself in the next few years, and what you need from your home. Homeowners who are starting a family, becoming empty nesters, or retiring sometime soon all need very different things from their homes. If the home you have right now fits exactly what you need right now, it may be worth it to stay put, at least for a little while longer. On the other hand, if your situation will be changing in the near future, now may be a good time to consider the move.

Appraisals Can Come in Short

Your home may be worth a ton of money, but make sure you don’t sell far past what the current market dictates. Why? The buyer’s appraisal could fall short, which means the lender may be unlikely to approve the mortgage amount based on the agreed-upon purchase price. Lenders don’t want to extend a home loan for an amount that wouldn’t be able to be recouped should the buyer default on the mortgage. For that reason, the appraisal needs to come in at or above the purchase price in order to avoid this precarious scenario.

Don’t Rush Your Decision

The last thing you want to do is rush such a monumental decision. Don’t let a hot seller’s market determine how fast you should move into order to potentially seize huge gains. When it comes to real estate transactions, every factor involved needs to be carefully considered. We’re talking about a lot of money here. A hot market isn’t going to fizzle out in a matter of days, so there’s plenty of time to consider every aspect of the situation before coming up with the right answer for you and your family.

The Bottom Line

Knowing that your home is potentially worth double or even triple what you originally paid for it can really get the wheels in your head turning about possibly selling sooner rather than later. But before you make that decision, take the time to meticulously go over the benefits and downsides of such a move. Consider where you want to be today, as well as where you see yourself being a few years from now. A move like this should ideally fit well into both your short-term and long-term plans.

Every home purchase transaction should be initiated with an earnest deposit to the seller. In fact, it’s rare for sellers to accept offers without a deposit. This monetary offering essentially tells the sellers that buyers are serious about purchasing the home, and shows their willingness to meet all of the clauses detailed in the contract.

If the offer is accepted by the seller, the deposit will be put towards the down payment and any closing costs. The money is kept in escrow, and is given back to the buyer if any one of the clauses cannot be met within the allotted time specified in the contract.

How Much Should Be Put Towards a Deposit?

Many industry experts agree that putting anywhere between 2% to 5% towards the purchase price of a home is acceptable. However, the actual amount depends on how hot the market happens to be in the area. If, for instance, the market is somewhat sluggish, buyers can realistically put down as little as 1%. On the other hand, sizzling markets where homes are flying off the shelf will demand much higher deposit amounts. Many bids have been won as a result of the highest deposit amount.

If buyers plan on putting in a large deposit, the lender may want to verify where these monies are coming from. The deposit can essentially be any dollar figure that the buyer is comfortable offering, and what the seller is willing to accept. In general, the deposit amount should reflect both the purchase price of the home, the state of the current market, and the length of time that has been requested for closing. The more time asked for, the bigger the deposit will usually be.

How Are Deposits Made?

Once the buyer and seller have both signed the purchase agreement, the buyer will provide the deposit either in the form of a money order or certified check, which is then placed in an escrow account held by the real estate brokerage of choice. The check is therefore made out to the brokerage, not the seller.

The money is kept safe in these escrow accounts, as state laws have stringent regulations about how these monies are handled and managed. Under no circumstances are these funds ever to be deposited into the business bank account of a broker.

During the time that these funds are sitting in the escrow account, they generate interest. If the interest amount is over $5,000, the buyer will need to fill out IRS Form W-9 in order to receive the interest. Once the deal is finalized, the deposit is released from the escrow account and applied towards the down payment.

Can the Seller Keep the Deposit if the Deal Falls Through?

If a liquidated damage clause is included in the purchase agreement (which it should), the seller can keep a certain portion of the deposit if certain conditions are met. This clause basically states that if the buyer falls through on the contact, the seller can keep the lesser of the earnest deposit or 3% of the purchase price.

An “earnest deposit” is often confused with “liquidated damages” in a real estate contract.  While the earnest deposit can be any dollar amount, the seller’s liquidated damages clause only allows the seller to keep a certain amount up to a maximum of 3% of the sales price in the state of California.

How Can Buyers Get Their Deposit Back if the Deal Falls Through?

If the deal is not completed for whatever reason, a cancellation fee is typically garnished from the deposit, and the rest stays in escrow. The deposit holder will determine whether or not the buyer will be getting that money back as per the terms of the contract. Ideally, the purchase agreement will detail how a refund should be dealt with.

Typically, if conditions in the contract cannot be met within the allotted time frame, the buyer should be able to get the deposit money back. If however, the clause expiry date comes and goes and the buyer has not fulfilled the promises made, the seller may be able to keep the deposit. 

The Bottom Line

Deposits aren’t just some arbitrary dollar figure thrown out there. These offerings keep buyers on track to fulfill their obligations and promises according to the purchase agreement. Not only do deposits help start the real estate transaction, they also protect the seller should the buyer ever default on the real estate contract.