Ok, I have written about it before, 
but it is time again to talk about why "I bought it for 20% under list" means absolutely NOTHING in the world of real estate.
This is a common misconception... but still a misconception. As an agent, I hear buyers (investors or peoplelooking for a family home) talk about how they only want to pay X% of the list price. Their fear is that if they are paying more than X%, they might be paying too much.
It doesn't matter.
For some, X=70, for other it is 90. But... it still doesn't matter. Let me explain...
Imagine if you will that you are in the market for a nice car... to drive. I happen to be selling this driveway art Jeepster. It is listed for $45,989.00. But I'm willing to make a serious deal. I will sell it to you for half. So, for $22,994.50 you can own this pretty gem. It is one of a kind... And it is 50% off.
Ok, you decide that maybe you should look around. Maybe there is another good deal out there. And then you run across a nice Pontiac G8GT. It looks nice and everyting, but the dealer is holding firm on their price. Despite the fact that there are 4 on the lot that look exactly the same, they are convinced that the can get $34,090... which is within "dinner" of the full list price.
Obviously this is a no brainer, right? Choice "A" is rare, heavily discounted and cheaper. Why would anyone spend another $11k+?
Right?
Hold up... I'm obviously not being serious... and the example is extremely over the top. But the basic premise still holds true. List price isn't a measure of actual value. List price is just a number. Sire, it is a number that was reached based on the professional advice of a real estate agent, maybe an appraiser and the seller. Right?
Sorry, but...
Right now in Gwinnett County, GA, about 1 in 3 homes listed ends up selling. That's right, there are three times as many homes coming on the market as there are getting sold out of the market. The rest languish, are withdrawn or expire. Many of them are nice homes. But here is the problem... they aren't good deals.
Here are some examples:
- A bank owned property that needed $50,000 worth of work to make it average for the neighborhood... but it was priced about $30,000 below homes that were ready to go.
- A property from an over-leveraged private seller that was priced $50,000 over the neighborhood comps, because that was what he needed to get in order to retire his debt.
- A property that the seller is "testing" on the market. They don't really need to sell, but "if they get their price" they would love to buy another home.
How many properties like this have we seen? In the case of the first one, a low-ball might get the property... but for the rest it would be pretty fruitless.
On the other side of the equation:
- A bank owned property that is priced $30,000 BELOW neighborhood comps... needs NOTHING to be ready to go. The bank knows that they need to price it astoundingly if they want to get it sold fast.
- A property that belongs to an estate. The previous owner had a paid off mortgage, and the heirs want it gone because they "want their money."
Now, every once in a while these kinds of sellers will price it high because "they want negotiating room"... but it is MUCH more likely that they will price it to grab the buyers attention. That means there isn't 20% to take out of it.
The point is simple...
Many of us... as well as our clients... get caught up in the idea that there is a percentage off of the list price that can make the property a "good deal". But, it just isn't the case. The reality is that there are properties that are cheap... and lousy deals. there are properties that are no cheap... and are great deals. There are properties that are bargains at full price, and there are some that would be a rip at half price.
Final example... There are homes being sold in Detroit and cleveland for as little as $500. in some cases these are killer deals and the banks are perfectly willing to lose money just to make them go away. In other cases they are over-priced. A relative just looked at one of these homes and what he found was that the $500 property needed $40,000 in repairs and when he was done he might be able to rent it for enough to cover the mortgage... but selling it would leave him upside-down for at least as long as it takes that market to come back... decent homes are selling for $30,000 on the same block.
List price isn't directly tied to value, just like the truth isn't directly tied to politicians.
When they say enough, something is bound to turn out to be true.
So very, very true, Lane. My partner and buyer's agent is working with a client right now that ONLY will consider REO properties under the assumption that THIS is the way to get a deal. They are missing on some GREAT properties that are not REO!
Reminds me of the old saying, "stepping over a dollar to pick up a nickel".
Those of us areound for a while know price is the most important factor. Even more so now in high inventory situation.
Great analogy Lane. It is just a number. In most cases a fair number within market range. The value is in the mind of the buyer. Something intrinsic many cases.
Lane,
Hey I'm impressed by the Jeepster! I think the last pic I saw was a year or so ago and you were just welding the frame or something. Lots of progress!
Related like second cousins? Hey remember we are in the south. Those second cousins could also be brother and sister... LOL.
Seriously. Great post and it really illustrates the point. I think with a good agent most buyers understand the concept. I had a very smart buyer just last year that ofered $2500 OVER list! Why? The house was a steal. The purchase appraisal ordered by the lender came in $70,000 over their contract price. Rather than just looking at percentages or magic numbers, buyers need to be smart and listen to good advice.
Make it a great day!
Lane: I absolutely love your analogies to the car business. I was in that business so long that my brain still thinks repo when I want to say foreclosure! LOL!
Thank you for this post. Very true in every sense of the word. I used to use the old willing buyer/willing seller as the true test of value.
But as the mortgage broker, even this concept has been busted apart because the appraiser has a different value in mind, then so does the bank.
Who knows what the real price of a house is any more?
Great job! Great explanation! Thak you.
Lane! This is great - I'm flagging it! An appriaser told me once, "price is what you pay - value is what you get." Now that it's a moving target, it's more important than ever to remember it's a long term investment.
Great post. List price is sometime just a figment of someones imagination!
Fantastic write-up! I think this applies to the majority of short sale listings, too. Many buyers are thinking that just because it's headed to foreclosure that banks are ready to approve the first low-ball offer they get. Unfortunately for them, most banks are looking at "value" as it relates to the current market conditions for the area, and are not willing to take much less than the appraisal price.
The value to a buyer is reflected in the buyer's price, that is, what a property is worth to him/her, given the property's combination of assets and liabilities, the buyer's plans for the property and the resources available to purchase it. I've appended one of my weekly columns on the subject.
All columns are available at www.curtis-seltzer.com. Another set of columns is available at www.landflip.com.
Curtis Seltzer, Ph.D. Land Consultant
Author, How To Be a DIRT-SMART Buyer of Country Property
Country Real Estate, #8 FOR IMMEDIATE RELEASE: November 1, 2007
Copyright applies.
Buyers need to know when their price is right
By Curtis Seltzer
BLUE GRASS, Va.-Buyers of country property always ask, "What's the right money to pay?"
They often seek an answer in three ways.
One approach is to assume that the buyer's right money is roughly 15 percent less than the seller's asking price.
Deduct five to six percent from the asking price for commission and five to 12 percent more for "negotiating." Whatever's left, the buyer thinks, is the right price.
This method often produces a purchase, because the buyer has accepted the seller's asking-price framework. The buyer derives his offer based on a fictitious number that the seller has proclaimed to be the property's value to him and the buyer.
Asking price has nothing to do with the value of the property to the buyer.
A second approach is for a buyer to hire an appraiser to do a comparables analysis. This establishes a Fair Market Value (FMV) for the seller's property by
judging its features against the selling prices of at least three nearby, recently sold properties (comps) with similar qualities. The appraiser tweaks the FMV to account for differences between each comp and the seller's property.
A typical appraisal will not value assets like minerals, wind rights and land quality individually.
Rural appraisers often use generic values for timberland, pasture and cropland without determining the actual in-the-field value of the seller's timberland, pasture and cropland.
An acre of generic timberland may be appraised at $1,500 across the board, but
a buyer needs to know whether the 100 acres of timberland on the seller's property contains merchantable timber worth $300 an acre...or $3,000.
FMV has nothing to do with the value of the seller's property to the buyer. It has to do with the value of the seller's property in relation to other sales.
The third approach is for the buyer to ask the seller's real-estate agent who's driving him around: "What do you think the seller will take for it?"
Seller and agent often anticipate this question and agree on an answer before the buyer asks it. A seller usually figures out his "will-take" price first, then steps it up
to an asking price.
An agent representing the seller should not give information to a buyer that harms the interests of his client, the individual whose funds will pay the agent's commission.
A seller's "will-take" price has nothing to do with the value of his property to the buyer.
So how does a buyer figure out what he should pay for rural property?
The right purchase money is the value of the seller's property in light of the buyer's capabilities, the property's capabilities and his plans.
The buyer's individual capabilities reflect the resources he can bring to bear on the property, before and after purchase. These include his time, knowledge, money and commitment. The less a buyer has of each of these, the lower his offer should be.
The property's capability to generate income (sale of products or service; income from rent and royalty; federal subsidies) and tax benefits (deductions, depreciation, capital-gains rate, estate sheltering, conservation easement, 1031 exchange potential) is a major factor in determining what a buyer should pay
Other property capabilities a buyer should evaluate are its long-term appreciation potential; ability to pay down the mortgage through the sale of severable assets like an unwanted house or land; and, finally, its potential to be sold, in whole or part, for a Higher and Better Use (HBU), which means a higher price per acre than the one the buyer just paid.
The buyer's plan for the property also determines its value to him. A plan can range from land used exclusively for personal recreation to a divide-and-flip business deal.
Any plan that builds a property's value and generates significant income increases the buyer's ability to pay the seller a high price.
When a buyer's capabilities are low, the right money for personal-use property should also be low. In other words, he who stretches to buy something he doesn't need has put himself on a rack of his own making.
The right money-value to the buyer--is what the buyer should pay, never more and less if possible.
The right money to the buyer may be the seller's asking price, or more, or far less.
Of course, if you have money to burn, buy whatever you want and forget about the cost.
Every seller dreams of a buyer with a ton of cash and a lighted match.
c
Thanks for this post Lane- good way to explain it... your point, which is simple is also bang on!
Lane,
Thanks! Liked the analogy used. It was a great read.
Have a great Friday.
Olga
Ron - I see a lot of that. I have taken some folks out and opened their eyes as to what a good deal really is...
Ann - ahh... yea.
Missy - It is just an artistic number. It is funny all of the different pricing strategies.
Bob - The frame is in the garage... the dilapidated beast looks just like it did when I was welding up the new frame. And thanks for the illustration.
Janet - And the fun part is that 7 appraisers can have 11 ideas about the value... Certainly not a science.
Eleanor - Thank you. And there is certainly truth to that. the hard part is putting a figure on what you get.
Joe - Absolutely.
Eric - Thank you, and it is a huge misconception that the banks have no idea of the value of the property. Often they might have an inflated or deflated idea... but they are usually as close to the ball park as anyone else.
Curtis - Gee... thanks? I don't think you needed to drop into my blog and publish your whole article as a comment. It would have been just fine to link to it. Kinda spammy as it is...
Eugenie - Thank you.
Olga - Thank you as well.
Lane,
Great post... I can't tell you how many times I've had to explain to buyers that the list price and the actual market value can be completely different...
Next time.. I'll just send them a link to this post.
Lane - funny analogy but oh so true, But they are "selling" "not giving away" . With the lender being so likely to predicate conditions of the home a foreclosure is very less inclined to make repairs then individual, so maybe that deal in light of loss incurred from apprasier and inspection fees is not that great. I personally think that the listing price and offer price influences the appraiser and that they should NOT have a copy of the contract. It really should have no bearing on the numbers.
Excellent anology on price and the deal everyone is after. I will have to remember the 'driveway art' comment.
Hi Lane,
I truly understand what you mean. I wish more Buyers and Sellers realized this!
It's really snowy & cold in Defiance, Ohio.
P.S. Your son looks so proud to be driving the car!
That is why a TRUELY smart real estate professional will price a property within the high and low of comparable properties in any given community.
Doing a PROPER CMA is the proper thing to do!!
VERY NICE post...I can see why it is in the newsletter!!
=-)
As always, very entertaining while making a very real and very serious point. I remember while working as an outside sales engineer that the VP of Sales repeatedly told us that price had nothing to do with manufacturing cost and everything to do with the customer's need and willingness to pay.
BTW - My wife said to remind you that second cousins are related but sometimes still get married.....but as you point out this is rare and probably should be even more rare.
Thanks again.
Great examples. It always help to show it in a whole other arena.
Thanks
Kim Fendrick
... I have a buyer who is interested in a low priced short sale property. The current list is the price the bank just APPROVED to sell the listing for. The home appears to be in move in condition, and is priced $45,000 less than a virtually identical home up the block.
BUT - because of the stigma of what you were saying in your post, he has in his mind that "he wont buy a home for more than 20% below list price, period" he wants the home for an additional 20% less ! ... the sad part is that if the home were listed at $50,000 higher, he would probably be ecstatic to get the home at the price it's at right now !!!!
...he may well lose out on what seems to be a terrific deal for him because of this misconception of how important it is to get X% below list !
Great post Lane !
I really enjoyed reading your post & will try to remember some of your examples the next time I work with a client telling me: I never pay full price for a property...
You sum it up so well!
Great post. Your "driveway art" is very attractive, lol.
Hi Lane, Loved your post- you said it! Thank you !!
Question for you Lane - I am not a Realtor (I market my product to Realtors - that is one of the reasons I am on ActiveRain.) I decided to list my home a couple of months ago so that my husband and I would be free to go to the mission field when the time was right. My Realtor suggested that I price the house $15,000 above the appraised value because people were low balling their bids. This seems crazy to me. We have a nice home, in a nice neighborhood where values have not dropped, the home needs no improvements (it is 8 years old). I took the time to have the house appraised just before listing so I knew what the value should be. I am willing to drop a little below appraised value. Why wouldn't the Realtor just list it for the appraised valued? Why do we have to play games? I have asked her this and get the same old economy answer. This has been very frustrating to me and I would love your opinion.
Thank you for your great post! I totally agree that nobody should go with a % off the list. My reason is many sellers have already come down in price, so had a buyer offered 20% off the list price at $300,000 and still tries to offer 20% off the list price at $250,000 something is wrong. Buyers need to know the comps, value and what the seller might take and that depends on the seller's situation which is usually not known until an offer is made. I always tell my buyers they do not want to totally offend a seller so they get a "no" back instead of a counteroffer. I do alot of research for my buyers and using the information I provide they are able to make an educated offer on a property and I have a 99% success rate in closing the sales!
Paul - That is a GIANT compliment. Thank you very much.
Marge - I agree with you about the appraisers knowing the contract price... but the flip side that we both know is that appraisals aren't as scientific as one might think. So, a different appraiser would likely give a different value...
Lyn - It is related to yard art... but here in Gwinnett County I can't park it in the yard. ;^ )
Alexander - A "proper CMA" is still a guess... At least with time our guesses can be better... but a buyer and seller agreeing is the real determinant of value.
DeWayne - Missed you at the Christmas Party. And thank you for the kind words...
Kim - Thank you for reading.
Sheldon - I have been there. Had a client look at a property we found on the first day it was listed. We were ready to go wit hcash... fast close. It was a DEAL. He wanted to "work it down" some more... it ended up going into a multi-bidder price war a week later. Sold over list. He could have pulled the trigger the first day... kicking himself now. He is still looking.
Monique - Thank you. Just think of the driveway art.
Sharon - My wife does NOT agree.
Mary - Thank you for reading.
Sue - It is tough to get inside the head of another agent without knowing their market. But... it seems a little gutsy to me. In my market, while you need to have a little room, it isn't the homes that are priced high that are getting the looks. Simply put, if it isn't priced in the right range, it isn't seen. If it isn't seen, it isn't offered on. Games are going to be played, but pricing even a couple percent over comps means that you will be on the sidelines.
Maggie - I always tell my sellers to ALWAYS answer an offer. Let the buyer drop out. And having good research on the property is key. When I get a low-ball on a property I always ask the agent how they came up with it. When I give a low offer on a property I am always willing to back it up with the reasoning... even if that is all the buyer can afford.
I have two comments that I recieved via email that I am going to post and answer soon.
Ok, one is answered below and the other will be a seperate post, linked here...
Some buyers just dont get it. They will see a house that has been reduced to the point of being the lowest price in the area, and then they want to offer even less on it. Whatever the price is, they want to pay less.
List price isn't directly tied to value, just like the truth isn't directly tied to politicians. So True!!!
A home is not necessarily an investment in your finances but rather, it's an investment in your life of which, to my knowledge, we have only one. So without being foolish, why not live it?
No one gives much thought to spending on high definition TV, usually I can't really tell the difference between HD or digital TV, or purchase cell phones for their 8 and 9 yrs olds, ect...not to mention texting nothing of any meaning to friends just to keep them occupied, and IPODS that hold thousands of tunes, but when it comes to family life, what we do every day, where we lay our heads every night, where our children get to play or what is available in the area for parks, etc...or where we can count our blessings , everyone wants a deal, and too many sellers seem to believe theirs is the Taj Mahal which in reality is in India and will never be transported here. So reality is different depending on who you are but the bottom line is we have one life to live, why put it on hold waiting for that wonderful deal when the best deal is where we can live happily enjoying life.
My reality is a comfortable home in an area where I have privacy, Coffee in the morning, great neighbors, good friends, a special family, warmth when I need it, food in the refrigerator, and sunshine and trees in my back yard when I get a chance to look out.
I like movies DVD's or on TV when I can take time to sit and relax and a place for my little pets, communication with friends on my on line or by telephone or even an occasional visit.
I like the challeng of my work and I have wheels to take me where I need to go. Simple needs that for an ncomplicated girl. Now a Harley with someone to drive it away might be a nice addition and a bit more time woud be nice, but I am not looking for perfection, just for happiness. At the end of the day-what when all is said and done, what can be better than what I have?
Fran MacDonald, Associate Broker, Partners Reality Group, Manchester NH and visit me online at www.ManchesterBedfordHooksettHomes.com
Lane,
Excellent post. I try to educate my clients about value. People have no clue, if they did then they would all be Realtors. Well, thats true in South Florida!
From Tim:
Hi Lane,
As you are a real estate agent, I have a question for you.If there ae home for sale for 500.00, regardless of their condiion to reapirs required to be habitable or sell,what is the value of the land? I have posed this question to other agents, and am surprised at the lengthy answers I receive.
Thank you in advance for your answer.
Tim - The answer is actually pretty simple. Let's value the land at $100,000/acre (probably high, but I don't know the Detroit area that well). The city lots are likely to be in the neighborhood of 1/10th of an acre. So, the lot has a "value" of about $10,000. The cost to clear the lot to build would likely exceed the $10,000 that is the value of the underlying property. Top that off with an environment where there is little or no demand for new construction, and there is no reason to buy the property to build on.
Leaving a dilapidated structure on the property isn't usually an option. Some cities are starting to either fine the owners for the buildings that are not inhabitable, or they are bulldozing them and billing the owner... and the city is NOT cheaper when they clean it up.
Thanks for the post Lane.
I wrote about a similar topic yesterday on my blog http://thebigbearskinny.com. If a property is worth $300,000 (real market value), and it is priced at $250,000, you shouldn't try to get it for less. Fact is, even in this slower market, there are many buyers out there that will jump on the real values.
Lane - So true, so true. I find myself begging agents bringing me an offer on a listing to show their buyer the history of the home---what the seller initially paid for the house, where we started with our pricing, and where we are now. We know the buyer wants bragging rights on the great deal they made, but we only have X amount of dollars in the bank to bring to closing!
Rich - The dela mentality is that it should always be lower.
Fran - That was like a "Cotton, the fabric of our lives" commercial.
John - I seriously think that 1% of the Atlanta area population has a RE license.
Tyler - So true.
Pat - I always show that info to my buyers... Sometimes it makes a difference... sometimes not.
Brilliant! Do you think the average buyer is going to listen? Most want to low ball their offer. Just like sellers want to test the market with a higher price, buyers want to test the sellers to see if they will get a low price.
Add to that the cousin who has bought and sold many homes, who really knows real estate and who convinces your buyer that he is paying way too much. Just recently, I had the cousin say that my buyer should only pay $100,000 for a $230,000 home!
Yes it always kills me the 50% off stuff. Value is what people are willing to pay for it.
Lane, you make some fantastic points here! Both buyers and sellers definitely tend to have a skewed idea of what makes a good value. Thanks for putting it in perspective!
Lane,
Good post, price is often nothing more than the sum of the sellers thought processes. Value can be substantiated. I like your example too.
Lane,
here in Buffalo, Ny we get TONS of out-of-state investors and lots of out-of-country investors buyng homes for $10,000, $15,000 and $20,000 in the inner city. They think that they cannot lose on these deals but don't realize when they become vacant what happens to the house. The copper gets stripped, the doors disappear and the furnaces and hot water tanks somehow take a walk.
People think it is easy to make money on these investments when nothing further can be the truth.
Tom Larsen
Lane....I'd take the Jeep, but she looks a little tough! And I've got 3 project cars of my own! As for the Pontiac, hmmm..not sure...it IS a Pontiac!
I think I'll just sit on the fence with the rest of the group till something better comes along!
(Don't you just hate THAT response!)
There are really some incredibly cheap people out there, aren't there? Some people just can't buy anything for the full asking price, no matter what. Sure, I like a sale, who doesn't, but if I find something I really like, I don't necessarily care that it hasn't been discounted (shoes, furniture, food even).
Lane,
What a great post! I think your analogy is something that most consumers can understand. I think I will use a similar analogy. I think your pics added to drive the point home, and as a wife of a car guy, I have plenty of prerestoration pics of a "69 Cougar convertible I can use! Thanks for the insight, as well as some great talking points!
Viji - Love the cousins... and the uncles.
Mike - I'd love for someone to be willing to give me too much money for something... I'll make up a price to discount that makes them feel great about it.
Kristen - Thanks.
Kenneth - Thaks.
Tom - I hate that for the people that start thinking like that... and then stumble into agents that are perfectly willing to let them think that way without disclosing reality.
Thom - Good talking with you today. If I called it a Holden, only a couple of people would have had a clue.
Kelsey - I'd rather pay a full, good price than a discounted price that is still too high.
Jen - I had a '67 Cougar. Loved that car. And you certainly have some great talking points.
I love this post! It is sooooo true! I was writing an offer for some clients of mine on a house listed for $129,900. The listing agent said that he didn't think the would accept a "low ball" offer since they have come down from $149,900. I told him that what is was priced at didn't matter but what it was worth in today's market is all that did. List price doesn't matter, it's value is all that does!
Sonya - That is exactly the point.