Value and Price… related, but like second cousins…
January 9th, 2009 Categories: For Buyers, For Sellers
Real Estate Misconception #1… “It is only a deal if it is X% off List Price”
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 The rest languish, are withdrawn or expire.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 reapirs 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.
