Real Estate – The #1 Question

The #1 Question in Real Estate is “How Much is THIS Home Worth?”

Every single person who is buying a home or selling a home is going to ask that question. Most people doing a refinance need the answer to that question as well.

1) A home seller needs to know the highest possible price they can sell for.

2) A home buyer needs to know the lowest possible number than can “get it” for…BUT they also need to know the maximum amount they SHOULD pay for it. The answer is often not one in the same.

3) A person planning to refinance, needs to know how much an appraisal will say it is worth, which isn’t necessarily the same method of valuation used by home buyers and home sellers.

Why do you need to know that Home Prices in King County are at early 2005 levels? Because that fact should lead you to some generally true conclusions.

1) If you are a seller thinking about selling your home, and you bought it between 6/2005 and 12/2008, you would be starting from the assumption that you CAN’T GET WHAT YOU PAID FOR IT”. If you bought it in 2001 and never refinanced it, then you should be able to sell it and walk away with positive net proceeds.

2) If you are a buyer wondering what to offer against the seller’s asking price, and he is asking more than he paid for it in 2007…well…you probably need to walk away. Maybe not see that home in the first place.

3) If you are thinking about refinancing and you bought the home in 2007 with zero down, you likely can’t. So save yourself the cost of trying.

Are there exceptions? Well, only a fool says never or always. But if you think you ARE the exception, you better have a really, really good reason why.

I know…your house is different. Your neighborhood is better. REALLY? Usually not as much as you think.

A good example of the dangers of applying Home Sale Statistics improperly, is in Redmond.

The Median Home Price in Redmond is up 66% from 2001 to Present, but not THAT house. That’s why you need to know when an area is running much higher or lower than the overall County market stats, and WHY.

Overall median price in Redmond is up 66% from 2001. Based on that true fact”:

1) A seller (erroneously) lists his home at 66% more than he paid for it in 2001. The house was built in 1985. He paid $350,000 + 66% + “negotiating room” = $599,950. He lists it at the highest possible price he can “reasonably” get for it. And he wants at least $575,000. This based on an article he reads saying Median Home Price in Redmond is up 66%, which is true…but not for HIM.

2) A buyer who reads my blog sees that 66% only applies if you include homes built in or after 1990. He sees that the % increase for homes built in Redmond prior to 1990 carry a median price of 42% more than 2001, vs 66% more. So while the “lowest price” the seller will accept is $575,000, the highest price he might be willing to pay is $500,000. We’d need to test homes built in the 80′s vs ALL homes built prior to 1990 to know for sure what a “reasonable” price for that home would be.

3) A person refinancing may expect it to appraise at $580,000, using the same logic as the seller in 1) BUT the appraiser may come up with $550,000 based on “3 comps”. This assuming the “average buyer” will pay closer to what the seller wants, than what the property is actually “worth”. An appraiser only looks at what people paid recently, not whether or not those few buyers were correct in determining “price to pay”.

There’s Good Reason why The #1 Question in Real Estate is what is THIS home WORTH?”

It’s one of the hardest questions to answer correctly. Keeping up on where home prices are generally (early 2005 levels) gives you a leg up on simply “What is the seller willing to take?”. But local stats can be misleading, if you don’t take the time to take it down to Apples to Apples.

Information is of Great Value! Knowing how to apply that information…is PRICELESS.

About ARDELL

ARDELL is the Managing Broker of Sound Realty in Seattle/Kirkland. ARDELL was named one of the Most Influential Real Estate Bloggers in the U.S. by Inman News and has over 22 years experience in Real Estate up and down both Coasts, representing both buyers and sellers of homes in Seattle and on The Eastside. Follow Ardell on Google+

Comments

  1. As an architect who sometimes has to do the same thing-
    lay out the facts of the matter in a clear and concise way,
    I wish I had Ardell’s formidable skills in doing just this. J-

  2. Thanks Jerry. I recently ran into this with “comps” in a neighborhood built in 1998. At face value house A and house B would equal the same price by any appraiser’s standards. House A sold for $620,000. House B appeared to be the same and had an asking price of $649,950.

    BUT when you look at what each house sold for when NEW, House A originally sold for $480,000 and House B originally sold for $420,000. Why the $60,000 difference when they were both new homes? Until that question is answered, we don’t know what House B is “worth”. If the difference of $60,000 was for something that is no longer “of value”, the answer is different than if it is something of sustained value.

    Too many people are relying on their lender’s appraiser to prove out “value”, and some are disappointed when it doesn’t appraise for less than they offered. I had three calls like that in the last 60 days from people in escrow (not my clients) who were upset that the home appraised at the offer price. I don’t understand why anyone would offer more, hoping the appraiser would make “the correction”, but it’s not a good strategy.

  3. Ardell-
    As to your” I don’t understand why anyone would offer more,
    hoping the appraiser would make “the correction

  4. So the old saying is true… Knowing is half the battle.

  5. I never heard that saying, Chris. I just googled it and found out why. :)

    In real estate valuations you basically attack “the problem” from several different angles to come up with a conclusion. But that conclusion is rarely coming from a position of actually “knowing” anything for sure. That’s why most people find it frustrating when after doing all the due diligence you possibly can, you end up at a “range of value” vs an absolute dollar amount.

  6. Very Very True….!

    Question should always be asked….!

  7. Ardell,

    This is pin point good advice, If you are a buyer wondering what to offer against the seller’s asking price, and he is asking more than he paid for it in 2007…well…you probably need to walk away. Maybe not see that home in the first place.

    Knowing that the Seattle market is at 2005 level.

    Sweet post.

  8. Great post. There is so much that goes into valuation, which includes all the points you have made.

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