Paying a fair price for the home you buy.

One of the problems with today’s real estate inventory of homes for sale, is that it is difficult to determine if the asking price is a fair price. Today I received an email noting that the price of a home was reduced by $200,000. It is today $300,000 less than the day it went on market about three months ago.

Think about how scary that is to a would be home buyer! Someone could have paid $300,000 more for it than the asking price today, and who knows? That “new reduced price” could still be $300,000 more than someone will end up paying for it. This is particularly true of the home I am referring to in this post. (as an agent I cannot mention the address, and will have to delete it from the comments if someone else guesses it correctly. Let’s stick to the general point of the post and assume many homes fit this broad description.)

I want to talk to you today about a totally out of the box approach to buying real estate. It isn’t necessarily a new concept, it is simply the same strategy used in the hot market. In the hot market when there were 3 offers “in” when you wrote your offer, you automatically attached an “escalation clause” saying “I will pay X$ more than the highest offer up to X$ cap price”.

There are two homes on market, one each for two of my clients that my clients like, but we are agreeing that the asking price is too high for that home, and higher than any buyer will be willing to pay. In the meantime the seller is not ready to take an offer at what we consider to be a “fair” price for the homes in our “saved homes” watch list. We, the buyers and I, have attached a price to the homes that the buyer would pay, that is substantially less than the current asking price.

The way the market works generally, is buyers save these homes and wait for the price to come down. On the one hand they are afraid someone else will buy it at the price they are willing to pay. On the other hand they don’t want to get into a negotiation stance that might draw them above what they are willing to pay.

Let’s use a hypothetical. Let’s say the asking price is $999,950 and your price is $875,000. It would be fairly simple to put in an offer of $850,000 or X$ more than any other offer received with a cap of $875,000 in the next 30 days. Offer may be withdrawn anytime prior to acceptance or extended at the end of this 30 day period.

Many years ago during the last market like the one we are in now, I did something like this for a client. Slightly different. It was an abandoned very nice home. The owner did not have it on market as a short sale, they simply moved out when they stopped making their payments and moved out of State. The Bank had not foreclosed, and so the Bank could not sell the home or even consider offers to purchase. There were many people who wanted to buy the house. In fact one of the agents whose clients wanted the home, sent that client to me (which is how I got the client in the first place) as they could not determine how the buyer could get the house, it not being for sale. In fact half my business that year came from local agents who sent me situations they could not figure out in the weak market. Odd, but true 🙂

I wrote an offer at a ridiculously low price, which was also the highest price my client could afford to pay. The buyer was willing to give it his best shot, realizing that his best shot might not be good enough. I wrote the offer and sent it to the bank, who did not own it. I wrote a response time of 30 days. Every 30 days I had the buyer and his wife come into my office and rethink whether or not they still wanted that house at that price. If they said yes, I had them sign a short 30 day extension to the offer. This went on for nine months.

One day the Bank was within the time range when they could foreclose on the house. That’s one thing people don’t understand about short sales. The bank can’t always foreclose when they want to foreclose, and the person who put the offers into that file is not the person who opened the file to start the foreclosure proceedings. Banks can’t always answer your short sale offer when you want them to. The day the bank was ready to start the foreclosure process, they opened the file and found an offer inside with nine 30 day extensions. Rather than begin the foreclosure process, they called me and accepted my client’s offer.

There was never a for sale sign on the property as it was technically never for sale. My buyer client asked me to put a sold sign on the property so that would be buyers would stop going inside it while we were “in escrow”. I went over and put a sold sign up. Within two hours 21 people called screaming that they wanted to buy that house, but their agent or attorney told them they had to wait until after it was foreclosed on. One even told me he had already purchased new kitchen cabinets for it, and they were sitting in his basement.

I know there is an old saying that “the early bird gets the worm”, but in a market like this one we need to fall back on a completely different idiom. “patience makes perfect”. If you do the right things while being patient, you just might end up with a perfect result for you and your family.

32 thoughts on “Paying a fair price for the home you buy.

  1. And another wrinkle (scary)….if someone bought the home at the higher price, it may very well have appraised for it.

    Note to consumers: If you buy a home for cash today, get at least two appraisals. DO NOT just buy the home at or near list price. It could save you, like Ardell suggests, hundreds of thousands. In the example I am thinking of…probably a half million. And get it inspected.

  2. The phrase that a home is worth what a ready, willing, and able buyer is willing to pay comes from what is a fair price.

    Number one is that a low offer should be based in facts to what the value of the home is. Sales data, as we are seeing, is meaningless. Many people pay way too much for homes. Second is my pet peave that Real Estate agents need to be able to float through bad markets and NOT be dependent on making a “sale” to pay bills.

    Real Estate has broad market cycles. We forget that because the price of properties has gone up so dratically in the past 12 years. So for 12 years Real Estate agents have had the free ride of making “sales” commissions. There are times when you need to tell buyers to wait, and tell sellers now is the time to get what ever they can for the property. It can make for some extended periods of dead market conditions.

    This is where having an experienced agent with some legs under them is the best choice you can make as a consumer.

  3. Tim,

    I just had a case where the lender required two appraisals, the one we are closing through your office on Tuesday. In some not all cases, the buyer might not be protected by the Finance Contingency for multiple appraisals.

    What if one appraisal comes in at asking price and the other lower? Did it appraise within the terms of the Finance Contingency? More importantly, were two appraisals required by the lender under the terms of the Finance Contingency? I haven’t had a situation where the house did not appraise (yet). I assume that is because I haven’t assisted someone in overpaying for a home.

    But if you electively go out to get multiple appraisals beyond what the lender requires, I’m not sure how well you are covered to cancel and get your Earnest Money back if one appraisal comes in at sale price and a second does not. When I worked at the bank (many years ago) we used to do three appraisals before selling a house in an estate. We then used the mean or median price.

    Also, I really don’t have much faith in the accuracy of appraisals in a market with fewer transactions. I have not found appraisers to be more accurate than I am, though I do wish that was the case. If appraisers were accurate, we would use them prior to listing more often.

    If you get an appraisal in August it will almost always be higher than if you get one in February due to Spring Bump. So if you are buying late in the season, you are getting an appraisal that will almost assuredly go down in the near future.

    The problem with comps and appraisals is they almost always point to a higher value in a down market…that reminds me. I have a post I need to write on 2010 value expectations.

  4. David,

    I like my Fair Market Value definition “the price at which neither party is exceedingly happy”.

    As to what “a” buyer will pay, more accurately it should be what several buyers would pay, and not merely one. That is why paying a few thousand more than another offer might be better than establishing a sale price with no other buyers “in the room”.

    I told many buyers to wait in 2008 and late 2007. That is why I don’t like the advice that you pick an agent by determining if they had a large number of “sales”. The better agent likely had few and fewer by advising their clients not to buy at times.

  5. Pingback: Top 10 real estate posts of the day for 3/18/2010

  6. I’m skeptical when it is labeled as “fair price.” I honestly have no faith on the accuracy appraisers make in evaluating homes. Yet in this case, I’m mildly surprised as to how things turn out;its a win-win situation to the buyer and seller. Its also nice to know of cases like this wherein banks opted to avoid the foreclosure process.

    • Pearlmarie,

      As they say, “timing is everything”. Banks will almost always take the offer vs “decide” to foreclose. The odds are best if you are there the day THEY are making that decision, and not the day you WANT them to make that decision.

  7. The value of a Real Estate is set in stone.

    The buyer may think the price is too high and the seller the price is too low. The value however should be what the professional Real Estate agents knows by experience.

  8. David said “The value of a Real Estate is set in stone.”

    That is so not true, David. The day no one wants “it” the value decreases dramatically. There is clearly NO “carved in stone” value that is inherent to or in a “property”.

    A home’s value is never a number…it is a range of value, always.

    And the value does not miraculously become what a given buyer pays for it, if that buyer overpays for it.

  9. David,

    If an appraisal were “only market data” the market could not have increased at the pace that it did. The lender’s appraisal would have revealed a value lower than the sale price. They clearly would not have appraised properties in the huge run up of home prices at sale price, if appraisals were “only market data”.

    If the only price that could appraise is a proven price from “only market data” from the past three sales, there could have been no zero down mortgages. People would have had to come to closing with the difference between proven value and the sale price. The market’s appreciation would have had to be funded via cash difference between appraised value and sale price.

    Appraisals are not, and clearly have not been for the last five years, “only market data”.

  10. Of course they have. It started with loans of 125% of value, and continued with the multiple offers.

    Banks lend money. The appraisal is for the banks.

    It’s two completely different things. The loans become product to be sold.

  11. As to “the right price“, it depends on the buyer and where he/she is in their life. And after a while, the timing and/or price won’t matter all that much. Sometimes you have to let your instincts an/or emotions guide you- sorta like making babies. JG

    • LOL, Jerry!!! Yes, sometimes it’s “like making babies”. I have a family like that now. They want a certain kind of home, and “great deal” is not high on their list of priorities. Finding a home with everything they want is doable, but not easy. When the finally found it, “great deal” was not much of an issue.

  12. Good success story, Ardell. In the volitile Arizona market at present, pending listings and very close comparable properties which have closed within the last 60 days or less, have a heavy impact in determining the market value of a property at a given time. The old adage stands true, however…the value of a property is what a buyer is willing to pay, a seller is willing to accept (AKA a meeting of the minds) and there is in fact a successful closing at this amount. I enjoued your post. Thank you.

  13. Thank you for stopping by, Jack. Often this market has no rhyme or reason. I think April could be a free for all as people rush toward the end of the tax credit. Sad, but true.

    I like a sense of order, but it is not always so.

Leave a Reply