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A house is worth what is worth from an appraisal or price opinion standpoint... whether Uncle Charlie died and left the house to the seller, the seller bought the house in 1977 or 2007. If a seller paid $100K or $400K, the house TODAY is worth the same $$$. What might change the price is the timeframe of the seller, based on the plans of the seller.
Have they already bought another house... does a job transfer start next week... or are they breaking ground on a new house with occupancy in two years. Throw in short sale, pre-foreclosure, etc...
It definitely matters to the seller. Sellers seem remarkably unwilling to sell properties for less than they paid.
It usually matters to the buyer. It matters to me, I know, and I'm a prospective buyer.
Case in point -
I just looked at a house that sold for $128,000 in July 2008. The buyer refinished the floors, slapped some paint on, and put in some low-end appliances, and put it back on the market for $200,000. Even if I liked the house, there's no way in hell I would just give this guy ~$50,000 worth of profit. If its "Current Market Value" was $128k this summer, why would it suddenly be $200k now?
So of course it matters, to both buyers and sellers.
So, in your above example, if the current owner had paid $200k back in July, would it be worth $200k now? And would he be justified in asking $200k for it becasue he paid $200k? Or would serious buyers still laugh at him because he is asking $200k when there are three others in his neighborhood, exact same floor plan on exactly the same size lot, at an average asking price of $140k?
What the current owner paid for their property might affect what a buyer thinks they should offer, but only if they believe theyare somehow entitled to dictate what sort of gain someone else is entitled to on their investments.
What the current owner paid for their property might affect what the seller is willing to accept for that property, if that seller has certain financial considerations that the sale price will affect.
In either case, an OBJECTIVE look at the property and the true comps for that property will show a reasonable value in the current market, and that value has NOTHING to do with the price the current owner paid.
So, in your above example, if the current owner had paid $200k back in July, would it be worth $200k now?
No, not necessarily. He could have overpaid.
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And would he be justified in asking $200k for it becasue he paid $200k?
Nobody needs justification from the market, they can ask or offer whatever they want. He paid $128k, which was a smart buy. If he would've paid $200k, it would not have been a smart buy - but he doesn't need my opinion.
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Or would serious buyers still laugh at him because he is asking $200k when there are three others in his neighborhood, exact same floor plan on exactly the same size lot, at an average asking price of $140k?
Yes, in that scenario, I think most would just skip his house. In reality, he is right across the street from a bigger, better house, listed for $187k.
Generally, his competition is in the $170k - $190k range, and is not selling well at those prices. If he had listed at $170k, he'd probably garner some interest. If his property had piqued my interest, I would have thought about offering $150-160k.
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What the current owner paid for their property might affect what a buyer thinks they should offer, but only if they believe theyare somehow entitled to dictate what sort of gain someone else is entitled to on their investments.
You can try to paint this as a moral issue for the buyer, but everyone in this game has the same goals and motivations. In contrast to your claim, sellers also believe they are entitled to dictate how much gain they should get on their investments, and they believe they can do so at the expense of a buyer.
It seems to me that you're suggesting that sellers are "allowed" to factor in their personal financial considerations into the negotiations, but the buyers shouldn't be afforded that same priviledge.
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What the current owner paid for their property might affect what the seller is willing to accept for that property, if that seller has certain financial considerations that the sale price will affect.
In either case, an OBJECTIVE look at the property and the true comps for that property will show a reasonable value in the current market, and that value has NOTHING to do with the price the current owner paid.
This makes little sense to me, since the price the owner last paid is, in fact, a comp. Sometimes it is the most relevant comp you have.
Sellers don't need justification from the market, they can ask whatever they want. He paid $128k, which was a smart buy. If he would've paid $200k, it would not have been a smart buy - but he doesn't need my opinion.
Yes, in that scenario, I think most would just skip his house. In reality, he is right across the street from a bigger, better house, listed for $187k.
Generally, his competition is in the $170k - $190k range, and is not selling well at those prices. If he had listed at $170k, he'd probably garner some interest. If his property had piqued my interest, I would have thought about offering $150-160k.
You can try to paint this as a moral issue for the buyer, but everyone in this game has the same goals and motivations. In contrast to your claim, sellers also believe they are entitled to dictate how much gain they should get on their investments, and they believe they can do so at the expense of a buyer.
It seems to me that you're suggesting that sellers are "allowed" to factor in their personal financial considerations into the negotiations, but the buyers shouldn't be afforded that same priviledge.
This makes little sense to me, since the price the owner last paid is, in fact, a comp. Sometimes it is the most relevant comp you have.
You missed the entire point. What the seller paid is IRELEVANT to the VALUE of the house. It may decide whether the property gets sold or doesn't get sold, because the seller may feel he will simply NOT take a loss. But it doesn't change the current value. If a buyer can get the exact same house for less money than the seller is asking, then he is likely NOT going to get his asking price. Whether he paid half what he is asking or twice what he is asking. There is simply NO REASON for a buyer to pay his asking price. If he is asking significantly LESS than the buyer would have to pay elsewhere for the same house, then he is MORE likely to get his asking price, and might in fact attract the interest of several buyers. Again, the price he paid for it has no bearing. The current market conditions, what is available to be bought at that price, and at what price one can buy a similar property. Those are the things that determine what an educated buyer will be willing to pay for this house.
I think you and I are almost certainly on the same page. The key is that what a seller "has into a house" is useful information to the process but that is not going to have anything to do with the value.
Emotions and financial considerations are almost impossible to separate for sellers. Heck I have run into the same thing with trying to buy used cars!!! There are people who will fondly remember every time they've personally changed the oil and waxed a car, magically making it worth 20% more than the same car with receipts from Jiffy Lube!
There is an interesting analogy from the car buying/selling arena too -- when you head to a real "used car auction" minor issues are quickly taken out of the equation, but those same cars on two or more competing dealers lots or evaluated as trade-ins will be treated as "night and day" as far as value. If you want to trade-in a car that you are upside down on, the dealer is going to take advantage of your situation, every nick is hundreds less in value. Simply put, one is a "wholesale commodity driven selling environment" and the other is the "full retail experience"...
So, it's possible that he OVERPAID, and his current asking price is absurd. OK. I agree with that.
Isn't it also possible he UNDERPAID, and his current asking price is a bargain?
Of course it is. Which is why we look at current market conditions to evaluate a property and it's value, instead of looking at the price paid by the current owner.
As Chet said, it's difficult to remove emotion from the process, at least for the principals. One of the key jobs of any professional you hire, especially a real estate agent, should be to remove that emoption as much as possible and provide an OBJECTIVE evaluation of the property.
Last edited by Bill Keegan; 11-14-2008 at 10:54 AM..
Reason: fixed the quote
A house is worth what is worth from an appraisal or price opinion standpoint... whether Uncle Charlie died and left the house to the seller, the seller bought the house in 1977 or 2007. If a seller paid $100K or $400K, the house TODAY is worth the same $$$. What might change the price is the timeframe of the seller, based on the plans of the seller.
Have they already bought another house... does a job transfer start next week... or are they breaking ground on a new house with occupancy in two years. Throw in short sale, pre-foreclosure, etc...
Right on, AM! Great post! While what the seller originally paid for the house doesn't affect it's current market value (which is why the best way to get a deal is to know your market -or have an agent that does - so you know a bargain when you see one), the amount of equity a seller has in a home can indicate whether or not he has room to negotiate and how much he may be able to come down off his price. Of course, not only is the amount he paid for the house important, but especially the amount he has financed.
Back to the OP's question. Besides being priced too high, the two other big deterrents are bad location (as in views of the dump or busy street or junky neighbors) and hard-to-update choppy floorplans. When the market was "hot" those things didn't matter. Now that things are slow and buyers have a lot to choose from, those homes remain untouched. It takes an incredibly low price to get them sold, and even then they may not sell.
cohdane, I'm trying to understand how this works. So, let's say I paid $400,000 for my house in Jan. 2001. What would you consider paying for the house now (assuming it has been well maintained)?
Aibutiej--
Sorry I didn't post a reply sooner. Yesterday was a DOOZY and I didn't get to it. Wanted to give you a complete answer.
Using your 400k example, here's a sample of what I'd do (in my own market, I'm doing more, since I've been researching it longer.):
You're in Norwalk, CT, so we'll use this roughly 400k house as an example:
If you scroll down to "Charts & Data" and click "See all charts and data," you get a chart that tracks sales for this home, this zip code and-- if you click the option-- all of Norwalk, CT. Select the 10 year option and you see the bubble (there is an assumption here, since usually, I'd go back further than 10 years to confirm the bubble shape, but I think this is a safe assumption for this case).
Scroll down to "Sales History & Tax Information," enter the security code and you get this data on the house:
Sale History 01/06/2005: $400,000, 11/22/2002: $314,500, 06/14/2000: $235,000, 11/18/1996: $173,000, 08/27/1993: $160,000
Now use the first link below to calculate inflation-indexed prices or the second to assume 3% per year:
Using either of these calculators, the jump from 1993 to 1996 makes total sense. The jump from 1996 to 2000, makes slightly less sense (bubble in my experience started in '99 or there may have been renovations).
The jump from 2000 to present is insane based on the CPI, 3% and/or "normal" real estate price trends.
Using soft estimates based on the above calculators, my no-bubble price range for this house is 275k to 300k. If I love the house, I might build in a bonus of 25-50k. So the most I would pay (not offer) is 350k.
Sellers will say this is unreasonable on my part, because that is not "today's" price. No, but I believe the house will be worth that-- or less--before I begin the LONG wait for it to return to anywhere near today's list price.
Why do I believe this? 1. Because it was a bubble market, by virtue of departing substantially from normal trends. 2. Because in addition to bubble deflation, history shows bubbles tend to OVER-CORRECT on the downside. 3. In addition to both of those factors, the economy is entering a severe recession at best and perhaps something much worse, and (based on history) that will exert even more downward pressure on the overcorrecting bubble market. 4. If interest rates go higher (and many say they will) home prices will be even further in the tank.
If none of those reasons is evidence enough for me not wanting to pay "today's" rapidly changing price, there's also this:
An independent assessment which shows that every zipcode in Norwalk, CT is considered a "declining market." More research with other mortgage insurers and the OFHEO (government data) would most likely confirm this "declining market" status. In short, Norwalk has not bottomed.
All of this bears the disclaimer that there might be mitigating factors such as extensive remodeling, a new employment base nearby, or additional negatives like the home being in obvious and decrepit disrepair. For example's sake, I'm assuming the house, neighborhood and previous buyer's negotiating skills are "average."
Sellers don't have to come down. Buyers don't have to buy. In this case, I'd be willing to "waste" 50-75k of further downside and time-- that's my concession if I love the house. Otherwise I'll wait it out for a few years in a rental home that will ultimately cost me much less than buying in a declining market.
Key point: I and many other buyers aren't seeing properties that are so special they overcome their prices with the love factor.
To sum it all up, an analogy: In my mind, the current market is like trying to buy a house that's on fire. I have no idea how long the fire will burn or how much of the house will be left by the time the fire is extinguished.
Hope this explains my thinking. No doubt others have their own methods or will disagree vehemently.
Which is why we look at current market conditions to evaluate a property and it's value, instead of looking at the price paid by the current owner.
The price paid by the current owner is a component of the current market conditions.
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One of the key jobs of any professional you hire, especially a real estate agent, should be to remove that emoption as much as possible and provide an OBJECTIVE evaluation of the property.
Interesting. So when two professionals give two different "objective" measures of value, doesn't that mean value is subjective? As far as I can tell, this is neither a math nor a science, and objective evaluations are not possible. Any pricing model that you set up carries the emotions and decisions of the modeller.
I bought my house 16 years ago, and spent half as much as I paid for it to improve it, so what does the price I paid for it have to do with it's present value? Nothing
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