Thursday, July 2, 2015

WHEN GREED RUNS A MARKET

In April, I got a call from a past client.

“I was working in my yard,” he said, “and the neighbor behind us said he was thinking about selling his house.  I told him he should talk to you.”

At the time, I had a buyer client with serious interest in this same neighborhood and so I took the initiative, first writing a letter introducing myself and then following up by dropping a comprehensive marketing package on his front porch a few days later. 

“I may have a buyer with serious interest in your home,” I wrote.  “But whether it’s the right fit for my client or not, I would be happy to sit down and help you assess your options.”

That weekend, I ended up getting together with this prospective seller, and we spent nearly two hours talking through the market, the process of preparing a home for sale, and how his home matched up with others in the neighborhood. 

“I have a lot of stuff and don’t really want to go through all the work of getting my home ready for market,” he said.  “I would be interested in selling to your buyer if the terms were right, and if he would give me time to get moved out after closing.”

We talked about a potential sales price of $290k - $293k, which was an honest interpretation of market value.  In fact, it was a generous interpretation of market value, because in my preparations for the meeting, I had discovered that the seller took out a new loan for $218,400 just four months earlier. 

Using basic math skills, I reverse-engineered that number and determined that his home had likely appraised for $273k at the time, since $218,400 is 80% of that number.  I asked him if that was the case, and he confirmed for me that the home had appraised for $273,000.

“So if I could get you $20,000 more than your home appraised for four months ago, you would consider that fair?”, I asked.  He nodded and said yes.

Every piece of real estate is different, and there is always a subjective component to value.  Truth is, this was a very middle of the road house in terms of condition.  While it had good square footage, the shag carpet was from the 80s, the paint was from the 90s the last time it was deep cleaned was around the turn of the century. 

The seller was a bachelor, which was part of the reason he was ready to downsize into something that required less maintenance. 

I brought my clients through to see it a few days later, and while they liked the location and the square footage, they also saw it needed updating. 

“We would have to spend $20k just to get the kitchen updated,” they said.  “It’s a nice house, but we just can’t pay $290k for it.”

With that, the negotiations broke down, and my buyers went back to pounding the pavement and the seller pulled back to assess his options.

Not long ago, that home finally showed up on the market with another agent… listed at $310,000.  That’s 13% over an appraisal which is less than six months old.  That’s 6% over my ceiling for the home from 30 days ago.  In short, it’s not a supportable price.  No appraiser will be able to get there, and anyone who offers that much is simply not doing their homework.

Stories like this are a bit demoralizing, not only because I worked hard to try and fairly piece a deal together, but because I hate it when greed becomes the focal point in pricing a home.    

His home isn’t worth $310,000, and the agent who listed it knows it. 

Yet I see more and more of this all the time, homes priced at numbers that are just not realistic.  Yes, if you have a spectacular home in a great neighborhood in impeccable condition, you can break through the neighborhood’s value ceiling and get a shelf-topping offer. 

But when people offer ordinary homes at top shelf prices, eventually buyers figure it out.  And they vote with their feet as they walk right back out the front door and mentally erase your home from their mind.

When this market slows down – and it will slow down – it won’t be because we ran out of buyers or because the economy turned.  It will be because sellers (and agents) let greed get the best of them.