I like a good deal. Everyone does. I work hard at getting my buyers the best deal they can, regardless of how overheated the market may be.
But sometimes “I’m looking for a good deal” is buyer code for “I want a screaming deal I can brag about to my grandchildren that leaves absolutely no doubt in my mind or anyone else’s that I beat the market with a very large stick.”
Now, I know you don’t feel that way. You’re a reasonable person who’s sophisticated about markets and knows that a good deal is the house you want at a fair price. But perhaps you have a friend who’s looking to steal a house. If you do, take him or her gently aside and say, “Look, we need to talk. Because I need to know how you’d like to spend the next few years of your life: enjoying your new home, or looking for bargains that don’t exist?”
Because it’s that clear cut. Your friend can buy a house at a fair price, preferably at the low end of “fair”. Then he or she can get on with life and get into a market that’s been very good to its participants over the long term. That’s a good deal—in fact, that’s a great deal.
Or your friend can think, as one buyer said recently in a national magazine article, that “if we keep looking, if we look harder, we’ll find something.” Great work ethic, lousy buying strategy, because it belongs in the “work harder, not smarter” category, or perhaps the “real estate is one big garage sale” category. $5-at-a-garage-sale Tiffany lamps don’t exist in real estate. It’s simple: Buyers will know after only a month or so of serious looking whether they can afford what they want in the neighborhood they want. After that, they’ll just be looking at the same deals with different addresses. The true cost to get into their target neighborhood will stay the same until there’s a significant shift in prices—and that shift has been up, more often than not, since the mid 1990s.
Yes, some houses will be priced less than others, but that’s because they’re worth less, not because they’re bargains. And the worst thing your bargain-hunting friend can do is buy a house just because it’s cheap. Perhaps your friend’s not convinced. Other people get screaming deals, right? Why not him? (And almost always it’s a guy thing.)
First, let’s separate real-life real estate from the tall tales heard around the office work station or at a friend’s backyard barbeque. When someone says they got a bargain, what they mean is that they didn’t pay much for a house that isn’t worth much. Or maybe they got their house for less than the list price, not realizing that list price and market value are rarely the same. In both cases they’re confusing a fair deal with a screaming deal.
Second, this area is special. Sometimes we get a little beat up, like in 2004 and 2009, but we do have our enduring charms. Our climate, scenery, cultural and recreational opportunities appeal to people even in a poor economy. Yes, sellers do fall on hard times and need to sell, but mid-Peninsula homes sell faster, even in a slow market, than do homes in other parts of the country.
But the biggest reason no one’s going to steal a house is that the real estate industry (lately with a big assist from the Internet) makes sure it doesn’t happen. Two huge marketing machines, the Multiple Listing Service and the Internet, work together to ensure that every seller gets market value for their home because every potential buyer knows it’s for sale. Think about that. When every house is exposed to every buyer, that makes real estate a transparent market, one with no secrets, no insiders, no insider deals and no angles to work. When thousands of agents and hundreds of potential buyers know about a house the minute it hits the market, the buyer of that house will pay full price, because if he or she doesn’t, the next person in line will.
All of this works against stealing a property. But there are still good deals out there.
Let’s define what a good deal is, and what a good deal isn’t.
We’ll use an analogy from a market you may already know. You’re shopping for a car, say a 1999 BMW 323. You know the price range that sellers are asking for this car because you’ve seen the ads. And you know what this car sells for, because you’ve gone online to check transaction prices. Then one day you see an ad for a 323 that’s priced really low. Excited, you hustle down to see it, sure that the seller is clueless and that this is the screaming deal you’ve been holding out for. You get there only to discover that this 323 doesn’t run and that a family of raccoons lives in it. Far from a bargain, it’s something that you and any other rational buyer would run away from screaming.
Some houses are like that.
If a house seems really under-priced it’s for one of two reasons. First, it has some glaring defect(s) that makes it worth less. Poor construction, bad location, cheesy neighborhood, awkward floor plan, small size, small lot size, poor condition—any of these defects reduce value by at least five percent and often more. They’re either incurable or cured only with too much money to make it worthwhile. Houses like these aren’t a good deal, they’re just distressed goods on the clearance rack.
The other reason for a low list price is that the seller wants to start a bidding war. Buyers see the low price, get excited and call their agent. But when they get to the office to write the offer, their agent tells them the listing agent says there’s lots of interest. “Okay, we’ll offer a little more than we planned”, our buyers say, and the bargain starts slipping away. Perhaps they write two or three offers, each with different prices, just in case even more interest from other buyers. Their agent shows up to present their offer and sure enough, there’s plenty of competition. So our buyers use their best offer, and more of the bargain disappears. Seller ends up getting seven offers and counters the top three, setting off another round of expensive competition. By now, whoever gets the house will pay full market value just to wrestle the house away from their competition. That might still be a fair deal, but it definitely won’t be a screaming deal.
There’s a third possibility, of course, the garage sale scenario every bargain hunter hopes for: the seller who doesn’t know how much his or her house is worth. As a robust buying strategy, this has two fatal flaws. First, sellers usually think their house is worth more than it is, not less. A house isn’t like that stuffed moose head you picked up cheap at a garage sale. No one looks at their own house and says, “Who’d want that old thing?” Second, even if a seller does want to give away their house, their agent’s commission is based on the sales price of the house. The higher the sales price, the higher their agent’s commission.
But remember, I did say it’s possible to get a good deal.
The absolute best way to get a good deal—guaranteed—is to buy a home when no one else is buying. Buy in a down market, not an up market. Low demand gives buyers more leverage. I know, “leverage” sounds dry and theoretical, but if you’ve ever tried to buy in a hot market when sellers had all the leverage, you know how huge and real leverage is.
Buying in a down market is a great strategy but one difficult to execute. People are unwilling or unable to buy then for the very reasons that make it a down market: a poor economy, high unemployment, low consumer confidence.
But there’s a great way to get a good deal in any market, up or down.
Most buyers gravitate toward the same houses, the top 10 percent. You can always spot those homes. They’re the ones with the “hot buttons”: new kitchen and baths, family room, beautiful landscaping and the latest designer touches. Every buyer wants these ready-to-move-in dream homes. Buyers compete for them and pay a premium to get them.
You want a house like that too, but remember, you also want a good deal. That means you can’t pay a premium for convenience and eye candy. You’re looking for the house everyone else ignores. You’re focusing on the tired, overpriced house that’s been on the market so long it’s dropped off everyone’s radar.
You’re focusing on fundamentals, not cosmetics. Your good deal will be a solid house in a good location. It won’t have a new kitchen or plantation shutters or refinished hardwood floors or designer faucets. In fact, your good deal may be downright ug-lee, but it’s an ugliness that a few relatively cheap fixes can cure.
If your good deal is overpriced, don’t wait for the price to go down. Other buyers are watching and waiting too. Make an offer with the necessary price reduction already built in. You may face a few rounds of negotiating but that’s what your agent is for. If the seller is really motivated you’ll get your good deal. If not, move on to the next potential good deal. There’s always a few, in all but the most overheated of markets.
Once you move into your good deal, yes, you’ll be a little embarrassed when your friends see a kitchen that hasn’t been hip since Eisenhower was in the White House—until you tell them what you paid, and how you arm-wrestled the seller into giving you a good deal. And yes, it’ll take blood, sweat and tears to get your home looking the way you want. But if you nailed the fundamentals, it’ll be well worth it.
Because you got a good deal.
Interested in getting a good deal? Please contact me at firstname.lastname@example.org.
copyright © John Fyten 2004-2014