An elegant way to miss out on your favorite home.
Let's say you're a home buyer who's lucky enough to know a distinguished economist. Wow! Talk about the inside scoop on markets, straight from the horse's mouth! And you know him well enough to know he's a good guy—no pretension, no inflated ego, just a quiet pillar of the community.
So of course you ask him, "O Wise One! How would you buy a home?" "Well," he replies, "here's how."
"First you determine the home's market value. Then you subtract from that number all the things you want to do to the house. Then you hope" and here he puts spread thumbs and forefingers together facing each other but slightly offset, "that your price and the seller's price intersect."
Eureka! Home buying secrets revealed! And without the cost of an advanced degree!
But before we break out the bubbly, may I respectfully point out a few flaws in this well-intentioned and otherwise robust theory.
First, market value isn't engraved in stone. As anyone who's received multiple offers on their home knows, market value is subjective, and sometimes highly subjective. Say a house listed at $750k gets six offers. One offer will be below list, two at list or slightly above, two more in the $770k range, and then there's the home run offer at $785k or $790k. That's in the South Bay, where buyers are conservative. Further north, on the mid-Peninsula, you'll still get the hopeless dreamer who offers less than list even though he knows he's competing with five other buyers, but add another $10k or so to the other offers. But wait, we haven't covered the entire spectrum of market values. Because there's the confirmed market-timer who's been waiting since 2000 for 1999 prices to come back, and to him all the home is worth is $350k. And then, of course, there's the confirmed renter who might part with his bottle cap collection, but only for the perfect house.
Then, of course, there's the market value of a home that comes on the market with tremendous momentum, priced right and presented well. Then there's the market value of that same home but dead in the water, stalled and stale, presented poorly because the agent doesn't know any better or because the seller won't listen, and priced far too high because the agent "bought the listing" or because the seller has a bad case of my-home-is-better-than-anyone-else's. Which do you think is going to sell for top dollar and quickly, and which is going to linger on the market abused and neglected until some savvy buyer makes a discounted offer?
So when we say "market value" we're starting from a point that's squishy, and sometimes very squishy, and that's never a good place for science to start. Ask an appraiser? You could ask three appraisers and get three different answers, as I found out last fall. Factor in the pressure appraisers are under from their employers the lenders (and from everyone else) to come in high during booms, and to come in low during busts (lender pressure only this time), and their omniscience starts to look a little suspect.
But okay, let's say you're using a reasonably competent agent who knows the market and can give you a likely sales price range. Let's also say that you've been looking a while, seen lots of homes and maybe made an offer or two, and you know market value—or at least you know what you're willing to pay. You also know that this particular house is the best you've seen, almost perfect in almost every detail. Man this house looks good and, besides, you're tired of house hunting every week-end and making offers that don't fly. For this house you're willing to make a home run offer.
But not so fast! Remember, your economist guru tells you to subtract whatever repairs and improvements you'd like to do. Now, of course, everyone wants to personalize their home, even if it's impeccably remodeled and in turn-key condition, and you've got a few ideas. The faucets are new and decorator, but you'd like them shiny instead of satin. And you'd like the hardwood floors stained a shade lighter. And the granite in the kitchen isn't quite to your taste. And the new windows are vinyl, not wood. And the house has a few maintenance items the sellers never got around to. And so forth and so on, and pretty soon you've knocked $20k off your home run offer and that's your competition leaving tire tracks on your back as they run you over. Again.
As for your offer price having to intersect with the seller's expected price, seller expectations amount to zilch in the determination of market value. Buyers—not sellers, not agents, not appraisers, not the Tooth Fairy—but buyers determine the highly variable variable called market value. Are Seller's expectations above market? Then Seller will never sell. The reverse is also true: if Buyer's expectations are below market, then Buyer will never get in contract, because Buyer 2 will pay more. But even Buyer 2 doesn't care about Seller's expectations. All Buyer 2 cares about is what the home is worth to him, and if Seller agrees whap! both are in contract.
But you know no distinguished economist would ever recommend a home-buying strategy so out of touch with reality. Obviously I've set up a straw target just to demolish it. Then you weren't with me one recent, beautiful and deceptively innocent Saturday morning.