Buyers and sellers need analysis of research
Originally appeared in Bay Area News Group publications on December 9, 2011
Referred by my former clients, I recently received a call from a prospective seller who bought her home in the last seller’s market with another Realtor. This seller feels her agent did not provide important information for her to consider prior to making the offer on her house. Among the missing input was a way for her, as a buyer, to place the purchase price into perspective relative to previous “hot” markets and what happens when the market cools down.
Before I go further, I suspect some readers might be thinking, “With hindsight, it is easy for someone to look back and criticize another agent for not knowing the future.” My response is that no one should expect real estate licensees to be clairvoyant, but using experience from past markets for the benefit of clients is something that differentiates top agents from the rest.
History repeats itself
In a March, 1999 article, Approaching the Peak, I wrote, “History often repeats itself, but we do not always pay attention. Many people treat ‘today’ as though it will never change. Both buyers and sellers need to factor this reality into decisions they make in this supercharged environment.”
In another article, How to Buy Value, written in August 1997, I advised always buying with selling in mind: “This is the dictum that supersedes all others. No matter how much you love the house and think you will be there forever, the day may come when you will want to sell.”
Numbers that matter
As a buyer or seller, specific figures can help you determine if a particular offering price (on a purchase) or asking price (on a listing) make sense to you. For example, if you were considering buying or selling a two-bedroom home in either the Glenview or Rockridge districts of Oakland, how do prices and trends compare?
Rockridge prices have held up better than other, desirable neighborhoods. There has been an approximately 19 percent decrease in the selling price of two-bedroom homes in Rockridge when comparing 2005 (the apex at approximately $815,000) to 2011 (the nadir at approximately $660,000). Nonetheless, note that five two-bedroom homes in Rockridge have sold for over $800,000 this year.
In comparison, two-bedroom prices in Glenview, another popular area, peaked in 2006 at about $650,000. Year-to-date, Glenview two-bedrooms have sold for approximately $465,000, with the highest sale being $625,000. This is the kind of knowledge that buyers and sellers find extremely useful, but is often not furnished by their agent.
Price per sq. ft. (ppsf)
It is logical that a 1485 square foot, totally upgraded, two-bedroom property would sell for substantially higher than a 1000 square foot home that needs tender loving care. I have written articles about ppsf because it is both useful to know and often overlooked.
The price per square foot of homes in the size and area you are looking is a good clue to whether the asking price of a specific house makes sense to you. In a hot market with higher prices, this figure increases; however, it is always interesting because ppsf remains relative.
When comparing prices in different neighborhoods, you will notice that the most sought- after ones have a higher ppsf. Remember that, while the price for a smaller house is generally less than for a larger one, you pay substantially more per square foot for a smaller property.
Value of improvements vs. cost of making them
There are two, likely scenarios you might have to ponder regarding improvements. The first is where the seller has done extensive remodeling. In this case, you want to evaluate the quality of the work and whether it was performed and finalized with permits. Think about how much value the seller has added.
Another possibility is that you will be doing the upgrading. Ask yourself how much this could cost. Keep in mind that redoing kitchens, baths, etc. can be done either cheaply (which may quickly show imperfections), or with quality (likely to look good and last).
The key question is: When I take the price I intend to offer and add in the cost of upgrades and repairs, will the money into the home be too high for the neighborhood? If the answer is yes, I suggest walking away from that house.
Value of repairs
Rule of thumb: In a hot market, buyers usually do not discount enough (if at all) the cost of making repairs once they own the home. Competition commonly leads them to buy a house with problems and then ignore them for as long as possible.
In a down market, expensive headaches (foundation, drainage, sewer line, roof) definitely detract from value. Most sellers are not clear that spending large amounts to eliminate these types of issues just brings the home back to neutral; it does not add value.
Over the years, I have seen innumerable instances where agents have not explained this to their clients. I tell both buyers and sellers that problems do not add value to the property.
Final Thoughts
There is an abundance of useful statistics online, but the information you need to make your most important decisions is not easy to find or to synthesize in a way that applies to your specific situation. Look for a Realtor who knows and cares enough to simplify and explain a variety of data to help you make the right choices.
Related Articles:
Pricing by the Square Foot
Pricing by the Square Foot Revisited
Condition: What Your Agent Should Tell You
Approaching the Peak
How to Buy Value