price does not equal valueIf you didn’t know, this little thingie (≠) is the ‘does NOT equal’ sign.
Creative Commons License photo credit: ejhogbin

So many people have an idea that price and value are connected… or more specifically, discount from original list and value have a connection… they don’t.  Bluntly, two buyers could go out and buy properties in the same neighborhood.  One might have a deal, and the other may not.  The one that got a deal might have paid more… and might have paid full list. The other might have paid 20% under list, and had a lower overall price.

The HECK you say…

Yep.

Let’s expound.  A couple of years ago, I had a client looking at a property in Gwinnett County.  It was a bank-owned foreclosure.  The list price was $439,000.  We offered $400,000 with no financing or other contingencies.  A year later, the property sold for $399,000… and the list at that time was $419,000.

Now, in this case, the $400,000 offer would have been a deal.  Had the bank hit us back with $410,000, my buyer would have done it.  But, the $399,000 wasn’t a deal.   (How could that be?!?)  Simple… let me explain.

The property needed some love.  It was bank owned, and hadn’t been lived in for a year when we were looking.  The basement was going to have to be unfinished because of mold issues.  The HVAC was about 50% junk, but the mold hadn’t migrated to the rest of the house.  We had budgeted about $100,000 for renovation and restoration.  We had another $50,000 in reserve for unexpected issues.  At that time, we felt that the ARV (After Renovation Value) would be around $700,000.  With reserves and carrying costs, and an acceptable RoI (Return on Investment) left us with $410,000 for the purchase.

A year later, the property was in worse shape.  The mold HAD moved into the rest of the house.  The insulation in the attic was moist, walls had mold in the sheetrock.   A lot more of the house would need to be unfinished.  And a lot more money would need to go into it…


Creative Commons License photo credit: dalazzarato

In another case, I looked at a few homes in a neighborhood.  I watched out of curiosity (my buyer picked a different property) to see what happened.  The two homes I was most interested in were listed at $145,900 and $159,900.  My buyer seriously considered the more expensive property.  These were identical floor plans.  After running numbers, we felt that full list on the expensive property wasn’t that bad.  But, comparing it to the less expensive property, it was a deal.  The lesser property needed carpet, new wood flooring, paint, appliances and a new fence.  The concrete in the garage was seriously oiled, and the HVAC system was on its last breath… another bank-owned property.

Which is a better deal? The property that eventually sold for $159,000, and needed nothing, or the one that sold for $25,000 less, but needed at least $35,000 worth of improvement (and that is assuming the owner does much of the smaller work)?

That is one of the things a good agent can help with; finding the right value proposition…  Of course, there are different buyers, with different skills and budgets that might make different properties a better option.